August 2022 Market Insights
August was generally a weaker month as markets continued their recent volatility and lack of direction.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in August?
August was generally a weaker month as markets continued their recent volatility and lack of direction. With inflation remaining elevated, central bankers were steadfast about raising interest rates even if it causes some short-term consequences.
As such, the risk of a U.S. recession remains likely and spread to other regions. Snapshots from European and Chinese manufacturing indicate that households worldwide are spending less as they deal with higher costs of living.
Positive performances were led by Japan’s TOPIX Index, up +1.18% and Nikkei 225 Index, up +1.04% (all local prices). European markets proved the weakest with the U.K. FTSE Index, down 5.46% and the Euro Stoxx 600 Index, down 5.29% (local prices).
A weaker AUD (-2.11% versus the USD) dampened AUD losses in the Trends and indices.
Interest rate rises to continue
Despite the rising rates, inflation continued to climb by 8.7% after rising 9.1% in June. Even though this was lower than expected due to falling energy prices, food and housing costs remained high.
This will ensure that the Federal Reserve will continue their path of higher interest rates, albeit at potentially a slower pace. On the positive side, jobs openings and consumer confidence remained strong.
Inflationary pressure across Europe
European manufacturing activity fell, and the energy shortage has no near-term solution, as the region remains dependent on Russian gas especially during the colder months. With many waterways down to low water levels and unable to transport energy products such as diesel and coal, the crisis is set to worsen.
European inflation accelerated to another all-time high of 9.1% lead by food and energy prices. U.K. inflation was 10.0%, hitting double digits for the first time in forty years.
With the highest inflation rate in the G-10, it appears the Bank of England will have little choice but to hike rates aggressively, by as much as 4.0%. The European Central Bank will also undertake similar hikes.
Chinese economy has several headwinds
Economists are downgrading growth forecasts for China further for 2022 (now at 3.5%, down from a previous forecast of 3.9%) as lingering risks from its property market and coronavirus outbreaks remain. China’s manufacturing activity unexpectedly contracted in July, consumer spending remains subdued and certain segments of unemployment remain elevated.
Meanwhile, Chinese inflation rose to the highest level in two years, mostly due to food prices caused by droughts. The said consumer inflation will likely exceed 3% in some months during the second half of the year.
In response, the People’s Bank of China reduced the one-year and seven-day lending rates by 0.10% and the Chinese government added US$146 billion in infrastructure investment and another US$29 billion in special loans to ensure stalled housing projects are delivered to buyers.
Ironically, the market for initial public offerings in China is strong with US$58 billion of transactions to date in 2022, the largest ever for such a period with activity greater than other major markets.
Jobs & skills summit in Canberra
In Canberra, the Jobs and Skills Summit was held to address issues around skills and worker shortages, declining real wages and slow productivity growth. Outcomes from the Summit included an expected boost to the migration intake to help ease widespread, critical workforce shortages. The summit also kicked off discussion around widening access to multi-employer bargaining.
The Australian share market finished flat in August in a tale of two halves. The first half saw the markets performing well only to return the gains achieved with falls in the second half due to inflation and interest rate predictions causing market volatility.
Of the 11 sectors represented on the ASX, all were down or flat except for: energy, resources, materials & telecommunications.