Tracing July’s footsteps, August was an equally volatile month. Market sentiment was buoyed by the “US-Mexico Trade Agreement” – a positive development in bilateral trade talks between the U.S and Mexico, assenting to stricter rules on automobiles. Although the U.S. and Canada didn’t strike a deal, the two sides would continue their negotiations. Nevertheless, trade war headwinds loomed in the backdrop.
Highlighting the economic landscape, advance U.S. Q2 GDP data showed that the economy accelerated to 4.2%, driven by strong household spending. Canadian Q2 GDP grew an annualized 2.9%, supported by rebounding exports and strengthening consumer spending. Eurozone economic fundamentals continued to progress, although lacking requisite momentum. The backdrop remains underscored by an uncertain political landscape; with substantial risks stemming from the populist coalition government in Italy with budget uncertainty, Spain’s fragile new government reigning over a slowing economy, the contentious Brexit process and Turkey’s economic crisis. Emerging markets endured pressure, amid fears of Turkey’s crisis posing contagion risks and the strengthening dollar. The Bank of England raised interest rates to 0.75% while reiterating its intention for slow and limited interest rate rises. At the Jackson Hole symposium, Chairman Powell noted that the Fed’s stance to increase interest rates gradually helps steer clear of the two risks of moving too quickly, which might unnecessarily end the economic expansion and moving too slowly, allowing the market to overheat. Separately, the U.S. imposed US$16 billion of tariffs on Chinese imports, with Beijing countering in kind; another wave of tariffs is expected in September.
Set against this backdrop, stocks thrived. Most of the major indices hit all-time highs, notably, the S&P 500 (3.4% monthly return), and the technology-heavy Nasdaq Composite Index, driven by strong corporate and economic fundamentals. Relatedly, technology stocks outperformed within the S&P 500. Growing trade tensions and increasing emerging market risk weighed heavily on the commodities sector. U.S. inventories fell, helping prices rebound amid concerns on impending sanctions on Iran which could tighten global oil supplies. Metals also traded at lows as copper held back amid labor strikes whilst gold hit fresh lows with investors moving to US Treasuries for safety. U.S. Treasury yields held steady as a flight to quality amid the Turkish crisis and potential economic sanctions maintained demand for safe assets.