Market Commentary – August 2014

August saw an increased divergence between Japan and the Eurozone, and the US and UK. This will be reflected by the monetary policy stance of central banks in the coming months.

Generally world markets experienced a fairly turbulent start to the month amidst continuing geopolitical tensions in the Middle East and Ukraine. However a strong second half of August meant that the FTSE All World index finished up by almost 5%.

The FTSE 100 made another step closer to its all-time high this month after the UK economy returned to pre-crisis levels in July. However, wage growth has been non-existent. In fact wages actually fell by 0.2% compared to a year ago in July. This pushed market expectations for the first interest rate rise to early 2015. Sterling reacted strongly to the news and the pound has depreciated by 1.6% against the dollar during the course of the month.

Second-quarter US GDP was revised up to 4.2% as the US economy continues to progress. The S&P 500 increased by 5% in August which has helped the index exceed 2,000 for the first time. While a great deal of focus remains on the labour market as it reaches full capacity, other areas of the US economy are improving after a difficult first quarter of the year, notably the manufacturing and housing sectors. It is this, along with expectations for further easing from the ECB, which has propelled the market to new highs. However, US progress is not reflected in bond markets as the continued rally in US Treasuries remains one of the most confounding aspects of global financial markets this year. Furthermore, the loss of European momentum has impacted the global recovery and higher inflation, which is supporting bonds.

GDP and inflation data from the Eurozone was disappointing in August, illustrating a loss of momentum. As the engine of the European Monetary Union, Germany’s recent weaknesses, highlighted by the 0.2% contraction in growth between Q1 and Q2, are worrying signs for the region if a monetary fix is going to occur.

The recent decline in house prices in China is of critical concern for the Chinese economy as its property sector is a key driver of growth, contributing to as much as 15% of China’s GDP in 2013. However, following on from July, exports remain strong as overseas sales have been expanding at their fastest rate since April 2013. In addition, as the US economy picks up, demand for “made in China” goods is rebounding too. Inflation appears under control as Government figures show a 2.3% year-on-year increase in consumer prices in July, significantly below the target of 3.5% for the year. With inflation low and stimulus efforts so far limited, the government has the scope to do more to boost China’s economic growth.

August saw another good month for emerging markets as a whole, which have now surged 7% in the last three months, outpacing US markets. While Russia and Ukraine have continued to struggle, India has thrived, with the Mumbai Sensex climbing almost 30% in 2014 so far. Emerging markets have benefited from new stimulus from the ECB, designed at propping up a stagnating Europe.

Outlook

Geopolitical tensions still remain, however markets have shown strong resilience once again and we expect this to continue. The Fed’s loose monetary policy remains positive for markets, but the strengthening of the labour market and raising inflation rate might lead to interest rate hike expectations lagging behind. An ill-timed hike might take bond and equity markets by surprise which could potentially increase the volatility within financial markets.

In the UK, the strength of the sterling is likely to continue to keep inflationary pressures below 2%. There are also signs that the London property market is cooling, which takes a lot of pressure off the Monetary Policy Committee to raise rates this year. However, as with the US, a premature hike in interest rates could damage economic recovery.

Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.

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