Monthly market update August '20
The following update is from Willis Towers Watson, the views, thoughts, and opinions expressed in the text belong solely to the author.
Global equity markets moved higher over August, supported by positive news on the health front, solid economic data and continued policy support. Developments regarding vaccines and treatments continued to be positive, with several vaccine candidates in final trial phases. New coronavirus cases trended lower in the US over the month, while several European countries and Australia have been dealing with resurgences and outbreaks. The hard lockdown in Victoria appears to be bringing new cases down as intended albeit while negatively impacting economic data. GDP data released this month for Q2 confirmed the Australian economy has officially entered a recession for the first time in 30 years as a result of the coronavirus induced cessation of economic activity in 2020. Policymakers around the world continue to provide unprecedented fiscal and monetary support, with the Australian parliament passing an extension to JobKeeper and the US central bank shifting its inflation targeting approach to be more accommodative.
The US equity market led global risk assets higher over the month, with the S&P 500 Composite returning 7.2% (in local currency terms). The Chair of the Federal Reserve confirmed a shift to an inflation averaging target, meaning the central bank will now be willing to tolerate a period of “moderate” inflation overshooting after a period of undershooting to achieve an average of 2% inflation over time. Positive momentum in economic data continued, with the US unemployment rate falling to 8.4% in August (down from 10.2% in July). The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 78 in August from 72 in the previous month, as sentiment continued to rebound following the easing of coronavirus lockdown restrictions. The Markit US Manufacturing PMI improved to 53.1 in August from 50.9 in July, indicating a strong expansion in factory activity (any number above 50 signals an expansion in manufacturing activity compared to the previous month).
The Chinese equity market’s positive momentum continued in August, with the Shanghai Composite Index gaining 2.6% (in local currency terms). Economic data in August reinforced the country’s “V” shaped recovery after successfully containing the virus. Chinese business conditions remained expansionary in August, with the Caixin Manufacturing PMI increasing to 53.1 in August, from 52.8 in July (a reading above 50 indicates an expansion of the manufacturing sector compared to the previous month). Tensions between China and the US were in a state of relative calm over the month, with the two countries reaffirming their commitment to the Phase One trade deal after a formal review. The CNY appreciated 1.9% against the USD, with 1 USD buying 6.85 CNY at the end of the month.
European equities, as measured by the Euro Stoxx 50 Index, returned 3.2% (in local currency terms), despite restrictions being reimposed following a resurgence of coronavirus cases in some countries. The Eurozone PMI Composite Output Index reading was 51.9 over August (down from 54.9 in July), with business sentiment remaining positive albeit lower than the previous month. The Eurozone Consumer Economic Sentiment Index was broadly in line with the previous 2 months at -14.7 (marginally better than the -15.0 reading in July) indicating that consumer confidence remains stable (-100 indicates an extreme lack of confidence, 0 neutrality and 100 extreme confidence).
Elsewhere, equity market returns were regionally diverse in August. The Japanese equity market (measured by the TOPIX index) returned 8.2% while the UK FTSE 100 index gained 1.8% over the month in local currency terms. Emerging markets returned 2.2% for the month in local currency terms, despite countries such as India, Mexico and Brazil struggling to contain widespread coronavirus outbreaks.
Australian shares, as measured by the S&P/ASX 300 Accumulation Index, returned 3.0% over the month, with virus cases in Victoria trending down under the extended lockdown. There were significant divergences between sectors: gains were led by the Information Technology sector (15.2%), Consumer Discretionary (9.7%) and Industrials (4.6%), with the biggest detractors being Utilities (-4.8%), Telecommunication Services (-3.8%) and Consumer Staples (-0.3%). The Australian listed property market rose by 7.9% in August, as measured by the S&P/ASX 300 A-REIT Accumulation Index. In its August meeting, the RBA left the cash rate on hold and revised down its outlook for economic recovery given the new lockdown measures in Victoria. The Manufacturing PMI (as measured by the Ai Group Australian Performance of Manufacturing Index) declined to 49.3 in August from 53.5 last month, falling back into contraction territory. The Australian GDP print came in at -7% for Q2 (-0.3% in Q1), bringing in the first technical recession in 30 years.
Major global bond yields moved higher over August, with the Australian 10-year Government bond yield rising by 15bps to 0.98%, the US 10-year Government bond yield rising 16bps to 0.69%, the UK 10-year Government bond yield rising by 21bps to 0.31%, the German 10-year Government bond yield rising by 14bps to -0.40%, Japanese 10-year bond yield rising 3bps to 0.05% and the Italian 10-year Government bond yield rising 8bps to 1.16%.
The Australian dollar appreciated alongside global risk sentiment, gaining 3.3% over the month against the USD, and ending August at 73.8 US cents. Similarly, the Trade Weighted Index closed at 62.6 for the month, up from 61.9 at the end of July, indicating appreciation of the AUD against the currencies of its major trading partners.
This information is general information only and does not take into account your individual objectives, financial situation or needs. Accordingly, before taking any action, you should consider whether it is appropriate to you, having regard to your objectives, financial situation and needs. You should obtain a copy of legalsuper’s Product Disclosure Statement (PDS) which is available by contacting legalsuper or via its website at legalsuper.com.au before making a decision. Past performance is not a guide to future performance.