Waiting for interest rate cuts
After a very volatile start to the month, the international stock markets were relatively calm in August. One of the factors contributing to the calm was that US Federal Reserve Chairman Jerome Powell confirmed the markets‘ expectations of an interest rate cut at the annual central bankers’ meeting in Jackson Hole.
The German share index DAX rose by 2.15%, outperforming the broad European index Stoxx Europe 600, which advanced by 1.57%. On the other side of the Atlantic, the broad US S&P 500 index rose by a moderate 0.19%. In Hong Kong, the Hang Seng Index rose by +1.83%. Overall, global equities, as measured by the MSCI World, climbed by +0.44% - all index figures in euro terms.
The month began with disappointing labour market data from the US, which raised fears that the country could slide into recession after all. The markets took this as a signal to the US Federal Reserve (Fed) to initiate interest rate cuts in order to stabilise the economy. As a result, the US dollar weakened. At the same time, the Bank of Japan raised its key interest rate from 0.10% to 0.25% on 31 July, which was actually moderate. This strengthened the Japanese yen. Both of these factors - an appreciating yen and a depreciating US dollar - jeopardised the interest rate differential business, the so-called yen carry trade, which has now become commonplace. This involved investors borrowing money at low interest rates in Japan in order to invest in markets with higher yields, e.g. the USA.
As a result, the Japanese share index Topix suffered a daily loss of -12.2%, and this was also felt by the other major markets, which fell as a result. The volatility index hit levels last seen in March 2020, when the coronavirus pandemic began. However, the situation calmed down again after 5 August. This was partly due to positive US economic and consumer data and partly to the Bank of Japan announcing that it would refrain from further interest rate hikes if the financial markets were unstable. In addition, Fed Chairman Jerome Powell confirmed the markets' interest rate expectations at the annual central bank meeting in Jackson Hole, also against the backdrop of a further fall in US inflation (from 3.0% in June to 2.9% in July). From then on, the stock markets slowly but steadily began to develop positively again.
In Europe, a positive signal came from the combined purchasing managers' index for services and manufacturing. This rose to 51.2 points in August (previous month: 50.2). This puts the index above the threshold value of 50 and signals a slightly expansive economy. However, the increase is solely attributable to the services component. As inflation in the eurozone fell to 2.2% in August (previous month: 2.6%), the markets are also anticipating a further interest rate cut by the European Central Bank.
The bond markets reacted differently to the market turbulence and the renewed high expectations of interest rate cuts. The yield on 10-year German government bonds only fell from 2.30% to 2.29%, while the yield on their US counterparts fell somewhat more sharply, by 13 basis points (bp) to 3.90%. Yields on high-quality corporate bonds also fell more sharply in the USA (by 20 bp to 4.94%) than in Europe (by 3 bp to 3.46%). Only high-yield bonds performed better in Europe: their yields fell by 34 bp to 6.23%, while in the USA they fell by 29 bp to 7.30%. The gold price also benefited from the prospect of falling real interest rates. The price of a troy ounce rose by +2.28% from USD 2,447.60 to USD 2,503.39.
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