In August 2023, global financial markets were volatile amid a complex and challenging environment. Concerns about inflation, central bank policies, and economic weakness in China combined to create uncertainty which made global shares fall in August.
Economic data in the US remained solid, as job gains remained strong and retail sales exceeded expectations. However, despite the robust economic data, US equities fell, as investor sentiment turned negative.
European equities also dropped in August. The Eurozone produced disappointing economic data, with the composite purchasing managers’ index (PMI) falling to a level that indicates risk of economic contraction, while inflation remained high.
In Japan, the economy expanded significantly in the second quarter of 2023, driven by net trade. Core inflation has risen, and wages increased, providing optimism of Japan overcoming years of subdued inflation. The Japanese stock market produced a more modest negative return in the month.
Australian stocks faced pressures due to economic concerns and negative investor sentiment, but the negative return for the month was also more modest than global markets in aggregate.
Chinese equity markets fell materially. China faces significant economic challenges, with negative inflation, weak retail sales, and declining investment. Real estate concerns were highlighted by the difficulties of major property developers. The People’s Bank of China (PBoC) lowered interest rates and took measures to support financial markets, but credit demand remained weak. Emerging market equities overall again underperformed developed markets.
The US Federal Reserve kept rates unchanged, but with a bias toward tightening if necessary. Market expectations are pricing the expectation of one final rate hike in 2023, followed by rate cuts in 2024. In contrast, the Bank of England raised its policy rate by 25 basis points to 5.25% and noted its intention to maintain restrictive levels for some time. The European Central Bank (ECB) faces pressure to increase rates, despite the challenging economic environment, because inflation remains elevated. The Bank of Japan adjusted its yield curve control policy to allow 10-year yields to rise further.
Global bonds produced negative returns in August as sovereign yields rose. Yields on the 10-year US Treasury increased, although Fitch’s downgrade of the US government’s credit rating from AAA to AA+ appeared to have had little immediate impact on Treasury yields but did contribute to market uncertainty. Australian bond returns were positive as Australian bond yields were flat over the month.
The US dollar strengthened against major currencies due to the deteriorating risk sentiment amid the global economic challenges, although the Yen weakened. The Renminbi also depreciated against the US dollar given economic concerns in China.
Oil prices remained relatively flat as growth risks in China countered production cuts. European natural gas prices increased significantly due to potential disruptions in supply.
Listed property and infrastructure produced negative returns along with broader equity markets. Australian listed property was the exception, with a positive return in August, as bond yields were stable over the month in Australia.