August 2022 Market Update

Image 1: US headline inflation rate 2021 - 2022

Global equities recorded strong gains to begin the month of August, driven by rising investor sentiment preceding lower than expected inflation readings, and better than expected corporate earnings results. The S&P 500, which reached a low point on June 16th, down 23.1% year-to-date, rallied notably, reversing more than 50% of its losses by mid August. Despite the strong start, global equities lost their momentum in the second half of the month. The S%P 500 ended August down 4.24%, bringing its YTD return to -17.02%.

The major shift in the equity market came following the U.S. Federal Reserve’s keynote address. During the address, Federal Reserve Chair, Jerome Powell, emphasized the central bank's commitment to monetary tightening in order to combat persistent high inflation, notwithstanding the potential risks to economic growth. The U.S. which reported an annualized headline inflation rate of 8.5% for July, a decrease from an annualized rate of 9.1% in June, is still far above the Federal Reserve’s 2% inflation target. Many market participants anticipate another 50-75 basis-point rate hike in the fall.

Geopolitical tensions remain high, as August marks the seventh month since Russia invaded Ukraine. The ongoing war continues to intensify the energy crisis in Europe, with natural gas prices up more than 400% from a year ago. Adding to the upward pressure, Russia announced an unscheduled maintenance shutdown of the Nord Stream 1 pipeline in August. It is likely that this announcement has broader geopolitical motivations designed to deprive Europe of Russian energy, and to further inflate prices. In response, European countries have attempted to stockpile natural gas supplies in order to reduce their dependence on Russian gas imports heading into the winter.

Driven partly by rising energy prices, the E.U. released a record 8.9% annualized inflation reading in July, up from 8.6% in June. Similar to the U.S. Federal Reserve, it is expected that the European Central bank will also deliver a large interest rate hike during their September 8th meeting to address the bloc’s rising inflation and depreciating currency. The Euro ended August on par with the USD for the first time in over twenty years. 

Image 2: The Euro ended August on par with the USD For the first time in over 20 years

Sentiment for Chinese equities continued to fall in August led by continued weakness in China’s housing market, extreme temperature driven power shortages, and elevated geopolitical tensions stemming from the U.S. House of Representatives speaker Nancy Pelosi’s controversial trip to Taiwan. In addition, China's zero-covid policy still remains a risk, however there are some positive indications that China may be exploring a re-think of its zero-covid policy that would better align with the rest of the world. This month Hong-Kong reduced its quarantine period for inbound travelers from seven to three days. In addition, the city will host two major international events in November: the World Rugby Sevens tournament, and a two-day financial summit. 

Heading into September, monetary policy decisions will likely continue to drive equity market sentiment as investors wait to see the magnitude of further quantitative tightening. In addition, inflation readings and other economic indicators will help determine whether inflation has reached its peak. As monetary policy acts with a lag, it is likely that the full impact of recent rate hikes has not been fully felt yet.

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September 2022 Market Update

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July 2022 Market Update