After several months of strong performance, the equity markets ended August flat, with the global equity index posting a very timid 0.20% gain (in euros). While the main US indices have been flirting with new all-time highs, European indices are just shy of them.
As far as US indices are concerned, a real currency effect is apparent: while the S&P 500 rose by 2% in dollars, the index’s performance is actually negative once it has been converted into euros (-0.4%). Indeed, while the dollar strengthened at the end of July, it weakened in August, and the exchange rate increased from 1.14 to almost 1.17 over the month. European indices, however, rose by nearly 1% driven by southern European countries such as Italy and Spain, with France and Germany posting lower growth rates.
From an economic perspective, the data published throughout the month sent out contradictory signals. While the US job creation data published at the beginning of the month was very disappointing, other indicators such as the Purchasing Managers’ Index (PMI) delivered positive surprises.
From a market perspective, this weak job creation data was welcome. Jerome Powell, Chairman of the US Federal Reserve Bank (Fed), delivered a dovish speech at the Jackson Hole symposium, to which the most optimistic reacted by referencing the ongoing weakening of the labour market, which requires changes to monetary policy as a result of (supposedly only temporary) inflation.
That said, in the same speech, Powell also said that inflation was rising again as a result of Trump’s tariffs. A more sceptical interpretation reminds one of the 2021-2022 period when the Fed nipped looming inflation in the bud, again referring to it as “temporary”. Ultimately, successive upheavals did not stop this inflation, and the Fed has still managed to bring inflation down to its target rate.
In August, fears over employment and the prospect of less restrictive monetary policy drove US rates down: the 10-year rate started the month at more than 4.30% and ended it at 4.20%. Naturally, expectations of rate cuts were more reflected in short-term rates (for example, the 2-year rate), which dropped by nearly 30 basis points. In Europe, rates are trending differently, with relative stability at less than 2% for 2-year rates and an increase for 10-year rates, which ended the month at close to 2.80%.
This change in tone increases the likelihood of a key rate cut in the US in September. As for the other rate cuts expected by the market, the tone will be set by the next employment and inflation figures.
In terms of positioning, it seems appropriate to remain invested in equity markets in an environment where the Fed is supporting the economy. From a geographical point of view, the preference is nevertheless for European and emerging markets, both of which are benefiting from expansionary fiscal policy. As lower key rates imply a steepening of the US yield curve, the banking sector is likely to benefit. At the same time, the Communications Services (AI factor) and European Basic Materials sectors are still overweight.
On the bond side, duration is generally kept in line, and caution is advised regarding long-term US interest rates. High inflation expectations, fears about the Fed's independence and the budget deficit reduce the appeal of long-term maturities. In Europe, a certain stability in growth and inflation expectations argues for a duration close to that of the market. As for corporate bonds, spreads are tight but still offer decent yields.
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