Political events
August was marked by a significant shift in global monetary policy and ongoing geopolitical tensions.
The Federal Reserve, under Chairman Jerome Powell, signaled a policy pivot, indicating the start of an interest rate easing cycle in September. Powell’s statement at the Jackson Hole summit emphasized the need for monetary adjustment, sparking market optimism. Other central banks followed suit, with many hinting at further rate cuts, except the Bank of Japan, which raised rates by 25 basis points. This hike caused major disruptions, particularly in Japan’s markets, where the unwinding of carry trades led to a sharp decline in equities. Investors, who had borrowed yen at low rates to invest in higher-yielding assets, were forced to close their positions as the yen appreciated, leading to widespread sell-offs and volatility.
Geopolitically, the Middle East witnessed a deterioration in its fragile ceasefire, and Ukraine made territorial gains in Russia’s Kursk region, raising concerns about further escalation. U.S.-China relations saw a positive turn with high-level dialogues, but the overall global political climate remained tense.
The situation on the markets
Despite early volatility, global equities rose by 2.5% in August, while global government bonds returned 1.0%. The market’s early struggles were attributed to fears of a U.S. economic slowdown, sparked by weak labor market data and a disappointing manufacturing performance. However, these concerns were alleviated as investors anticipated the Fed’s rate cuts, driving a recovery in both equity and fixed income markets. The VIX index, which measures market volatility, spiked early in the month before stabilizing. By the end of August, global markets had rebounded. The S&P 500 rose 2.4%, supported by broader earnings growth outside of the tech sector, while European markets, particularly France, saw a modest recovery thanks to the Olympics-related boost in services. However, cyclical sectors remained weak, and Japan faced significant challenges due to the Bank of Japan’s policy change.
The impact on the asset classes equities and bonds
Equities
The equity market experienced heightened volatility, especially in Japan, where a 12% single-day drop on August 5 marked the largest decline since 1987. U.S. equities, led by the S&P 500, were initially impacted by the retreat of big tech stocks and concerns over economic data, but a solid earnings season and anticipation of rate cuts led to a recovery.
Asian markets showed resilience, with the MSCI Asia ex-Japan and emerging markets delivering positive returns, supported by expectations of a weaker U.S. dollar and Fed easing. However, Japan remained an outlier due to the carry trade unwind and yen appreciation. While European stocks did experience a rebound in August, their performance trailed U.S. and Asian counterparts due to a less favorable economic backdrop and slower corporate earnings growth in key sectors.
Bonds
Fixed income assets benefited from the market’s flight to safety at the start of the month, with U.S. Treasuries outperforming as expectations for aggressive Fed rate cuts mounted.
The Bloomberg Global Aggregate Index posted strong gains, with global investment-grade bonds returning 1.9%. High-yield bonds also delivered positive returns, though they lagged behind their investment-grade counterparts. European bonds saw moderate gains, while Japanese government bonds rallied due to strong domestic demand.
Emerging market debt outperformed, bolstered by a weakening U.S. dollar, which provided a tailwind for the asset class. As a result, emerging market debt posted returns of 2.3%.
What are the implications for the Everon portfolios?
Overall, the Everon portfolios performed positively in this volatile month, which was characterised by an abrupt start with some significant losses on the stock markets and a rapid recovery. Both the global markets and the Swiss markets were able to recover from the cold start to the month. The performance of almost all Everon strategy lines was slightly positive at up to +1.2%.
