Global Market Overview | August 2024

04 September 2024

August was characterised by heightened volatility, with global equities seeing erratic movements early in the month before gaining some stability and locking in solid gains overall (MSCI World Index: 3.2%, MSCI Emerging Markets Index: 1.9%). The aggressive sell-off at the start of the month was underpinned by fears of a recession in the United States (US), heightened geopolitical concerns, a move away from expensive technology stocks, and the violent “unwind” of the Japanese carry trade. The carry trade is premised on investors borrowing money in a geography where interest rates are low (in this case Japan) and buying assets with this money in geographies where interest rates are high (in this case the US). 

A sudden rate hike in Japan, coupled with weak US economic data sparking fears of larger-than-expected rate cuts by the Fed, saw many traders caught out in this type of trade and forced them to close their positions. The S&P 500 Index and Nikkei Index gave back about 5% and approximately19.5% respectively in the first five days of the month. Fortunately, global markets recovered swiftly from this “flash crash”, with commentary from Japanese and US officials soothing market concerns.

The recovery in the US market (S&P 500 Index: 2.5%) was bolstered by a fresh batch of supportive economic data. July retail sales beat estimates and weekly jobless claims for the period ended 10 August, which hit the lowest levels since early July) and helped to restore confidence in the resilience of the world’s largest economy. Investors then shifted their attention towards the Jackson Hole Economic Symposium where US Federal Reserve Chairperson, Jerome Powell, all but confirmed a September rate cut – noting that "the time has come for policy to adjust". This built on expectations after the Federal Open Market Committee’s (FOMC) July minutes indicated that there is now a broader appetite for easing among members. As usual, Powell noted that the timing and pace of cuts would depend largely on the incoming data.

The market is still pricing in 100bps of rate cuts this year, but the Fed only has three meetings scheduled, which implies that a larger rate cut,more than the usual 25 basis points (bps), is currently expected at one of these meetings.

The Eurozone also locked in solid gains over the month, with the Euro Stoxx 600 Index increasing by approximately 2.7% as market participants continued to cheer growing expectations for dovish policy action. More recently, easing price pressures in two major Eurozone economies, namely Germany and Spain, provided additional support for further rate cuts at the European Central Bank’s (ECB) next meeting. These readings suggest that Eurozone inflation data could come in close to the ECB’s 2%. Market expectations, prior to the release of the German and Spanish figures, were for a decline in the Eurozone headline rate to 2.2% in August, from 2.6% in July. Overall, investors expect the ECB to cut its benchmark rate by 25bps to 3.5% at its next meeting in September.

China remained on the backfoot with the MSCI China Index delivering a lacklustre performance, ending the month flat as investors remained skittish about growth prospects in the world’s second largest economy. The Chinese economy expanded 4.7% y-o-y in 2Q24, missing market forecasts of 5.1% and slowing from a 5.3% growth in Q1 amid a persistent property downturn, weak domestic demand, a falling yuan, and trade frictions with the West. As a result, China’s annual growth target of 5% looks increasingly out of reach to economists, with many downwardly revising forecasts as consumer spending slows and President Xi Jinping’s government avoids a major stimulus.

On the local front, the JSE All Share Index (4.2%; USD: 8.2%) maintained upward momentum as generally positive themes (i.e. a favourable election outcome, more secure energy supply and growing expectations for lower interest rates) continued to bolster sentiment and drive flows. In terms of recent data, annual Producer Price Inflation (PPI) for July came in well below forecasts, recording its lowest reading since July 2023, which was driven by a broad-based slowdown in costs. This followed a similar outcome in the July Consumer Price Index (CPI) where headline inflation slowed to 4.6% (below market expectations as well). Softer inflation could support dovish action by the South African Reserve Bank (SARB).

Economic Data Review

Powell’s commentary bolstered expectations for a September rate cut

Flash estimates showed that the S&P Global Composite PMI for the US dipped to 54.1 in August (ahead of the forecasted 53.3) indicating continued growth, despite a slower pace. The service sector remained strong, while manufacturing output declined at its fastest in 14 months. Retail sales climbed 2.7%, following a downwardly revised 2% rise in June – and above a forecasted 1.8% rise. The trade deficit narrowed to $73.1 billion in June, compared to a revised 20-month high of $75 billion in May, but above market expectations of $72.5 billion. The unemployment rate edged higher to 4.3% in July from 4.1% in June and ahead of market expectations, which had forecast the rate to remain unchanged. The annual inflation rate eased to 2.9% in July from 3% in June, which was the lowest reading since March 2021, and below the forecasted 3%. The Federal Reserve (Fed) kept the fed funds rate steady at 5.5%, as expected. Fed Chairperson Jerome Powell gave clear signals that the central bank will cut its interest rate at the September meeting in his speech at the Jackson Hole Economic Symposium. Powell noted that the US labour market is cooling quickly following the softer jobs report from July and the downward revision to payrolls that week. He also noted that the FOMC has gained further confidence that inflation is slowing to the central bank’s 2% target. The speech followed minutes from the Fed's last meeting, which suggested that most policymakers agree that it will be appropriate to lower the Federal funds rate this quarter.

ECB expected to cut rates amid favourable data out of key regions

The HCOB Eurozone Composite PMI rose to 51.2 in August from 50.2 in July, well above market expectations of 50.1, to mark the sixth consecutive expansion in the Euro Area’s private sector activity, according to a flash estimate. Growth was carried by a four-month-high expansion for the services sector, offsetting two straight years of declines for the manufacturing sector. Retail sales decreased 0.2% in June against expectations of a flat reading. The Eurozone also posted a trade surplus of €22.3 billion in June 2024, wider than the €14 billion in June 2023, but lower than market forecasts of €23.4 billion. The unemployment rate rose to 6.5% in June, up from 6.4% in the prior two months and below the forecasted 6.9%. The annual inflation rate in the Euro Area was confirmed at 2.6% in July, slightly higher than 2.5% in June and above market expectations that it would slow to 2.4%. The next meeting of the ECB Governing Council is scheduled for 12 September.

The BoE cut interest rates but still maintains a cautious approach

Initial reports showed that the S&P Global UK Composite PMI surged to 53.4 in August, the highest level since April and ahead of expectations of 52.9. Growth was supported by a significant rise in manufacturing production, and growth in service providers activity driven by increased spending by businesses and consumers. Retail sales improved by 0.5%, compared to a decline of 0.9% in July, aligning with market expectations. The UK’s trade deficit narrowed to £5.32 billion in June, from a revised £15.77 billion in May – this was larger than the forecasted deficit of £1.1 billion. The unemployment rate slid to 4.2% in June, from 4.4% in May and below the expected 4.5%. The Bank of England (BoE) lowered its bank rate by 25 bps in August to 5%, in line with expectations, but noted that it will move with caution when loosening monetary policy further. The decision was noted as “finely balanced”, with four members of the Monetary Policy Committee (MPC) opting to hold borrowing costs unchanged. The MPC expects headline inflation to fall and inflation expectations to converge towards the target.

Investors remain skittish about China’s growth prospects due to ongoing headwinds

The Caixin China General Composite PMI was at 51.2 in July, lower than 52.8 in June and below forecasts of 52.3 – it was the lowest figure since October 2023. Retail sales increased by 2.7% in July, compared to market forecasts of 2.6%. China’s trade surplus widened to $84.7 billion in July from $80.2 billion in July 2023 and below market expectations of $99 billion, as exports rose 7% y-o-y and imports increased 7.2%. The surveyed urban unemployment rate increased to 5.2% in July from 5% in each of the previous three months, and slightly above market forecasts of 5.1%. China’s annual inflation rose by 0.5% in July, from 0.2% in June, ahead of market estimates of 0.3%. It was the sixth straight month of consumer inflation, as Beijing ramped up stimuli to bolster consumption. The People’s Bank of China (PBoC) kept key lending rates unchanged at the August fixing, matching market forecasts. The move reflected a balancing act by China after Governor Pan Gongsheng recently said that authorities would avoid any “drastic” measures to support the economy. Further, he mentioned that the central bank will speed up the implementation of existing financial policies, study new steps, and support proactive fiscal measures.

A turbulent month for Japanese equities but the recovery was swift

Early estimates showed that the Jibun Bank Composite PMI ticked up to 53 in August from 52.5 in July, the highest such print since May 2023. It was the seventh reading of growth in private sector activity year-to-date, bolstered by an acceleration in the services economy as the manufacturing sector shrank further. Retail sales rose 3.7% y-o-y in June and exceeded forecasts for a 3.3% gain. Japan’s trade deficit increased to ¥621.8 billion in July from ¥61.33 in July 2023, missing market estimates of a shortfall of ¥330.7 billion. The unemployment rate slid to 2.5% in June compared with market forecasts of 2.6%, which was also the reading in the previous four months. The annual inflation rate steadied at 2.8% in July for the third straight month while remaining at its highest level since February. The Bank of Japan (BoJ) raised its key short-term interest rate at its July meeting to around 0.25% from the prior range of 0 to 0.1% it set in March. The BoJ intends to reduce the monthly bond-buying to ¥3 trillion in January-March 2026 from the current pace of around ¥6 trillion to pursue a more normal monetary policy.

Local sentiment remains upbeat with expectations for easing economic pressures supporting upside potential

In June, the composite leading business cycle indicator declined 0.4% m-o-m (following a drop of 1% in May), marking a steady improvement in business activity. The SACCI Business Confidence Index saw a slight uptick in July to 109.1, reflecting steady business sentiment with the coalition government taking shape. Retail sales grew 4.1% y-o-y in June, marking the strongest increase in retail activity since July 2022. The trade balance surplus increased to R24.2 billion (ahead of the estimated R16 billion) as imports declined 6.5%, while exports fell at a slower 3.4%. Local mining production declined 3.5% y-o-y in June (well below forecasts of a 0.8% drop) and manufacturing production slumped 5.2% y-o-y, also well below forecasts (-0.9% y-o-y), signalling a further drop in manufacturing activity. Nevertheless, in July, the S&P composite PMI edged higher to a reading of 49.3, suggesting a slight softening in private sector decline. The ABSA Manufacturing PMI climbed to a reading of 52.4 (June: 45.7), highlighting a renewed expansion in factory activity supported by recovering demand both locally and globally. Annual CPI for July came in at 4.6%, against expectations of 5%, but remained slightly above the SARB’s target of about 4.5%. Core inflation softened to 4.3% in July, reaching a two-year low. The SARB MPC’s next policy announcement is scheduled for 19 September.

Outlook

Local

• The global economy should be confronted with ongoing fracturing, with inflation and interest rates higher than in the 2010s. According to the International Monetary Fund (IMF), medium-term growth should average just above 3%. The SARB predicts that trading partner growth will lift from 2.7% this year to 3.1% in 2026. Global inflation should continue slowing but the path is threatened by distorted trade and geopolitical tensions. Higher public debt and a growing demand for savings suggest that monetary policy will be tighter than it was before the pandemic.
• SA’s medium-term growth outlook remains modest but is supported by the ongoing reform agenda, which should enable the economy to take advantage of improving trading partner activity. Slower inflation, lower interest rates, and the retirement pot innovation should also support household balance sheets and spending growth. We forecast real GDP growth to rise to 1% this year, 1.8% in 2025, and 1.9% in 2026.
• Improved confidence following the formation of the Government of National Unity (GNU) and cessation of loadshedding has supported foreign inflows into bonds and near-term business conditions are expected to improve. These are among the factors that have supported the trend recovery of the rand. A stronger rand and weak local demand have assisted a faster deceleration in inflation. We currently anticipate inflation below 4.5% for the next four quarters, averaging 4.6% this year, 4.3% in 2025, and 4.6% in 2026.
• Slower inflation has prompted us to front-load the expected 75bps-worth interest rate cutting cycle, with the first 25bps cut in September, another in November, and the final in 1Q25. Nevertheless, interest rates should be higher than pre-pandemic levels, in line with higher risk-free rates and the SARB’s pursuit of a lower inflation target.
• The property market is likely at a trough. The ease in political uncertainty and improved sentiment towards SA could support more participation by higher-earning households and foreigners/expats. Meanwhile, a lower cost of living and the willingness to buy cheaper properties rather than going into the rental market should uphold the affordable housing market. With activity supported in both the lower- and higher-end, we see volumes and prices lifting into 2025. House Price Index growth is expected to average 1% this year, 2.6% in 2025, and 3.6% in 2026.

Global

• US growth has held up very well over the last few quarters despite a very aggressive interest rate hiking cycle. 2Q24 GDP came out at 3%, beating market expectations of 2.8%. Consensus estimates for 2024 growth has been revised higher to 2.5%. In the latest Bank of America survey, it became evident that participants are becoming more optimistic that monetary easing will generate a ‘soft’ landing, with 76% of participants favouring this outcome, versus only 13% of the participants calling for a ‘hard’ landing. We expect this soft vs hard landing rhetoric to continue throughout the year as new data becomes available. Our house view is for US growth to underperform consensus in 2024 and 2025.
• US Inflation has peaked and is now gradually falling towards target after a ‘sticky’ first quarter. This month CPI came in slightly below expectations, confirming the lower trend. Shelter inflation and core services should continue to trend lower; causing overall inflation to move down towards target.
• The Fed’s interest rate hiking cycle is over. The question is now more around the pace and quantum of these cuts. There was a very clear ‘pivot’ from Fed Chair Powell at the Jackson Hole symposium in August, saying that ‘the time has come for policy to adjust’. The Fed is now more concerned about weakness in the labour market than on inflation. The market has reacted strongly to these comments and is currently pricing 100bps of cuts for 2024, as well as a terminal rate of 3% by March 2026.The ‘soft’ landing narrative is based on the Fed cutting rates fast enough, so real rates don’t become too restrictive on the economy.
• In emerging markets, it is encouraging to see the PBoC maintaining loose monetary policy and further injecting liquidity into the banking system. However, the recovery will remain fragile in the absence of fiscal stimuli targeted at restoring confidence to the consumer and addressing the property sector issues. On this front, the Third Plenum announcements were disappointing. Economic data for the month has also been disappointing, with GDP for Q2 at 4.7% versus a consensus number of 5.1%.
• The Jackson Hole speech caused the US dollar to weaken quite substantially in August. It is expected that the US will cut rates more aggressively than peers so that interest rate differentials will favour a weaker dollar.
• Geopolitics are always important for asset markets, but the election calendar for 2024 is exceptionally busy. This year 76 countries will be voting, representing more than half of the world’s population and over 65% of global GDP. This, together with two major ongoing wars, could exacerbate uncertainty and volatility near term. The impact from these developments, especially on oil, should be monitored very closely. The buildup to the November US elections should also be monitored very closely.
• Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.