August 2020 Review
August was a mixed month weather-wise, starting with a heatwave and feeling quite damp and autumnal at the end. Financial markets also had a mixed month, but risk assets generally performed well and finished on a firm note. The exceptions were the US currency which continued its weak performance from July and bond yields which, while remaining low, endured a significant rise, inflicting negative price action.
Just like the previous month, the US Federal Reserve (Fed) had a material impact late in the month. Whereas in July, its frank assessment of the US economy’s challenges unnerved risk assets such as growth equities and credit spreads, Fed Chair Jerome Powell’s virtual presence at the annual Jackson Hole event gave a clear perspective on a change in Fed policy. The resultant focus on inflation averaging gave an end of month boost to equities. The Fed will be tolerant of higher inflation above its 2% target to compensate for periods when it has been below 2%, as it has been for some time. Unsurprisingly, this caused a rise in long term government yields in the US to reflect increased inflation risk in the future. The rise was quite sharp as can be seen below in the chart of thirty-year US Treasury yields from The Daily Shot.
There was less to comment on in the UK, yet the government bond market performed similarly to its US counterpart. Thirty-year gilt yields rose by around 30bps resulting in more than a 5% drop in price. As we have noted previously, extremely low bond yields below inflation are no longer low risk assets. Credit spreads offset some of the rise in government bond yields.
Gold oscillated during August, in part due to the extent of market long positions previously acquired but overall fell back slightly, having reached $2,000 an ounce earlier in the month. The prospects for economic recovery, and better than expected economic data in a number of major economies, helped industrial commodities like copper.
While the US dollar continued to decline against major currencies, the US stock market returned to top billing in August. Led by the tech-heavy NASDAQ which delivered a near 10% return, US equity indices led the way and the Dow Jones Industrial Average had its best month since 1986. While European and Asian stock markets had a solid positive month, they were unable to track their US counterparts. Japan was the best of the rest, providing similar albeit lower returns to the US.
Politics are never far away from financial markets’ thoughts and while both the Democrat and Republican National Conventions captured attention, it was the resignation of Japanese Prime Minister, Shinzo Abe, that provided some late drama on the last business day of the month. Japan’s longest-serving post-war Prime Minister resigned because of ill-health, due to a reoccurrence of colitis. Abe has been a key figure behind corporate reform in Japan and a significant reason for our exposure to Japanese small and mid-size companies as part of our reform theme. It remains to be seen if his departure alters the corporate governance landscape in Japan. Chief Cabinet Secretary Yoshihide Suga would appear to be the front runner to succeed Abe but there will be more candidates and a desire to appeal to the electorate ahead next year’s election might be an important factor.