Global Asset Allocation Team Market Update – August 2023
The third quarter got off to a roaring start. While recession fears have been building given the Federal Reserve’s most aggressive tightening cycle in decades, a string of positive economic data surprises and signs of easing inflationary pressures provided a dose of optimism that policymakers may achieve a soft landing whereby central banks return price stability without tipping the economy into recession. Meanwhile, the cascade of second quarter corporate earnings results have been stronger-than-expected, which also bolstered investor risk appetite in July.
Global equity markets surged higher in July, with the MSCI All Country World rising 3.6%. Emerging markets (+5.8%) led the global charge on the back of stimulus pledges in China. Meanwhile in developed markets (+3.3%), the S&P 500 advanced 3.1% on hopes for a soft landing, while the better-than-expected second quarter earnings season also supported US stocks. Elsewhere, the S&P/TSX gained 2.3% as commodity prices pushed broadly higher, while the MSCI EAFE gained 3.2%.
Fixed income markets generated negative results last month. Yield curves steepened in a bearish fashion. Longer-term bond yields saw a more profound upward move following a rush of robust US economic data, while the risk-on mood in the market dampened demand for long-term bonds. Adding to the upward move in global bond yields was the Bank of Japan’s surprise tweak to its yield curve control (YCC) program, where the central bank indicated it would tolerate higher yields on 10-year government bonds. For the month, the FTSE Canada Bond Universe declined by 1.1%, while the Barclays US Aggregate Bond Index shed 0.1%.
The US dollar lost some steam in July after easing consumer inflation in the US prompted calls for a less-hawkish Federal Reserve. By contrast, the Canadian dollar strengthened alongside the latest surge in crude prices and a relatively hawkish Bank of Canada that saw interest rate spreads between Canada and the US narrow. Elsewhere, the yen shot higher following the Bank of Japan’s adjustment to its yield curve control program, while both the euro and the pound advanced against a broadly weaker greenback.
In commodity markets, crude oil posted its biggest monthly gain since January 2022 amid signs that the market is tightening, with estimates that crude demand is running at a record clip just as OPEC+ cuts back production. WTI crude rallied close to 16% to $81.80/barrel, the highest level since April. Gold notched its best month since March as cooling US inflation spurred hopes that interest rates have peaked, which is supportive for gold which bears no interest. Finally, copper hit a three-month high amid growing optimism over the outlook for Chinese demand following pledges for stimulus, while mounting supply risks in top producing Chile also supported the red metal last month.