Economic growth is showing signs of a soft landing, with slower but steady private consumption across developed economies. Disinflation is strong, particularly in consumer durables, reducing the focus on inflation for investors. Central banks are expected to carry on cutting rates in response to easing inflation, avoiding increases in real interest rates.
In the US: Cautious optimism
Economic growth is still strong at 3.1%. Inflation cooled to 2.5% year-over-year, moving closer to the US Federal Reserve’s 2% target, which strongly supports the scenario of a first rate cut by the Fed this year in September. Labor market conditions have softened, and the Fed is now focusing more on these conditions. Overall, the economic environment shows signs of stabilization but with cautious optimism regarding future growth.
In Europe: Geopolitical uncertainties and productivity challenges
Although growth in the Eurozone picked up to 0.6%, it is still below potential due to weaker global demand and the slowdown in China. Meanwhile, inflation pressures have moderated down to 2.2%, contributing to the potential for the European Central Bank (ECB) to keep cutting rates. The economic environment is also influenced by geopolitical uncertainties and productivity growth challenges.
In China: Stabilization of the economy
China’s economy has experienced 4.7% growth, supported by policy stimulus despite challenges from the downturn in the property sector. Inflation in China slightly rebounded to 0.6%, with consumer prices increasing, indicating a better demand environment. The People’s Bank of China (PBoC) has maintained an accommodative monetary policy stance, keeping interest rates low at 1.7% to support economic recovery. The central bank’s focus has been on managing debt risks, promoting economic growth, and addressing the challenges in the property market to stabilize the overall economy.
Equity: In August, the S&P 500 rose 2.3% month-to-date (MTD) and 18.4% year-to-date (YTD). The Nasdaq 100 saw a smaller MTD increase of 1.1% and a YTD rise of 16.3%. The Euro Stoxx 50 grew 1.7% MTD, while the Nikkei 225 declined 1.2% MTD but remained up 15.2% YTD. The Hang Seng China Enterprises was up 3.7% MTD and 9.8% YTD.
Fixed Income: The 2-year US Treasury yield decreased by 34bps MTD, while the 10-year yield fell by 20bps MTD. In Germany, the 2-year yield fell by 11bps MTD, while the 10-year yield remained unchanged for the month but was up 29bps YTD.
Currencies: EURUSD appreciated 2.4% MTD, while USDJPY decreased 5.1% MTD. USDRMB also lost 1.9% MTD, while AUDUSD saw a significant increase of 3.9% MTD.
Commodities: Mixed movements with WTI oil prices decreasing 5.6% MTD, while gold increased 3.2% MTD, marking a strong YTD growth of 20.9%. Copper prices contracted 0.4% MTD while being up 6.8% YTD.
Bitcoin: Significant decline of 10.3% MTD but up 41.1% YTD.
Global equities experienced significant volatility over the last two months. A sharp rotation occurred as small-cap and value stocks outperformed due to a surprising decline in the US CPI. Growth concerns resurfaced in August following weaker-than-expected PMI and non-farm payroll data, causing global equities to dip over 8%. However, more constructive economic data, such as jobless claims and retail sales, helped markets recover most of the losses, highlighting the market’s reliance on a resilient economic outlook.
In the US: Continuing positive backdrop for the equity market
US equities experienced volatility over the past month but have almost returned to all-time highs. The market initially declined after a weaker-than-expected July labor report but rebounded due to strong retail sales, favorable inflation data, and low unemployment claims. This recent market movement has not changed the overall positive outlook, which is supported by healthy earnings growth, improving inflation, anticipated Fed rate cuts, and increased artificial intelligence (AI) investment.
In Europe: Moderate positive growth and declining interest rates benefit European equities
Eurozone equities appear to be in a more favorable position following a recent market pullback. Despite some weaker economic data, the overall moderate positive growth outlook remains unchanged. Along with an improving domestic economy and easing monetary policy in the Eurozone, equities seem relatively well-supported at the moment.
In China: Long-term growth likely to stay between 4% and 5%
Stocks have shown mixed performance. The HSCEI index increased 3.7% MTD in August, reflecting a positive trend for Chinese companies listed in Hong Kong. The overall market sentiment has been influenced by policy stimulus, with investors focusing on growth prospects amid global uncertainties. Despite these gains, there remain underlying concerns regarding China’s property sector and the sustainability of the economic recovery.
The recent outperformance of the US economy, with strong growth and a robust labor market, led the Fed to raise interest rates to the highest level among G10 economies, supporting a strong US dollar. However, the current economic environment is changing, with inflation moving back to target, a weakening labor market, and the end of above-potential growth. This shift does not justify a strongly restrictive monetary policy anymore, prompting expectations that the Fed will start easing rates aggressively from September, leading to a broad weakening of the USD.
EURUSD: 1.1070, above the [1.05; 1.10] range for the first time in 2 years
The ECB is expected to continue with rate cuts of 25bps per quarter through at least mid-2025. This steady approach contrasts with the anticipated more aggressive rate cuts by the Fed in the US, providing a relative advantage for the euro. Additionally, the eurozone’s trade balance has recovered from the energy crisis-induced deficit in 2022, now returning to pre-Ukraine war levels, which further supports the euro.
USDRMB: 7.10, collapsing from its 7.30 all-time high
The Chinese renminbi is strengthening, with the country’s balance of trade reaching a significant USD 100bn/month. USDRMB could drop below 7.00, driven by robust trade fundamentals and an anticipated US interest rate cut. Nonetheless, USDRMB would likely remain above 6.30, given Chinese officials’ reaffirmation of their commitment to currency stability during the recent politburo meeting.
USDJPY: Drop from 162 to 140 on BoJ’s interest rate hike
USDJPY experienced a significant sell-off from 162 to 140 following the Bank of Japan’s (BoJ) decision to increase interest rates from 0-0.10% to 0.25%, prompting a wave of yen short-covering. This decline was also influenced by steadily falling US yields, which pushed the exchange rate below the key technical support level of 141.50, leading to stop-loss selling in the market.
How to benefit from the cycle of declining interest rates?
The yield curves in USD and EUR are steepening, i.e. the slope is becoming positive (long-term rates > short-term rates). This means that there are now opportunities to lock yields for longer maturities. Yields are declining but are still high with respect to the levels of the past 15 years.
Bond yields remain elevated as overall bond credit spreads (i.e. the extra yield above government yields) are wider, reflecting some political unrest and uncertainty both in the US and Europe. Central bank rate cuts have started, and robust economic growth is maintaining low default rates. This environment presents an opportune moment to increase active bond exposure.
High interest rates can be locked for longer periods by investing cash in bonds from large Investment Grade banks, which can provide an income per annum of 5%+ net in USD and 4%+ net in EUR, with a duration of 5 to 10 years.
Gold: All-time high at USD 2,585/oz, up 25% YTD
Gold has reached all-time highs this year and may continue its upward trend over the next 12 months. The inflows and momentum may push gold prices to USD 2,600/oz by year-end and USD 2,700/oz by mid-2025. This growth is driven by anticipated large inflows into exchange-traded funds (ETFs), which typically rise as interest rates decline. Additionally, central banks are expected to maintain elevated net buying, projected at 900-950 metric tons in 2024, thus supporting the ongoing demand for gold.
Oil: Stabilizing near USD 80/bbl, near the lowest price point of 2024
At USD 80/bbl, oil prices are close to the YTD through. The sell-off was triggered by recession fears in the US following a weak job market report and reduced risk premiums due to ceasefire hopes in Gaza. Weak crude imports and refinery activity in China in July raised concerns about global oil demand, although a rebound in China’s crude imports in August suggests improvement. Global crude inventories have continued to decline, indicating that supply growth is not keeping up with demand, with US crude production growth slowing down and declining drilling activity not pointing to an increase in supply anytime soon.
Copper: Stabilizing near USD 9,200/mt, the lowest level of 2024
Copper prices have stabilized after reaching a 4-month low due to increased inventories and weak global manufacturing data. Despite ongoing demand concerns, the copper market is expected to remain in deficit, with prices possibly rising to USD 12,000/mt in 2025.
