Markets faced weakening global economic and corporate data combined with an increase in geopolitical risk during August, resulting in an increase in market volatility and investors to favour more defensive assets. As Argentina decide whether to give socialism another go, resulting in asset loss and capital flight, global bond yields currently trade at record low levels.
US Treasuries are perceived to be a safe asset and so it is unsurprising that they performed particularly well. The yield on the US 10 year bond fell to 1.50% at the end of the month from 2.0% at the start and now yield less than the 2 year bond, resulting in an inversion of the US yield curve. Yield curve inversions have predated each US recession over the last 50 years and are closely watched by investors. The more defensive sectors of the US equity market were the best performing during the month, with Real Estate and Utilities generating 4.5% return relative to the S&P 500 index, which fell -2.7% in the period, generating a return of 2.3% over the past year.
In Germany it was reported that GDP growth fell -0.1% in the second quarter, with manufacturing, export and business sentiment date continuing to disappoint into the third quarter. With a weakening economic backdrop and benign inflation the expectation is that the European Central Bank will sanction further monetary easing at their September 12th meeting. Bond yields have fallen further. In a possible sign of investor antipathy, Germany managed to sell only 43% of the €2bn on offer for their 30 year bonds yielding -0.11%. The German 10 year government bond yield fell to -0.71%, the French 10 year bond yield -0.41% and Swiss 10 year bond yield fell to -1.02%. MSCI Europe ex UK index returned -0.8% during the month, 2.6% for the past 12 months.
The Brexit debate continues to influence markets in the UK, with the Government increasing its preparations for leaving the EU without a withdrawal agreement on 31 October. Business and consumer confidence continues to be negatively affected by the Brexit impasse. Consequently UK government bonds rose, with the FTSE Actuaries UK Gilts All Stocks index returning 3.5% and the yield on the 10 year government bond falling to 0.43% at month end. Following the decline from 1.33 ($ to GBP) in March, Sterling was relatively stable over the month against the US Dollar finishing as it started the month at 1.21 ($ to GBP). UK stock market indices provided divergent returns in August. The FTSE 100 index returned -4.1%, whereas the FTSE 250 (excl. Investment Trusts) index lost just -0.90% over the month. The Oil and Gas sector was the major detractor to the FTSE 100, with the sector declining -9.7% over the month. In capital terms the FTSE 100 index has lost -3.0% over the last 12 months, generating a total return of 1.4% with income included, over the same period.
There is much to worry about in the Asia Pacific region with US-China trade dispute, Japan and South Korea trade restrictions, North Korea testing missiles and the crisis in Hong Kong. Investors share those concerns with the MSCI AC Asia Pacific ex Japan index declining -3.1% during the month, falling -2.6% over the last year. Likewise the MSCI Japan index lost -3.2% in August, resulting in a one year fall of -9.6%.
Gold is a beneficiary of the investor preference for safer assets, with the price of the yellow metal increasing by 6.5% over the month to 1,520 (US$/Oz). Brent Crude declined -8.3% in August, ending the month at less than $60 a barrel as concerns over global trade and tensions in the Middle East continue.
Chief Investment Officer