Selected Market Indicators for Periods to 31 August 2023
As we’ve seen in the past, when China experiences economic turmoil, the rest of the world is likely to feel its effects. This month, there was a decline in global share markets due to increased market volatility caused by stress in the Chinese property market, weak macroeconomic data from China, and a rise in sovereign bond yields. In August, the stock market in developed countries went down by -1.8%, and in emerging markets such as, Brazil, India, South Africa, and others fell by -4.7% in local currency. The fixed income market did not help to balance out equity weakness, as government yields were once again on the rise across most major economies.
The pickup in yields was largely a result of the “higher for longer” interest rate narrative. Despite no Federal Open Market Committee meeting in August, minutes from the July meeting showed that US policymakers are divided on the next steps, which triggered some uncertainty among investors over the future course of US rates. Elsewhere, UK and Eurozone share markets both dipped -2.5% and -2.3% respectively, while Japanese equities were flat on the month (local currency terms).
In commodities, oil prices also remained relatively flat over the month as production cuts were offset by weaker growth prospects in China. The Bloomberg Commodity Index (NZD hedged) was down -0.8%.
The New Zealand share market underperformed global peers in August. Weak economic data, an upwards revision of the Reserve Bank of New Zealand’s projected interest rate track and other global forces all detracted from domestic equity market performance this month. Although also posting a negative return, Australian equities fared much better and returned -0.7%.
Global equities lost momentum in August. Negative sentiment was largely driven by the bleak outlook in China and the knock-on effect this would have for global economic growth. “Higher for longer” interest rates and the corresponding increase in yields also weighed on equity market performance. The MSCI World (local currency) finished the month down -1.8%.
The domestic bond market saw a slight decline in August. New Zealand Government bonds underperformed global peers as the NZ 10-year yield experienced a rather dramatic increase and ended the month at 4.91% (up 0.28% from last month). Cash was up 0.5% in August and has risen 4.7% over the last year.
Asia-Pacific currencies depreciated this month due to growth risks associated with the Chinese economy and a strengthening USD. The NZD/USD was down -4.3% as the US dollar continues to benefit from the ongoing resilience of the US economy and a weak global backdrop. The NZD also fell against the AUD and GBP by -0.5% and -2.9% respectively. Elsewhere, the JPY/USD was considerably weaker in August and now hovers around the lows that prompted an attempt to shore up the currency by the Bank of Japan last year.
Significant developments for August:
- Credit rating agency, Fitch, downgraded the US government’s credit rating from AAA (the highest investment grade) to AA+ in early August. Fitch cited unsustainable debt and political dysfunction as the main reasons for the downgrade.
- Weighing heavily on emerging markets more broadly, Chinese equities were particularly weak this month as slowing growth reverberated across Asia. As if a deteriorating property sector wasn’t enough, a range of other economic barometers from manufacturing to exports all fell in July as China slipped into deflationary territory for the first time in over two years. Policymakers cut interest rates twice during the month in an attempt to absorb deflationary risks, however, credit demand remained weak.
- The annual Jackson Hole symposium of central bankers was held in August. Fed Chair Jerome Powell struck a much different tone to last year in his keynote speech; however, he did stress that the Fed’s policy will remain data dependent with a bias to tighten if necessary.
15 September 2023