U.S. Slowdown and Yen Unwind Keep Investors on Their Toes
• Weaker US economic data triggers market volatility.
• Japanese Yen spikes higher, causing unwind of popular carry trade.
• US inflation falls to lowest level since March 2021.
• Bank of England announces its first cut to interest rates since 2020.
• AI chip manufacturer Nvidia announces strong second quarter revenue growth.
• UK prime minister Keir Starmer warns that “painful” choices are likely in the October budget.
• Democratic nominee Kamala Harris pulls ahead of Donald Trump in US election polls.
• Iron ore prices hit their lowest levels in two years.
Equity markets around the globe briefly declined at the start of August, following the publication of less encouraging US economic data. A weaker than expected US jobs report raised concerns there is a chance the US may be heading for recession rather than the hoped-for soft economic landing. At the same time, the Bank of Japan announced its biggest increase in interest rates for over 17 years. This added to the volatility as ‘carry traders’, who borrow in a low-interest rate currency (such as the Japanese Yen) and invest in a higher yielding currency, tried to exit their positions as the Yen strengthened. This caused the prices of Japanese equities to fall, as they suffered their largest one-day decline since 2016. News that Berkshire Hathaway, the investment vehicle of legendary investor Warren Buffett, had sold off a large part of its holding in Apple shares added to the negative sentiment towards Technology stocks. The VIX measure of volatility, often referred to as Wall Street’s fear gauge, rose to its highest level since October 2020, before stabilising to more normal levels.
The US Federal Open Market Committee did not have a scheduled meeting during August, but it now looks almost certain to start cutting rates in September. Fed Chairman Jerome Powell made a commitment to markets at the annual Jackson Hole event that they would begin reducing rates soon. The Bank of England did meet in August, where it announced its first cut to interest rates since 2020. Expectations of significant rate cuts also helped bonds as well as so-called ‘bond proxy’ equity sectors, which tend to do well when interest rates fall.
At the start of August, polls and betting markets had Kamala Harris and Donald Trump effectively neck and neck in the race to become the next US President. Over the course of the month, Harris has started to pull away. The Democratic Party, which had been deeply divided just a month ago, has experienced a resurgence of hope.
The Democrats gathered in Chicago for their Democratic National Convention (DNC) during the month. The atmosphere at the DNC stood in stark contrast to just a month earlier when there were widespread calls for Biden to step down from the race. Now, the crowd expressed gratitude towards President Biden for his decades of public service, his personal kindness, and, though with some discomfort, his “decision” to pass the baton to Harris. In a surprise appearance on the first night of the convention, the new Democratic nominee, Kamala Harris, took the stage, expressing her desire to begin the event by honouring President Biden before he delivered his own speech.
Biden’s address, filled with emotion, conveyed a passionate endorsement of Harris. Reflecting on his career, Biden declared that choosing Harris as his Vice-President was the best decision he ever made. He emphasised her readiness for the Presidency, asserting that she will be a leader children can admire and one who will command respect on the global stage, something he claimed she already has through her role as Vice President. While Biden expressed his love for his job, he underscored that he loves his country more, marking the closest he came to explaining his decision to relinquish his own campaign. The first night of the DNC also marked the return of a familiar figure, Hillary Clinton, eight years after she made history as the first woman to be a major party’s Presidential nominee. Clinton did not hold back, delivering sharp jabs at Donald Trump and accusing him of spreading lies about Harris, much like he had done to her eight years ago
As is tradition, on the closing night of the convention, Harris concluded the Democratic National Convention with a headline speech, formally accepting the nomination as the party’s 2024 Presidential candidate. Amid growing pressure to clarify her stance on key issues, Harris delivered her most definitive statement yet on U.S. foreign policy during her 40-minute primetime address. She vowed to ensure that "America, not China, wins the competition for the 21st century", pledged unwavering support for Ukraine and NATO allies and pledged to continue her efforts to get a hostage deal and a ceasefire in place in relation to the Israel-Gaza conflict, an issue that had divided Democrats and sparked protests in Chicago during the convention.
Beyond these key remarks, Harris’s speech was light on new policy proposals. Instead, she shared the story of her mother’s journey from India to California at 19, meeting her Jamaican father, and their struggles to afford a home in the San Francisco Bay Area. This personal narrative highlighted her middle-class background and underscored her promise to pass a middle-class tax cut if elected. Harris also spoke of how witnessing injustice in her own life fuelled her passion to become a prosecutor. This cautious approach, avoiding an abundance of policy proposals, may reflect her recent experience in North Carolina, where a rally just a week before the convention did not go as planned.
Speaking at that rally, Harris outlined several economic policy proposals that have since drawn significant criticism from economists and business groups. Her suggestions included raising the corporate tax rate from 21% to 28%, implementing a federal ban on price-gouging in the food sector, boosting housing supply, and offering more tax breaks for families with children and first-time homebuyers. However, these proposals have been met with concern, as critics argue they could lead to excessive government regulation and market distortions—policies that have a history of failure. In the context of the ongoing presidential race, I think Barack Obama got it right when he said, "this will still be a tight race in a closely divided country." As you are aware, the political and economic developments in the U.S. have significant ripple effects on global markets.
By the end of August, most markets had recovered much of their lost ground from the early part of the month, following several developments. This included the Bank of Japan ruling out a further rise in interest rates while markets were volatile. There were also more positive labour market releases as well as data showing that the US service sector returned to growth in July. The much anticipated second-quarter results from AI chip manufacturer Nvidia at the end of the month did not unsettle the market recovery. Despite year-on-year revenue growth of 122%, its share price still slid amid concerns over whether its revenue can continue to grow to justify its lofty valuation.
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