Global Market Commentary- August 2022

Global markets pulled back in the latter part of August after rallying in July and continuing their rally in the early part of August. The MSCI World Islamic Index and the Dow Jones Sukuk Index fell by 4.6% and 0.3% in August, respectively.

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The key turning point was US Federal Reserve Chairman Jerome Powell’s eagerly awaited  speech at the annual Jackson Hole Conference, where he indicated that interest rates would continue to be raised as needed in an effort to restore inflation back to target  levels, even if doing so would likely slow GDP growth. 

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With the Fed having restored market participants’ confidence in the Fed’s ability to effectively navigate the current economic climate thanks to a series of encouraging economic releases,, the Chairman’s messaging resonated with both equity markets, which priced in slower growth, and bond markets, where short-term bonds were repriced downward to reflect unfamiliarly high yields.

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Prior to the Chairman’s remarks, market participants were debating whether the US economy was already in a recession. The component data was mixed, and the possibility of a continuing expansion was not ruled out.   

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In total, the S&P 500 dropped 4.2% in August 2022. With earnings remaining strong and inflation appearing to begin to subside, equity markets may begin  to view new economic information in more nuanced ways, where continued positive economic releases  may lead to more aggressive interest rate hikes. Further, lower valuations, and negative economic releases may lead to lower inflation and less aggressive interest rate hikes.  The continued strength of US earnings will be crucial in all cases. 

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The positive economic releases in the US combined with the continuation of weakness in the UK and European markets led to currency devaluation, with the Bank of England hiking interest by 50 bps. This hike was the most in nearly three decades and was putatively made to combat persistently high inflation. Meanwhile, the Euro fell below parity against the US dollar. The strength of the US dollar compared to the Euro and Sterling contributed to the strong performance of US dollar denominated assets in the UK, even as they declined in US dollar terms.  

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In China, markets were surprised in mid-August by key rate cuts of 10 basis points in its one-year and seven-day leading rates, which were followed by other cuts throughout the month.  These cuts exposed  a deepening real estate slump, as many urban development projects have stalled over the years and many property owners are in overdraft.  Furthermore, China’s post-lockdown recovery has slowed  as the country’s zero-COVID policy continues to impose constraints.. These unexpectedly deteriorating conditions have also had an impact on other emerging markets, with stocks falling and local bonds rallying.

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Markets are likely to remain volatile in the coming months, as the summer rally appears to have ended for the time being, with the historically volatile fall season looming. Markets will continue to evaluate whether the more cautionary macroeconomic outlook has already been fully reflected in market prices, which could position them for gains in the coming months if the outlook starts to improve.

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