Stock markets started August strong after the rally in July but, after the speech of the chairman of the Federal Reserve, Jerome Powell, the market turned around and initiated a correction as it became clear that further substantial interest rate rises may be needed to tame inflation. The correction lasted throughout the month, leading the markets in red for August.

US Congress passed the Inflation Reduction Act which aims to reduce inflation by curbing the deficit, as well as investing in domestic sources of clean energy. US inflation increased by 8.5% year-on-year in July, down from 9.1% in June and below analyst expectations of 8,7%. Also the US jobs market remained strong with non-farm payrolls growing by a larger-than-expected 528,000 in July.

But then, despite rising concerns of an economic downturn, the Fed stuck to a hawkish message at the annual conference at Jackson Hole, saying they would not shift course from raising rates. With expectations of a 1 percent interest rate increase in September, the market reacted swiftly with the S&P500 index dropping 4,24%, Dow Jones dropping 4,07% and Nasdaq dropping 4,64% for the month.

As a result of anticipated further interes trate increases, the yield on 10-year treasury bills soared from 2,67% to 3,196%. Also gold dropped 3,12% to 1726,2 dollars per ounce.

Eurozone shares fell in August amid ongoing worries over inflation, particularly as a result of soaring gas and electricity prices as Russia said it would halt the Nord Stream 1 pipeline, which supplies natural gas to Germany. Inflation continued to rise in the eurozone with annual consumer price index (CPI) inflation estimated to be up 9.1% in August. Industrial producer prices for June were up 35.8% in the eurozone compared with June 2021. Also European indices lost ground with the DAX, Eurostoxx and CAC40 dropping 4,81%, 5,15% and 5,02% respectively. The Slovene SBITOP index booked a modest loss of 0,95%.

The Hong Kong Hang Seng index lost 1,00% in August amid losses among Chinese carmakers. Vehicle deliveries suffered from supply chain disruptions and weak consumer confidence, undermining the corporate earnings outlook. The Japanese stock market closed the month with a 1,04% gain, driven by strong quarterly results and an anticipated peak in US inflation. The yen resumed its weakening trend against the US dollar, after the brief reversal seen in July.

As a result of recession fears crude oil dropped 8,57% to 89,55 dollars per barrel despite the ongoing war in Ukraine.

In September all eyes will be on the US inflation report and the consequent decision of the Federal Reserve on the interest rate. Expectations are they will increase by either 0,75% or possibly even 1%.

Rudy Marchant
Fund manager Primorski skladi

Monthly reports - August 2022