It is now August, and many people are returning to work mode. What happened on the markets during the summer, and as we head into autumn, what are our starting points?
Over the summer months, the equity and fixed income markets recovered from the springtime tariff storm. The markets had a fairly peaceful summer, with the equity markets showing a steadily rising trajectory since late June.
However, that peace was shattered at the turn of the month, on the 1st of August, when the equity market saw its first substantial drop in several months. The US Nasdaq, for instance, fell around two per cent during the day, while the European markets dropped two to three per cent. The bigger drop appears to have been temporary, however, and the markets opened this week in a calm mood.
The trade war was the dominant topic on the markets in the spring. The USA recently reached preliminary agreements with its key trade partners, and many see this as the end of the trade war. Even though tariff and trade talks will certainly continue, the trade war is now moving into the background as the main theme. Easing uncertainty has helped lift markets across the board, and developments in US domestic politics have also favoured the markets.
Several observers are currently forecasting the tariffs to settle at roughly 15 per cent. The markets by far regard this as a victory since that level is significantly lower than the previously dreaded 30 per cent. It is still very high from a historical perspective, with the current tariffs comparing with those of the early 1900s.
While the full effect of the tariffs is not yet visible in the economy, they are expected to boost inflation and slow down growth. The US GDP growth forecasts have been downgraded since March and April. US labour statistics for July came out weaker than expected last Friday. At the same time, the figures for the two preceding months were also substantially revised downward from earlier reports.
Inflation slowed during the first half of the year on both sides of the Atlantic, in some markets even more rapidly than expected. European monetary policies have eased significantly during H1. The uncertainty caused by the tariffs has kept US key interest rates unchanged, but markets nevertheless expect interest rate cuts also in the USA.
Lower short-term interest rates have not yet impacted longer-term rates, and the interest rate curves have become steeper both in Europe and the USA. Inflation-related uncertainty and expansionary financial policy are likely to keep long-term interest rates stable also going forward.
Early in the year, a new theme emerged: European equity markets outperformed their US counterparts. However, this theme reversed during the second quarter, and the markets have reverted to the trend of recent years’, when US companies and technology stocks led the way. The fixed income markets have repeated the recent years’ pattern of corporate bond domination.
Yet new themes are also emerging on the equity markets, as small-cap companies are outperforming large-caps in Europe. Moreover, the domination of growth companies in relation to the rest of the market seems to have dissipated outside the USA.
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