General market sentiment has remained positive, but the climate is uncertain as we head into autumn. Investors’ focus is especially on the US interest rate policy, the availability of refined petroleum products and the high expectations placed on AI companies.
In the equity market, August ended on a positive note, on the whole. In several key markets, the month’s returns were approximately three per cent in local currencies, although in Europe the increase was just one per cent.
The fixed income markets have shown some fluctuation on both sides of the Atlantic. In the United States, interest rates have moved mostly sideways, while in Europe, interest rates have seen a slight upward trend. This year, the rise in interest rates has depressed returns on long-duration, or interest-rate-sensitive, fixed income investments in particular.
The fixed income market is likely to be this autumn’s key theme. The markets anticipate changes to the Fed’s interest rate policy under its new Chair Kevin Warsh. Addressing the annual event held in Jackson Hole in late August, Warsh spoke about how the Fed’s policy should be based on different themes, metrics and tools than before.
In the USA, inflation has been above the Fed’s two per cent target for the past five years, although market conditions have been exceptional. However, Warsh noted in his speech that, of the Fed’s dual mandate, inflation currently poses a greater challenge than unemployment, and that the objective is to bring inflation closer to the target.
Right now, the markets are expecting the Fed’s first interest rate hike in the second half of the year and a second one towards the start of next year. Warsh’s speech at the Fed meeting confirmed these expectations. It will be interesting to see, however, how the markets react if Warsh adopts his planned, more tight-lipped approach and refrains from commenting on the Fed’s future plans in any way in connection with possible hikes. This could lead to stronger market volatility, as investors have grown accustomed to the Fed’s detailed communications in the past few years.
The war in Iran has impacted the markets due to energy and particularly oil shortages. The biggest concern is no longer crude oil, but rather refined petroleum products, such as petrol and diesel. Their prices have risen more rapidly than crude oil’s, which increases consumer costs and could heighten inflationary pressures. Diesel in particular is used in significant volumes globally, but its refining capacity is currently low and prices are up.
Behind this is the escalation of the wars in the Middle East and Ukraine. Aside from crude oil, the Middle East holds plenty of refining capacity, but with freight traffic in the Strait of Hormuz at an almost complete standstill and some of the refineries damaged in strikes, it is not possible to get the accustomed volume of refined petroleum products onto the global markets. Russia’s refining capacity has also suffered due to Ukraine’s drone strikes, and sanctions prevent the transportation of the parts needed to repair the refineries to Russia. Previously, large volumes of refined petroleum products flowed out of Russia into China in particular, but China has now had to deploy its abundant energy reserves.
The markets have, however, adapted to the falling availability of oil and reacted to the rise in prices. Several countries have tapped into their oil reserves, and with the Strait of Hormuz currently closed, oil traffic has been re-routed.
Over the summer, there has been significant discussion in the markets about the impacts of AI on both financial markets and economic growth. Nvidia’s Q2 earnings and outlook were strong, which put the negative talk around the AI theme on hold temporarily.
The importance of the AI theme is also illustrated by the fact that around 20 per cent of the United States’ total imports are currently AI-related. Data centre construction is surging and microchips are being imported in large quantities.
When it comes to returns, the current year has resembled a roller coaster, as usual. In the summer, returns came close to 100 per cent, but have since fallen, while still remaining positive. However, semiconductor companies are generally volatile and their valuations fluctuate often.
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