T8 – Market update

Insights — September 2023

We share our latest observations on global asset markets

Selling across all geographies saw world equities retreat by -2.4% in August (in US dollars), with markets in Europe and the Asia Pacific (-4.0% and -6.4% in US dollars, respectively) underperforming the United States (-1.8%). The Clean Energy Index followed the equity market lower, falling by 14.4%, as small and mid-cap companies bore the brunt of the selling.

One of the main catalysts for the selloff in August was investor uncertainty on the future path for interest rates after an aggressive 18-month tightening cycle. Resilient economic data out of the United States was reducing the likelihood of monetary easing (rates cuts) for the foreseeable future and increasing the possibility of further interest rate hikes. Further, there was investor concern on how long tight monetary policy would stay in place if the US Federal Reserve was to hold at current levels and its long-term impact on the economy.

During August, bond markets continued the yield curve steepening from the previous month (following the 25 basis point interest rate hike by the US Federal Reserve in late July), with yields on short-dated US Treasury bonds (1- to 3-year maturities) staying anchored while 10-year US Treasury yields moved up by 15bps (to 4.1%) and the long end of the curve (+20-year maturities) increasing by 20 basis points. These movements in the yield curve and a stronger US dollar, its first positive month since May (+1.7% on a trade-weighted basis), were the result of the risk-off tone in markets and was a headwind for commodities (including gold).

Despite interest rates in the United States being at their highest level since mid-2007, the consensus outlook for a slower pace of rate hikes, a likely pause, followed by rate cuts driven by the macroeconomic cycle is likely to be supportive for risk assets and gold going forward. A scenario of lower interest rate expectations and thus lower US Treasury yields (real and nominal) would also put pressure on the US Dollar which is likely to be beneficial for risk assets (and gold).

The correlation between equities and bonds remained elevated, as both asset classes posted negative returns in August. In currency markets, investors looked for the safety of the US dollar which strengthened by 1.7% (trade-weighted basis).

The macroeconomic challenges facing China, especially within its property sector, were a considerable headwind for cyclical currencies (like the Australian dollar) and industrial metals (like copper) and placed a negative tone on investor sentiment. China’s government responded with further stimulus measures to help reassure investors and counteract the macroeconomic headwinds.