Research Insights Market Commentary August 2022
In August most investment markets were positive for most of the month until comments made late in the month by the US Federal Reserve Chairman Jerome Powell at the annual Jackson Hole Economic Symposium triggered swift declines, particularly in international shares. Chairman Powell stated that the Federal Reserve would continue to raise interest rates, which may “bring some pain to households and businesses”.
Inflation concerns, particularly around energy pricing, are continuing to force central banks to raise rates with predictions that UK inflation could rise to above 20% when the Northern Hemisphere enters winter. Russia is halting/restricting gas supplies to Europe and using its abundant gas reserves as leverage in an attempt to remove sanctions imposed by Western nations.
Equity returns across global markets were mixed, and were influenced by the sector composition within the various indices. Australian large cap equities returned +1.3% for the month with the Materials and Energy sectors, which comprise 28% of the Australian equity market, doing the heavy lifting. International equities, with a 71% weighting to US equities, were more significantly influenced by the technology and communication services sectors which declined in August.
Currency hedged international equities fell by (-3.6%) while unhedged international equities fell by (-2.5%), cushioned by a falling Australian dollar which was down (-2.1%) for the month, buying US$0.6842 at the close.
Currency movements are primarily a story of US dollar strength, with the USD achieving 20-year highs against a broad basket of currencies, at the same time that China’s economy stalls. China’s property sector is in need of stimulus while a fresh round of lockdowns of major Chinese cities is underway due to China’s zero-Covid policy approach.
In early August the RBA raised rates by 0.50%, taking the official cash rate to 1.85% with guidance that further interest rate rises were necessary and to be expected -the RBA then raised rates by a further 50bps at their 6th September meeting increasing the cash rate to 2.35%.
The Australian 10-year government bond yield rose by 54bps to 3.60% and the 2-year government bond yield rose by 56bps to 2.99%. The US 10-year government bond yield increased by 54 bps to close at 3.19% and the US 2-year government bond yield increased by 61bps to 3.49%.
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