August 2017 Monthly Market Review
While most equity markets enjoyed another positive month in August, these gains masked greater uncertainty and increased geopolitical tensions. In the last week of the month, North Korea fired several ballistic missiles into the East Sea and over Japan, which sparked a rally in interest rates and precious metals as investors sought safe-haven assets. While several broad market indices ended the month in positive territory, within these aggregate returns there were relatively high levels of dispersion across and within capital markets. The decline in the U.S. dollar (USD) continued, and the Dollar Spot Index fell 9.3% for the YTD period. However, August’s decline (−0.2%) was modest relative to recent months, with some directional divergence amongst the major currencies.
Overall, global equity markets largely shrugged off the rise in geopolitical concerns, with the MSCI All Country World Index posting a modest 0.4% gain. Select Asian markets with closer proximity to North Korea experienced weakness in the month—South Korea and Japan declined 1.7% and 0.5% in local terms, respectively. However, South Korea remained a leading performer YTD, growing 21.0% in local terms and nearly 30% in USD terms. Japan posted a more moderate 5.8% YTD increase in local terms, but the rise of the yen propelled USD returns to 12.1%. Despite delivering a modest return during the month, sector returns within the U.S. equity market varied widely. IT rose 3.5% and led the S&P 500 higher, helped by tech giant Apple hitting a new high. Conversely, consumer-related sectors declined despite consumption- driven gains in the economy and low unemployment levels. Even more dramatic was the 5.2% decline in the energy sector, which retreated alongside the 5.9% drop in the price of WTI crude oil. Equity market volatility remained relatively low throughout most of the month; however, the VIX spiked and reached a 2017 high as tensions between the U.S. and North Korea grew.
Emerging markets equities were among the strongest-performing areas during August, as the MSCI Emerging Markets Index rose for the ninth consecutive month. The Index advanced 2.2% in the month, bringing YTD returns to 28.3%. Favorable economic data and government actions helped propel several markets—particularly China, which continued to post positive returns in part due to an acceleration in manufacturing activity. At month-end, the International Monetary Fund increased China’s economic growth projections, projecting 6.4% annual growth from 2017 to 2020—up from its previous 6.0% estimate. This projection followed the government’s July announcement that the GDP grew 6.9% during the second quarter of 2017. In August, China formally announced controls to curb overseas investment as a means to promote investment within the country. Russia also posted strong returns during the month, gaining more than 8% in USD terms as investors responded positively to the central bank’s rescue of its largest privately owned bank, Otkritie. Brazil’s equity market rose more than 6% in USD terms, driven by the announcement of an ambitious privatization program targeting a number of state-controlled companies and assets. The privatization plan was announced just ahead of the October presidential election, with an aim to improve investment in the country, encourage reform, and boost economic growth. Conversely, Pakistan posted a double-digit loss in the month as the market pulled back on rising tensions with the U.S.
The MSCI Frontier Markets Equity Index also experienced healthy gains, rising 3.7%. Argentina was a key driver, as investors responded positively to reforms targeting the financial sector as well as better-than-expected industrial production figures. A strong showing by President Mauricio Macri’s party in the August primary legislative election provided further support for the equity market and the currency. Several African countries also experienced double-digit gains during August.
Overall returns for the month were modest within the broad basket of commodities (0.4%, as measured by the Bloomberg Commodity Index). However, this masks sharp dispersion across subsectors; agriculture (−6.9%) and livestock (−6.2%) were both down sharply, while industrial metals (+9.6%) and precious metals (+4.0%) moved materially higher. Within agriculture, wheat (−13.6%) fell on global oversupply due in part to a record grain harvest in Russia, while corn (−6.9%) and soybeans (−6.1%) moved lower on strong growing conditions in the U.S. Livestock also declined, with live cattle (−5.7%) prices also slumping on oversupply and lean hogs (−6.9%) declining on USDA data showing historically high inventories. In the last week of the month, Hurricane Harvey caused a number of Texas-based refiners to shut down, prompting a spike in the price of gasoline (+43.5%). Reduced demand from refiners also pushed near-term domestic crude prices lower, with WTI ending the month down 5.9%. This appears to be a short-term supply disruption, and demand dynamics have not changed appreciably.
In contrast, industrial metals prices continued to move higher (+9.6%), rising 21.4% YTD. Prices for base metals increased on elevated global demand, continued positive Chinese economic data, and a modestly weaker USD, which makes commodities less expensive for foreign currency holders. Generally bullish sentiment on the direction of the global economy also appeared to attract speculative trading within base metals. Precious metals also advanced, with gold gaining 3.9% on rising geopolitical concerns. ETF inflows grew as investors sought to hedge a potentially weaker U.S. economy and a decline in the dollar. Precious metals prices rallied following indications that the Federal Reserve may be reluctant to raise policy rates later this year. Year–to-date, gold prices have advanced 14.5%.
In addition to the increase in gold demand, U.S. interest rates rallied partly due to a flight to safe haven assets. The U.S. Treasury yield curve flattened during the month, driven by a decline in long-term rates while the front end remained stable. The U.S. 10-year yield declined 17 bps to end at 2.12%. The drop in yields appeared to be driven by a number of factors, including low inflationary pressures and the rising geopolitical tensions surrounding North Korea. The 10-year yield reached an intra-month low of 2.09% on August 29th, after North Korea fired a ballistic missile over Japan. U.S. inflation readings during August remained below the Fed’s target rate, raising speculation that the Federal Open Market Committee may not hike rates for a third time this year. The spread between the 2-year and 10-year Treasury tightened from 93 bps to 80 bps for the month; this spread has tightened 42 bps YTD and the curve is now slightly below its historical average steepness. Declining rates drove gains across fixed income markets, with the exception of high yield, which was flat for the month. Amid the flight to quality, U.S. Treasuries outperformed—particularly at the long end of the curve as the Bloomberg Barclays Long Treasury Index returned 3.4%. The broad market, as measured by the Bloomberg Barclays Aggregate Index, was up 0.9% with all major sectors posting modest gains.