Equity Markets Retreat
The S&P 500 closed the week down over 4%, marking its worst performance since early 2023. The tech-heavy Nasdaq Composite fared even worse, sliding nearly 6% as the artificial intelligence sector showed signs of faltering. Nvidia, a bellwether for AI stocks, suffered a particularly steep decline, falling almost 10% in the middle of the week, setting a record for the largest single-day loss in market capitalisation.
In Europe, the FTSE 100 index dropped 2%, and the STOXX Europe 600 Index ended down 3.52%, reflecting the global nature of the sell-off. Germany's DAX also posted losses, with weak industrial production data from Germany adding to concerns about the health of the Eurozone economy.
Economic Data and Macroeconomic Analysis
The week was punctuated by several key economic releases. In the US, August's Nonfarm payrolls report showed the economy added 142,000 jobs, slightly below expectations of 161,000, however the unemployment rate improved marginally to 4.2%. While these figures suggest a resilient labour market, they also indicate a gradual cooling that could influence the Federal Reserve's monetary policy decisions.
In the eurozone, Q2 GDP growth was confirmed at 0.3%, which aligned with expectations. This means the eurozone’s shallow technical recession is over after GDP shrank by 0.1% in last year's third and fourth quarters. This was the eurozone’s most robust quarterly growth since the third quarter of 2022, lifted by stronger-than-expected growth in Germany, France, Italy and Spain. However, regional economic troubles remain, with Germany's industrial production figures released on Friday showing further weakness in factory activity.
Central Bank Watch and Monetary Policy Implications
Investors are closely monitoring central bank signals as the September policy meetings approach. The ECB's interest rate decision on the 12th September will be crucial in determining the near-term trajectory of European assets. Eurozone inflation fell to 2.2% in August, down from 2.6% in July, barely above the ECB’s 2% target. This adds to the case for the European Central Bank (ECB) to cut interest rates in September in line with expectations.
In Canada, the Bank of Canada announced on the 4th September 4 that it had cut the key interest rate by another 25 basis points to 4.25%. This is the third consecutive policy rate cut this year and the lowest since May 2023.
The potential divergence in timelines for monetary policy decisions between major economies could have significant implications for currency markets and global capital flows.
Bond Markets
The US corporate bond market saw robust activity, with 29 borrowers issuing investment-grade bonds on Tuesday alone. This surge in issuance suggests companies are eager to lock in borrowing costs while yields remain relatively low. Investment-grade yields fell from a year-to-date high of 5.85% in April to 5.04% today. Additionally, the strong demand for corporate debt indicates that investors still seek yield despite the uncertain economic outlook.
Global Economic Outlook
The global economic landscape remains complex, with various regions facing distinct challenges. The US economy continues to show a level of resilience, but questions remain about the sustainability of its growth trajectory and the Fed’s rate cut timeline. On the other hand, Europe is grappling with energy security issues and the threat of recession, particularly in its largest economy, Germany. Furthermore, a diverging trend between consumer and business sentiment is apparent, with consumer confidence recovering over the past months from its previous low levels. However, spending has been sluggish, especially in consumer goods, despite rising real incomes and high savings, boosting consumer sentiment.
Emerging markets are also navigating a challenging environment of higher global interest rates and a strong US dollar. In China, an economic slowdown and property market woes overshadow global growth prospects, with potential ripple effects on commodity-exporting nations and supply chains. China’s official manufacturing purchasing managers’ index (PMI) slipped to a lower-than-expected 49.1 in August from 49.4 in July as production and new order declines deepened. This marks its sixth straight decline and fourth month below the 50 mark, separating growth from contraction, highlighting that the world’s second-largest economy may struggle to meet this year’s growth target.
Looking Ahead
As we move into September, traditionally a challenging month for equities, investors will be keenly watching for signs of economic resilience or weakness. The upcoming Federal Reserve meeting on the 18th September looms large, with markets currently pricing in a 25-basis-point rate cut. However, after the disappointing Nonfarm payrolls figure, a 50-basis-point rate cut is still on the cards.
This week has served as a further reminder of the market’s sensitivity to economic data and policy expectations. As we navigate the traditionally volatile month of September, investors would do well to maintain a diversified portfolio and focus on long-term objectives rather than short-term market fluctuations. The interplay between monetary policy, economic growth, and market valuations will continue to shape the investment landscape in the coming months.