Week ending 30th August 2024.

August has taken markets on a wild ride, particularly in the US and Japan during the first couple of weeks. When the Federal Reserve decided against cutting interest rates at the end of July, investors worried that the window for lower rates had closed, especially given the unexpectedly cool labour market report. This uncertainty was further amplified by the unwinding of a Japan-focused carry trade, where investors borrow yen to invest in higher-yielding assets.

However, it’s crucial to remember that market volatility is often short-lived, and this month has proven just that. Markets have steadily rebounded, closing August broadly in line with or even above where they started. Whilst these brief episodes of volatility also represent key buying opportunities for long term investors, they also highlight the importance of diversification and active investment management.

This week, all eyes were on semiconductor giant Nvidia’s earnings, which were closely watched as a key indicator of the AI-driven tech boom’s health. Despite Nvidia delivering impressive results that exceeded both revenue and profit forecasts, the smaller-than-expected earnings beat, relative to recent high standards, led to a 6% drop in its stock price. This decline had broader market implications, leaving the S&P 500 unchanged and pushing the tech-heavy Nasdaq down by 0.2%. The market’s reaction underscores how investors can become more critical after significant gains, even when the underlying results remain strong.

In a positive turn for the US economy, gross domestic product (GDP) grew at an annual rate of 3.0% in the second quarter of 2024, surpassing the initial estimate of 2.8% and showing a marked improvement from the 1.4% growth in the first quarter. This robust growth reflects stronger-than-expected consumer spending and upward revisions to import data. The impressive 3.0% growth in Q2 addresses earlier concerns about the economy’s strength, suggesting that the Federal Reserve may be successfully steering towards a so-called “soft landing.” The closely watched US core PCE (the Federal Reserve’s preferred measure of inflation), excluding food and energy, rose by 2.6% over the month in July, again at the same level as June. Markets reacted positively following the report, building upon hopes that this leaves the door open for policymakers to start cutting interest rates next month.

In Europe, inflation showed encouraging signs of moderation in August, dropping to its lowest level since mid-2021. The annual rate for the Eurozone fell to 2.2%, down from 2.6% in July, meeting market expectations. More notably, the core inflation rate, which excludes volatile items like energy, food, alcohol, and tobacco, decreased to 2.8%, the lowest it has been in four months. This trend of cooling prices supports the possibility of a rate cut by the European Central Bank. While policymakers will continue to review a range of economic indicators, this data provides a positive signal of easing inflationary pressures and adds to hopes that they will look to loosen policy again next month.

Coming up next week, final PMI figures from the likes of China, UK Eurozone and US. UK Retail sales as well as US employment data later in the week.

Nicola Tune, Portfolio Specialist

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