This month we’re discussing what drove markets throughout August, including signs of strength in the US market, slow-progressing trade negotiations, and news out of emerging market economies.
Continued Strength in the US
Throughout August, the US commerce department revised its GDP figures showing that gross domestic product increased at a 4.2% annualized rate; this is its strongest economic growth in nearly four years.
Also, US equity markets hit new highs with the S&P 500 and the NASDAQ both climbing to new record levels, fueled by fiscal stimulus, in the form of tax cuts and increased government spending.
Positive trade developments moved forward with the US and Mexico finally reaching a preliminary agreement on a bilateral trade deal. Equity markets reacted positively to this news. Questions remain at large as to whether the deal can become a trilateral agreement to include Canada, as negotiators work towards a revised NAFTA 2.0. We expect to have much more clarity on this deal by the end of September. The cleaner the outcome, the happier the markets will be.
The heavyweight trade war between the US and China failed to reach any meaningful breakthroughs in August. The faster progress can be made on the North American trade front, the more the US and its strategic allies can shift their focus to Chinese trade practices.
Mixed data exists globally for the month of August. Japan reported second quarter growth of 1.9% despite global trade tensions. Their central bank also announced that they plan on keeping interest rates low for an extended period of time, despite many other developed markets taking on a stance of monetary tightening.
Emerging market economies remain under pressure as they’re hit hardest by a strengthening US dollar and ongoing trade disputes, as these are heavily export-driven economies. In August, a diplomatic dispute saw the US levy tariffs on Turkish goods and the sanction of two Turkish ministers, taking the Turkish Lira to a record low.
Argentina is also in the midst of a currency crisis with their peso down 50% compared to USD from the start of the year to date. Argentina’s central bank has hiked its benchmark interest rate all the way up to 60% - the highest in the world - in an effort to stabilize the currency. This unprecedented action taken by their central bank signals that more troubles are on the horizon for Argentina, as some believe they should abolish the peso altogether and shift to the greenback.
These currency events have foreign investors pulling their capital in search of safe havens such as the USD or Euro. The strength of the US dollar can create more risk for countries that hold US-denominated debt by making it harder to service; this reinforces default risks and can lead to more capital outflows, creating a vicious cycle.
Not much has changed in terms of our outlook; we expect volatility to persist. We also expect continued strength in the US, which represents over 40% of global equity markets driven by strong fundamentals. We’ll continue to follow trade developments as they occur, as we are under the impression that the end goal of all the trade headlines we’ve been witnessing is to make trade more accessible globally - even if that goal is being met by unconventional methods.
Lastly and most importantly, we believe that those who stay committed to their plans and continue investing automatically at pre-determined intervals will be rewarded long-term.