Quilter Cheviot|Weekly Comment

Stocks extend recovery

Our weekly market overview from Quilter Cheviot

By Chris Beckett, Head of Equity Research

Global stock markets extended their recovery last week, with the MSCI All Country World Index gaining 2.6%. Although this meant that August was the first negative month for global equities since February, the move higher means that around half of August’s declines have been recouped, leaving the monthly return at -2.8%.

A pullback in bond yields has supported the recovery in stocks, most notably in short-dated US Treasuries which tumbled following last week’s job openings number. US equity benchmarks enjoyed their best day in over two months after it was announced that job openings unexpectedly fell by 338k in July. Signs of softening in the labour market are viewed positively by equity investors at the moment and a significant fall in the job quits number provided further evidence that employment gauges are showing signs of cooling.

Typically, the monthly nonfarm payrolls number is the biggest market mover among employment data, but last week it was the job openings and quit numbers a few days prior that had the greater impact. The August payrolls were also broadly supportive of loosening conditions, with the headline number of 187k not far from consensus and downwards revisions seen to the two previous months. Furthermore, the unemployment rate ticked up to its highest level since February 2022 at 3.8% as labour force participation rate increased to its highest level since the onset of the pandemic. Wage growth was also a little lower than expected.

After initially moving higher on the news, stock markets pared the gains on Friday as bond markets reversed. However, the price action may have been distorted by the rally in equities ahead of the event and the Labour Day bank holiday in the US on 4th September, which may have led to some position squaring and less liquid markets. Overall, US benchmarks ended the week 2.5% higher, down 1.6% for August but up 15.4% year-to-date.

The US employment data enhanced hopes that the US Federal Reserve (Fed) will deliver no more monetary policy tightening, as evidenced by a 20 basis point decline in the two-year Treasury yield last week, ending at 4.88%. The move means that the two-year yield declined 1 basis point in August.

ECB near the end of tightening cycle? There is also rising expectations that further interest rate increases this side of the Atlantic are becoming less likely. Eurozone inflation according to Eurostat was steady at 5.3% in August, slightly above consensus forecasts but the core reading was more encouraging, slowing in line with expectations to 5.3%. July’s reading was 5.5%. There is currently around a one in four chance that the European Central Bank (ECB) increases interest rates at this month’s policy meeting, according to derivatives markets. European stocks underperformed a little as the UK gained 1.7% on the week, ending August down 2.6%, while the MSCI Europe ex UK benchmark tacked on a 1.3% weekly gain to post a 2.4% loss for the month. The pound and euro ended the week little changed versus the US dollar at 1.26 and 1.08 respectively. European bond yields were little changed on the week, with the German 10-year declining one basis point to end at 2.55%. In the UK the 10-year gilt yield continues to hover around one-month lows, also down one basis point last week to close at 4.43%.

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