Quilter Cheviot|Weekly Comment

Stocks gain as rise in yields cease

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

End of the weekly losing streak

A bounce on Friday in global stock markets marked the end of the weekly losing streak, as the MSCI All Country World Index closed up 0.5% on the week and 12.5% year-to-date. Equity and bond markets have been closely correlated for much of the last month as rising yields have applied downward pressure to stocks and a pause in increasing yields supported the recovery in stocks.

Friday’s speech from Federal Reserve (Fed) chair Jerome Powell at the annual symposium in Jackson Hole, Wyoming, was keenly anticipated but it failed to provide much clear, market moving information. US stocks rallied a little into the close, but this was perhaps as much due to the absence of any clear hawkish message rather than representative of a dovish shift. Overall, the higher-for-longer messaging on the Fed’s monetary policy was reinforced by Powell.

US durable goods orders and the University of Michigan consumer sentiment index both pointed to consumption slowing while a manufacturing index showed a recent decline in activity. New home sales reached their highest level since early 2022 despite higher mortgage rates. Homebuyers are increasingly turning to the new home market as the supply of existing homes dwindles due to owners being locked into long term, fixed-rate mortgages at significantly lower levels than those currently available.

The policy sensitive US two-year Treasury yield ended the week at 5.08%, up from 4.95% but the yield on the 10-year Treasury note fell two basis points to end lower at 4.24%. US stock benchmarks chalked up a 0.8% weekly gain, with growth stocks outperforming value and large caps outperforming small caps. Earnings from Nvidia sent the stock to a new all-time high close to the 500 mark, although price faded into the weekend somewhat.

UK stocks gained 1.2% on the week, boosted by a depreciation in sterling as the pound dipped to 1.26 against the US dollar – its lowest level in 2 and a half months. Government bonds bounced off their recent lows, with a 23 basis point decline in the 10-year gilt yield to end the week at 4.44%. The decline in bond yields was supported by soft UK data, as composite purchasing managers indices (PMIs) fell into contraction for the first time since January, business activity fell to its lowest level since the start of 2021 and new orders shrank for a second consecutive month.

Continental Europe also posted soft PMI data, with a composite reading showing a third monthly contraction in a row. A survey among German businesses also showed greater levels of pessimism in August, with an index falling for the fourth consecutive month. The MSCI Europe ex UK added 0.8%, with German bourses underperforming and Italian stocks outperforming. The euro declined against the US dollar, ending at 1.08, down from 1.09.

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