August proved to be another exceptionally strong month for risk assets. Equities registered almost daily gains in the month and brought global stock indices back to their all-time highs.
As has been the case since the March lows, a combination of accommodative central bank policy, direct government support for businesses and improving economic data have been behind the rally.
On the COVID-19 front, the number of new daily cases in the US declined but other countries in Europe are facing a second wave of rising infections. However, there is little sign of any major developed nation moving back to full lockdown and targeted measures, including travel restrictions or compulsory face masks in public, have become the norm.
The leading markets in the month were US and Japanese; the FTSE Japan ended the month up 5.7% and the S&P 500 5.0%. These good returns would have been higher but for the strength in sterling in August, which recorded a 2.2% rise against both the JPY and USD. UK and European equities also delivered reasonable returns, up 2.4% and 2.2% respectively. Emerging Market stocks were broadly flat.
August also marked the end of the Q2 earnings season, which surprised on the upside relative to weak expectations. More than 80% of S&P 500 companies beat expectations and a large number revised their guidance higher for the coming quarters.
Healthcare and technology sectors were particularly strong, and US large-cap tech stocks continue to drive global markets higher.
By contrast, it was a tougher month for fixed income assets as sovereign bond yields rose across the developed world. For the first time since the March lows, bond yields began pricing in a better economic environment leading to around 3% losses for both UK Gilt and US Treasury assets. Meanwhile, corporate bonds outperformed sovereign bonds but the gains from the tightening spreads was not enough to push the asset class into the black.
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