A bumpy ride for August on the markets

Stock markets, as well as some family holidaymakers, experienced a rollercoaster August.

The traditional holiday month proved to be anything but quiet on the world’s investment markets. As the graph of the major UK and US stock market indices shows, there were plenty of sharp lurches, up as well as down.

Inevitably the downward trends attracted more attention, particularly the fall in US share values on 13 August. “Dow drops 800 points” is a headline that newspaper editors find hard to resist. ‘Dow falls just over 3%’ would have been equally accurate, but 800 points sounds considerably more dramatic.

Several factors challenged the markets in August:

• Short-term interest rates look set to fall further in the US (where the first cut in ten years took effect at the start of the month). Elsewhere there is less scope to cut as rates are so low, but central banks are hinting at other measures, such as a return of quantitative easing.
• Long-term interest rates also continued to fall, often deeper into negative territory. In the second half of the month the German government sold a 30-year bond which paid no interest and guaranteed investors a loss of 0.11% a year, if they held the paper until 2049.Tumbling and negative yields are seen by some commentators as an indicator that a recession is looming.
• The trade war between the US and China reignited, with a new round of tariff-by-tweeting from President Trump. In response, the Chinese allowed their currency, the Renminbi, to weaken, with knock-on effects for its neighbours.
• The Brexit saga ratcheted up in the UK and Europe, as the new Prime Minister Boris Johnson adopted his ‘do or die’ stance to 31 October and announced a provocative prorogation of Parliament ahead of the deadline.

As with any rollercoaster ride, the experience can be both exhilarating and nauseating. It is by no means clear when this particular trip will end, but – again like the rollercoaster – it could be highly dangerous to jump out before the journey finishes.