Monthly letter August 2024

KEY EVENTS

The month of August saw financial markets focus more on news from central banks and macroeconomics, rather than geopolitical news. However, the situation remains particularly tense both in the Middle East and between Ukraine and Russia.

In the former, on the one hand, efforts to reach a truce continue, but on the other, the sword of Damocles of direct intervention by Iran looms over a conflict that increasingly involves Lebanon. In Eastern Europe, the main news concerns the entry of Ukrainian troops into Russian territory, and Moscow has responded to this upsurge by increasing the intensity of its bombing in the Donbass region.

The main event in the political picture in the United States was the Democratic Party convention, during which Kamala Harris’ candidacy for the presidential election was formalized.

The race for the White House between her and Donald Trump is currently neck-and-neck, making it impossible to pinpoint a favourite candidate. Interestingly, they are crystallizing electoral agendas at polar opposites in several respects.

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks”
(23.08.24, J. H. Powell a Jackson Hole)

Macroeconomics and central banking captured investors’ interest. U.S. labor market data released earlier in the month showed an increase in unemployment to such an extent that a possible recession was expected.

This growing risk came up against a Fed that until then had considered inflation to be the greatest danger, thus showing little inclination to favor rapid interest rate cuts and related support for the economy.

The Fed has a dual mandate: to ensure price stability and maximum employment; although for a long time the former task has been the focus of major concerns, the latter also needs careful attention.

At the same time, the cost of living continues to be on a downward trajectory. At the beginning of August, some unexpected hawkish comments from the BoJ made investors nervous. The two factors from the U.S. and Japan led to sessions characterized by volatility seen in this century only in 2009 (financial crisis) and 2020 (pandemic outbreak).

In the second half of the month, major events influenced the Fed’s stance on interest rates. The minutes of the July 31 meeting showed a committee more inclined to reduce the cost of money than its chairman hinted at during the press conference following the meeting. Later, at the Jackson Hole central bankers’ conference, Powell was clearly open to the possibility of reducing the cost of money.

At the time (that of the summer vacations) characterized by low volumes, situations as prominent as those just described amplified market movements out of all proportion.

PROSPECTS

September is shaping up to be a month marked by important events. The US election campaign will be marked by the first debate between Kamala Harris and Donald Trump.

The fact that the outcome of a contest between two candidates with particularly divergent agendas remains completely uncertain does not allow investors to plan for event management. In terms of the economy and central banks, an undoubtedly interesting period lies ahead: the latter will meet again a full two months later, given the summer break.

Those in charge of various monetary policies will be called upon to make major decisions, and it is highly expected that in many cases they will opt for a reduction in the cost of money. In particular, the Fed will be the focus of attention: the last time it had tweaked interest rates downward was in March 2020 (at the height of the pandemic crisis), while subsequently, after keeping rates just above 0 percent until early 2022, it has intervened several times, raising them until mid-2023 to the current level of more than 5 percent.

Expectations for the European Central Bank and the Swiss National Bank are also for lower interest rates. Many central banks therefore need to adopt a stimulative stance, while the Bank of Japan is being called upon to act in a diametrically opposite context.

As always in such cases, investors will be very careful in trying to interpret any information coming from the economy and central bankers.

September is historically a seasonally unfavorable month for financial markets, often characterized by increased volatility and negative performance. In this context, it is critical to take a prudent approach and diversify the portfolio to mitigate risk.