Volatility rose further in August. Markets endured a sharp sell-off early in the month and drifted lower before rebounding. The initial catalysts were rising trade tensions and ongoing protests in Hong Kong, with negative sentiment exacerbated by the Federal Reserve’s decision to cut rates but stop short of a commitment to further aggressive easing. Markets then regained some of their poise as the rhetoric around trade softened while economic data improved marginally.
Geopolitical events continue to shape the medium-term outlook for equities. Shorter-term, however, there have been some incrementally positive economic data points. Activity levels are continuing to slow, but not as sharply as had been expected. Various economic surprise indices have begun to turn upwards. Investors need to be careful not to weigh these too heavily in their assessment of the economic outlook, but they are incrementally positive. October’s trade negotiations will be key for the future performance of equity markets and the global economy. A recession going into 2020’s US Presidential election would provide a significant headwind for President Trump’s re-election hopes and with the window to avoid this closing we continue to believe we will see a degree of progress on trade. This will almost certainly fall short of a grand bargain that provides platform for a prolonged rally in equities, but should provide enough respite for monetary and fiscal measures to work and stabilise economic activity.