While US equity markets continued to rally in August – with the S&P 500 and Nasdaq indices reaching new historic highs after recording their best month of August in 18 years – European markets, on the other hand, after rebounding in July, suffered from the return of geopolitical and macroeconomic risks in August, and notably:
- The crisis in Turkey: after Erdogan’s refusal to free a U.S. pastor suspected of having ties with terrorism, the United States doubled its tariffs on steel and aluminium; in response, Turkey increased the tariffs on alcohol, tobacco and rice. The Turkish lira tumbled 17% in one day and 33% in August; it has lost 42% of its value since the beginning of the year.
- Fears of contagion to banks and emerging countries (Argentinian peso down 50% YTD).
- Tensions on Italian sovereign debt: 10-year rates in Italy increased by 52 bp in August to reach 3.24% on 31.08.2018 and the spread relative to the Bund reached its highest level since the new government was formed. It is likely that rating agencies will downgrade Italian debt by one notch. While the Minister of Finance has assured that Italy would meet European budgetary rules, the leaders of the two parties currently in power stated that nothing would hinder the implementation of the reforms that had been promised and that they were prepared to challenge Brussels. The government has a budget of around 30 billion euros (2% of GDP) to fund these reforms and meet the European deficit criteria; however, it seems the cost of the reforms is actually closer to 100 billion euros. These concerns weighed heavily on the European banking sector.
- The trade war between the United States and China: negotiations resumed but quickly became tense as the 5th September loomed closer – the date from which Trump plans to implement new import duties on 200 billion dollars’ worth of Chinese goods.
Furthermore, the second quarter earnings’ season – now drawing to a close – turned out to be robust and company executives are showing a certain degree of confidence for the second half of the year. However, the dispersion of performances remained high between sectors and individual stocks in August.
The opinions and estimates constitute our judgment and are subject to change without notice, as well as assertions about trends in the financial markets, which are based on current conditions in these markets. We believe that the information provided in these pages is reliable, but it should not be considered exhaustive. These data, graphics or extracts were calculated or made on the basis of public information we believe to be reliable but which nevertheless have not been subject to independent verification on our part. Past performance is no guide to future returns.