Welcome to the latest Astute Market Overview. As we approach the end of summer, we find ourselves in that quieter time of year for many businesses, and typically for markets too. Whilst the sunny August Bank Holiday gave the London Stock Exchange a break from trading, we’ve had a strong reminder that market dynamics don’t take holidays, even when many of us do.

The standout event since our last overview at the end of July was the heightened market volatility at the start of August. It started with the reversal of the “tech rally”, where the rising price of large technology heavy companies began to pull back due to weaker-than-expected earnings reports. This led to a dip in many major investment indices, given the sheer weight that these companies represent in the market.

This volatility spread more broadly across the market, driven by a confluence of factors: weaker than expected job creation and an increase in unemployment in the US sparked fears that the Federal Reserve’s interest rate cuts may arrive too late to save the economy from recession. In addition to this, the Bank of Japan increased interest rates by more than expected, triggering significant currency market movements and the largest drop in Japanese equities since Black Monday in 1987.

However, it’s important to note that the market’s reaction to these events was simply not justified by the data available, it was an overreaction. The US economy is slowing, but this is necessary to tame inflation.

Whilst it would be better for everyone for interest rates globally to reach a sustainable level (or ‘normalise’) without market corrections such as these, it’s unrealistic to expect such a huge change without hitting some air pockets along the way, which is precisely what this was.

As we are recording, we are expecting the release of Nvidia earnings this evening. Markets are braced for a range of outcomes, and some short-term volatility is possible. However, it is important to keep in mind that a single earnings report is unlikely to cause significant and long-lasting market shifts on its own.

As we often say, keeping your head up and thinking long-term is the best way to navigate these kind of market corrections. And the good news? After three weeks of steady climbing, many key markets sit close to the levels seen at the end of July. Taking a broader view, markets have performed strongly this year.

In other news, the Jackson Hole Symposium took place last week: an annual gathering of decision-makers, economists and academics in the US, penned in the calendar of every market watcher. Whilst we don’t ever expect central bankers to drop any bombshells, it is a useful opportunity to gain an insight into their thoughts, how they are interpreting the data, and what they are planning.

Often policymakers keep their cards close to their chest, but the hints they leave in their speeches are not accidental. They carefully deliver their narrative to put across the points they want to. If they want to prepare the markets for an impending decision, then this is the forum in which to do it.

We are finally beginning to see a shift in interest rates. For completeness, let’s go back a little bit. Since the global financial crisis in 2008, interest rates in the UK were cut to very low levels (great news for borrowers, such as mortgage holders, but not so great news for cash savers). In 2021, to tackle the high inflation, the base rate saw its first (of many) increases from 0.1%, to its highest point of 5.25% in August last year. Whilst the rate of 0.1% wasn’t a sustainable, ‘normal’ rate for interest rates, the central bank was clear that 5.25% was restrictive, designed to kick inflation back into shape through consumer and investor behaviour. At the start of August, we saw a cut in the UK to 5.00%. At the Jackson Hole conference, the Bank of England Governor Andrew Bailey was clear that the course of bringing down interest rates “will be a steady one”. We believe there are further cuts in the UK likely at the end of the year.

The situation isn’t too dissimilar in the US, however the Federal Reserve are still holding their Federal Funds rate at a high pain point. The Federal Reserve chair, Jay Powell, made it clear that they will cut interest rates in the near future. In fact, the question has now broadly shifted from “when will the Federal Reserve cut rate?” to “by how much?”. The Open Market Committee of decision makers will meet in September.

If you would like further updates, in our latest Quarterly Update, Dr Scott Osborne discusses the UK election and upcoming US election and whether the war on inflation has finally been won, and in our latest Insightful Planning with Astute video, financial planner Stephen Spencer walks us through a client’s (William) financial plan.

Coming up we have Eurozone CPI inflation, US PCE, Purchasing Managers’ Index (PMI) data for the US, UK and Eurozone.

See you next time.