Key points for August 2011
- Market fraught with worry
- Very volatile month for equities
- Indiscriminate selling
- Lift for safe-haven assets
- More whip-sawing expected
UK
An extremely turbulent month came to a close with the FTSE 100 closing out -6.6%. There was a veritable list of fears in the market: the potential for a double-dip recession in the US; lack of growth in the UK, coupled with civil unrest in London; continued violence in the Middle East and North Africa; ballooning European sovereign debt yields; and Hurricane Irene in the States just to top it off. Typically, the UK ten-year Gilt benefited from a flight to quality, ending the month on a yield of 2.60%; having hit an intra-month low of 2.31%. The FTSE 250 fell 8.6%, and the FTSE Small Cap was down 7.2%. The FTSE All-Share returned -6.9%.
Global
Anxieties have been mitigated over the last few days by better US economic data, although the fear that has driven the markets lower through the month is still palpable. Volatility has been amplified by thin volumes over the summer, high frequency trading and frantic ‘hedging’ programmes used by large institutions. Over the month, the equity markets were down between 5% for the US to 10.6% for Europe. Emerging markets returned -8.4%. West Texas Intermediate oil held steady at $88.81 per barrel; gold closed the month at $1,825.72 troy/oz.
Outlook
Investors have been quick to pull the trigger on the back of bad news. At the time of writing, non-farm payrolls were flat in August, well below market expectations. This should continue to support flight to quality trades, but might induce further negativity for equities. The downside, for now is being limited by expectations of further Fed easing. We continue to expect a roller-coaster ride for the rest of the year, characterised by sharp rallies and drawdowns. In 2009, the market started its rally when there was almost nothing positive to point to; we might be heading for a reprise.