Monetary policy supports equity markets

Even though August is considered to be a rather restrained month for the stock markets, the international stock markets did well with a few exceptions (Brazil, Singapore). Among other things, the markets benefited from the continued expansionary monetary policy in the USA and the euro area, while the further increase in inflation weighed on the markets.

The German stock index DAX posted a gain of 1.87% and the broad European index Stoxx Europe 600 rose by 1.98%. In the US, the S&P 500 gained 3.35%, while the Hang Seng Index (Hong Kong) rose only moderately by 0.06%. The global equity index MSCI World closed the month with a gain of 2.35% - all index figures in euro terms.

Equity markets benefited from several factors: Fed Chairman Jerome Powell reassured investors with his speech at the annual Fed meeting in Jackson Hole that the recent inflation spikes were likely to be temporary and that no immediate tapering (tapering of bond purchases) was necessary, also due to recent developments in the US labour market: the unemployment rate in the US was still at 5.2% in August and only 235,000 new non-farm jobs were created. Market participants had expected more than three times as many new jobs. As a result, the Fed only announced a possible shift away from its ultra-loose monetary policy at its meeting, but without giving a concrete timetable for reducing bond purchases. The yields of US government bonds, which had risen more strongly in anticipation of a change in strategy by the Fed, therefore fell slightly again at the end of the month. For the month, the yield on 10-year US Treasuries rose by 9 basis points to 1.31%. 10-year German Bunds yielded -0.38%, 8 basis points higher.

Furthermore, equity investors took it positively that the US Senate passed the infrastructure investment package of $550 billion for the next eight years. Finally, investors were relieved that the delta variant of the coronavirus was not expected to spread further.

However, rising inflation continued to weigh on markets on both sides of the Atlantic. In the USA, consumer prices rose by 5.4% and core inflation (excluding food and energy) increased by 4 basis points to 3.6% - both figures compared to the previous year. In the euro area, inflation also climbed year-on-year to 3.0% in August, driven primarily by energy. The rising inflation hardly affected the gold price on a monthly basis, which remained almost unchanged at USD 1,815/troz.

The European Central Bank commented on the rise in inflation as a temporary phenomenon triggered by special Corona effects. Accordingly, ECB President Christine Lagarde announced that monetary policy would remain expansionary until the inflation rate not only reached the inflation target of 2% in the medium term, but remained there.

Sentiment in the German economy dampened slightly in August, mainly due to continuing supply bottlenecks in industry and pessimistic expectations in trade due to rising prices. The ifo Business Climate Index therefore fell to 99.7 points (July: 100.7).

 

 

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