Recovery and tailwind
Against the backdrop of rising new corona infections, quarterly profits of many companies, especially in the U.S., significantly exceeded the low expectations. In addition, various economic data improved in Germany, the U.S. and China, and the U.S. Federal Reserve additionally supported the stock markets by changing its strategy towards its inflation target of 2%.
With few exceptions (including Brazil) the stock markets gained in August. The German DAX rose 5.13% and the broad European index Stoxx Europe 600 2.86%. In the USA the S&P 500 index gained 5.64%, while the Hang Seng index (Hong Kong) increased moderately 1.05%. The global stock index MSCI World rose 5.17% and reached an all-time high - all index data in Euro terms.
One reason for this positive trend were the reported quarterly profits, especially in the USA and to some extent also in Germany. Companies listed in the S&P 500 exceeded the corona-related low expectations by around 23%. In August some economic data also developed better than expected. In Germany the purchasing managers' index for industry rose by two points to 53.0, the highest level in two years. However, its counterpart for services fell from 55.6 to 50.8. The business sentiment improved for the fourth month in a row as measured by the ifo Business Climate Index, which rose from 90.4 to 92.6 points and the ZEW Business Climate Index, which climbed from 59.3 to 71.5 (the highest level since 2004). New orders, industrial production and exports also increased significantly compared to previous month but were still below previous year's figures.
In the US, Purchasing Managers' Indices rose from 50.9 to 53.9 for industry and from 57.1 to 58.1 for services, clearly indicating an expansionary economy. The unemployment rate continued to fall from 11.1% to 10.2% and retail sales and consumer spending increased again compared to previous month. In addition the Fed's change of strategy supported the equity markets: instead of proactively containing inflationary risks in advance the Fed is now aiming for an average inflation target of only 2% and will consequently let inflation rise above this level before reacting. This represents a shift away from previous monetary strategies and is a further easing of monetary policy.
Positive for the stock markets were also the statements of responsible politicians in the USA and China regarding their intention to maintain to the trade agreement (phase 1) signed at the beginning of the year. Key economic data in China showed a firmer trend. Industrial production and exports increased 4.8% and resp. 7.2% compared to previous year and the Purchasing Managers' Indices for services (official) and industry (Caixin) improved.
On the other hand, there were negative factors for the stock markets: worldwide, the number of new corona infections rose again so that a second lockdown was discussed on various occasions. The sharp declines in the German and US economies (-10.1% and -32.9%) in the second quarter were only marginally corrected upwards to -9.7% and -31.7%; and the UK economy contracted by -20.4% in the second quarter. In the Euro zone Purchasing Managers' Indices for industry and services disappointed with declining values. In addition renewed economic tensions between the US and China regarding two Chinese companies in the internet/social media and communications sector irritated market participants.
Bond markets were unable to benefit from these factors which were weighing on the stock markets. Ten-year government bond yields rose from -0.52% to -0.40% in Germany and from 0.55% to 0.71% in the US. The oil price recovered slightly, rising by USD 2 to USD 45 per barrel. The price of gold, on the other hand, fell from USD 1,975 to USD 1,968 per troy ounce as investors became more willing to take risks after new highs had been reached in the meantime.
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