August has been known historically to have its moments and this month did see a couple of flashes of volatility, however, the month ended on a strong note. This resulted in the FTSE 100 making a gain of 1.5% on the month, despite this, it remained within the trading range of 7300 to 7500 points. The bouts of volatility saw a couple of sharp spikes in the Vix index, by the end of the month the MSCI All world index reclaimed its losses and finished the month pretty much where it started, as did the S&P 500(USD). The MSCI Europe lost 1% in the month as the euro continued to strengthen particularly against the USD.
Equities and bonds may be impacted on Monday after news over the weekend that North Korea executed a nuclear test, along with their claims to have the ability to deliver a nuclear warhead. Sundays futures markets not unsurprisingly are indicating that equity markets around the globe will open lower when trading begins again.
The US treasury yield curve has flattened from the start of the year and this trend continued in the month of August. This is despite a generally supportive backdrop of economic data, which was underlined on Friday by the latest Institute Services managers’ survey that reported the pace of activity growth in the US factory sector rose to its highest level in more than six years. The index climbed to 58.8, well above expectations and above the 50 mark that suggests the manufacturing base is expanding. The recent weakness in the dollar may well be helping to boost the US economy.
Despite a broader stronger economic picture and unemployment levels remaining close to historic lows, there are little signs of wage inflation as average hourly earnings grew 0.1% month on month in August. The year on year rate of 2.5% was unchanged from the previous month. Wage growth and commodity prices are the ultimate drivers of inflation.
Looking to the week ahead, purchasing manager surveys for the past month will be released for many developed and emerging economies. For the UK economy, we get construction on Monday and services on Tuesday. Also on Tuesday, we get new car sales for August. On Friday, we get the Industrial and Manufacturing production data for the month of July.
Markets in the US are shut on Monday for Labor Day. On Tuesday, Congress returns from its August recess where the focus is likely to be to tackle the deadlock over the US debt ceiling. Tuesday also sees several voting members of the Federal Reserve deliver speeches. Investors will look for any clues on policy sentiment ahead of the next Fed meeting.
The main event of the week is likely to be the ECB meeting on Thursday. There will be a statement from the ECB post the meeting, which there are no expectations for any policy change. The question and answer session, post the rate announcement will be where the analysts and market commentators will hope to get some real clues as to the ECB’s monetary policy in the coming months.