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As many investors headed off on holiday, August presented global markets with a much more turbulent environment, spurred primarily by concerns over a slowing of economic growth in the US. As the month progressed, fears eased, buoyed by more stable economic data and assurances from central banks, particularly the US Federal Reserve. By the end of August, much of the earlier losses had been recovered, allowing equity markets to regain their footing.

Periods of volatility are not unusual in financial markets, but August’s volatility was striking. Global equities saw sharp declines early in the month, as investors grew increasingly uneasy over the resilience of the job market in the US and several large technology businesses that have invested heavily into Artificial Intelligence, but with very little to show for it. Circumstances were further compounded news from Japan of the Bank of Japan’s decision to increase interest rates from 0.1% to 0.25%. This modest increase had outsized consequences, as for many years investors have used Japan as a source of cheap finance: borrowing money in Japan (where interest rates have been very low) and investing it elsewhere (such as the US), in the expectation of achieving much better returns. With higher interest rates in Japan pushing up the cost of borrowing and the opportunity for investors in the US looking a bit shaky, investors began head for the exit. This sudden reversal led to significant selling of Japanese equities, which plummeted as much as 20% before beginning to recover. Investors who had previously benefited from Japan’s low interest rate environment were caught off guard, triggering a wave of volatility across other regions.

While the US grappled with volatility, other markets displayed more resilience. European and UK equities posted gains in August, supported by the belief that the European Central Bank (ECB) would cut rates to counter weak economic data. Despite disappointing corporate earnings from Germany, particularly in its industrial sectors, investors interpreted this as a precursor to further ECB intervention. European equities closed the month of August in positive territory, reflecting investor optimism around the possibility of rate cuts. We have subsequently seen a 0.25% reduction in interest rates from the ECB. In the UK, the FTSE 100 edged closer to record highs, underpinned by strong corporate earnings. However, a stronger pound and weakness in some energy and mining stocks tempered gains.

Amid the turbulence in equity markets, bonds proved a safe harbour, providing much-needed stability to diversified portfolios. US Treasuries performed well, benefiting from growing expectations that the Federal Reserve would begin to lower interest rates. Those expectations came to fruition with a 0.5% interest rate cut after month end. High quality corporate bonds also gained ground, as investors sought refuge from equity market volatility.

Bonds remain a crucial component of portfolios, particularly during periods of economic uncertainty. The promise of more support from central banks further bolsters the outlook for bonds. Should economic growth slow more than anticipated, bonds, especially those of higher credit quality, may benefit from falling interest rates and remain an attractive option for investors seeking stability. While inflation remains a persistent concern, the income generated from bonds has become increasingly appealing, especially as other asset classes experience heightened volatility.

Looking ahead, market participants will continue to focus on central bank policies and geopolitical developments, including the US presidential election and tensions in the Middle East, both of which could have far-reaching effects on financial markets. While uncertainty remains, the underlying picture is cautiously optimistic, with easing inflation and the potential for further interest rate cuts offering support to both equities and bonds as we move towards the end of the year.