The benign markets of July continued into August, with financial conditions remaining accommodating, reflected in historically tight credit spreads and low levels of volatility, the MOVE and VIX indices of bond and equity market volatility bumping along lows for the year. Global developed world equities returned 2.6% in August and global government bonds 1.4%, in USD terms. The US market returned 2.0%, with the S&P 500 index reaching new all-time highs, but was notable for a broadening out of returns. Megacap tech stocks underperformed slightly (Mag 7 index +1.4%) as investors questioned returns from their huge AI-driven investments, whereas the Russell 2000 index of small cap stocks returned 7%, taking it close to its all-time high of November 2024. There were also notable gains in Japan, the Topix index +4.5% in yen terms, and China, MSCI China index +4.9%, taking its return over 3 months to 14%, well ahead of developed markets. The more domestically focussed Chinese mainland index of ‘A’ shares, CSI 300, was considerably stronger, +10.3% in August, responding to further moves by the authorities to support the beleaguered property development industry. In contrast, European markets were subdued, MSCI Europe ex-UK +1.1% and MSCI UK +1.5%, both in local currency terms. After a storming start to the year, Europe ex-UK has been flat over the past 3 months.
