Market Commentary

The fastest bear-market recovery in history showed little sign of wavering in August. Investor optimism remained buoyant on signs of progress in developing a vaccine to quell the pandemic, which helped to instill confidence in a swift global economic revival. Meanwhile, the sheer abundance of policy support and the conciliatory tone on US-China trade also emboldened risk appetite during the month. Importantly, the Federal Reserve’s prominent policy shift rippled across financial markets after Chair Powell unveiled an average inflation targeting regime that will allow for a more relaxed approach towards inflation and consequently, an extended period of monetary accommodation – providing yet another tailwind for the global economy and stock markets alike. 

SEPTEMBER 2020

Global equity markets thrived for a fifth straight month, with the MSCI All Country World rising 6% in August. American bourses lead the charge, with the tireless rally in the heavy-hitting technology space fuelling the stretch of record-breaking gains for both the S&P 500 and the Nasdaq. The S&P/TSX also gained, albeit more modestly. Looking abroad, European stocks posted their best monthly gain since April on speculation that governments can avoid new lockdowns, while emerging market equities trimmed their 2020 losses after the US and China reiterated their commitment to the phase-one trade deal. 

Fixed income markets posted negative results in August. The Federal Reserve embarked on a significant shift in its monetary policy framework and announced that it will target an inflation rate that averages 2% over time, implying greater tolerance for an overshoot. The biggest move was in the longer-end of the curve, with the 10 year treasury yield jumping 18 basis points to 0.70% as the more relaxed stance on inflation and employment stoked inflation expectations. Indeed, the 10-year breakeven inflation expectations rate shot higher and closed at 1.80%, just shy of January’s pre-pandemic high. With the Fed ultimately reinforcing that rates will remain anchored at the short-end for an extended time, the yield curve steepened, with the closely-followed spread between the two- and ten-year yields expanding by 15 basis points to 0.57%, the widest in over two months. 

The wave of softer dollar conditions prevailed as declining real rates eroded the US yield advantage, while the upbeat mood in the marketplace curbed demand for the world’s reserve currency. The loonie touched its highest level versus the US dollar since January, while the euro rose to a two-year high thanks to the European Union’s coordinated response on a joint recovery fund that has boosted the common currency’s credibility. 

Unrelenting weakness in the dollar bolstered the commodity spectrum through August. Oil rose more than 5%, which marked its fourth straight monthly gain. Copper advanced on mounting signs that the market is tightening, with improved global demand dynamics, China’s liquidity injection, and shrinking inventories sending the red metal to a fresh two-year high. Finally, gold was whipsawed. While lingering risk appetite weighed on the haven metal, gold managed to eke out a modest gain after the Fed pledged to keep interest rates lower for years to come. Indeed, higher inflation tolerance and an extended period of low rates will keep real yields pinned lower, increasing the appeal of non-interest bearing gold.