Unexpected market volatility: Data releases crucial in the near and medium term
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Article Type
Insights
Topics
Credit, Rates, Banks, Macro, Opinion
Published
August 06, 2024
Read time
2 mins
Author
Stephen Jones
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Its been an interesting few days in markets, with the recent market moves quite unexpected. Seasonally however, August, with many traders and investors on holiday, has historically been a month where events can lead to bigger than normal market moves.

 

This time, the trigger was a weaker-than-expected job market report in the US, which was complicated by weather-related distortions in the data. This led to concerns that the Federal Reserve was too slow in cutting interest rates to support the economy. Additionally, some corporate earnings reports failed to meet high expectations, causing a dramatic reassessment of prior assumptions. Despite Q2 US GDP growth being reported at +2.8% and averaging +2.1% over the first half of 2024, the markets reaction seemed more about the quick unwinding of positions built up during a period of good risk asset performance and low volatility. The movements in currency markets, particularly around the Japanese yen, support this view. We maintain a growth bias and a small overweight to equity growth markets in our funds.

 

In the near and medium term, data releases will be crucial. Every piece of economic information will be scrutinized for signs of quicker deterioration in the economy and in business and consumer confidence. We anticipate a manageable slowing in activity that central banks and corporations can handle with interest rate cuts and normalized input and pricing processes. The market will continue to reflect the ongoing debate about whether the economy will experience a hard landing, a soft landing, or no landing at all. The latter seems less likely now, but as we know from watching plane landings on YouTube, you can land hard and bounce if you dont land softly.

 

Our current asset allocation still favours risk assets, which have now been repriced back to levels seen earlier in the year. This appears to be more of a correction than a full reassessment of the future. There is significant central bank firepower available to support markets with lower interest rates, and the rally in government bonds has already provided some easing in monetary policy in anticipation of actual action. In terms of shifts in asset allocation, credit spreads in both investment grade and high yield have widened, which we believe could present an opportunity to buy credit generally into September.

 

Regarding taking advantage of the market downturn, we are closely watching credit spreads. We anticipate some interesting new supply in the credit market in September, which we may be able to leverage. Credit is likely to look attractive from an income and carry perspective when central banks cut rates.

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Author

Stephen Jones
Chief Investment Officer of Fixed Income, Multi-Asset & Equities

Stephen Jones is chief investment officer of Aegon AM’s Fixed Income, Multi-Asset & Equities investment platforms.

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