A Peaceful August with Small, Positive Returns
In August, market movements were very small — both in the stock, bond, and currency markets, as well as in commodity prices. In the bond markets, yield curves became even steeper, meaning the difference between short-term and long-term interest rates increased.
Short-term rates remained stable, while long-term rates rose slightly. This led to a slight increase in the value of short-term bonds, while long-term bonds saw small negative returns in August. We’ve seen the same trend for much of the year, and as a result, short-term bonds have yielded a return of 1.8% over the past year, while long-term bonds have produced a negative return of -1.3% over the same period.
When it comes to riskier bonds, investors continued buying both high-yield bonds and corporate bonds in August, which are currently trading at historically low spreads compared to government bonds. This provided good returns — especially high-yield bonds, which returned 1.3% in August and 6.9% over the past year.
Global stocks returned 0.2% in August, bringing their return over the past year to 1.2%. Stocks from emerging markets — especially in China and Brazil — increased more than 10%. Danish, and particularly Nordic, stocks also performed well last month, but the Danish market has dropped more than 4% since New Year’s — mainly due to Novo’s decline.
The dollar remained stable, and prices for gold and silver continued to rise, while pressure on the oil price persists.
Why? Satisfactory Macroeconomic Data, a Dovish Fed, and Political Uncertainty
Long-term interest rates have risen in recent months, even as more and more central banks are cutting short-term rates. This is unusual, though it has happened before.
There are three main reasons for this:
Many countries have financial difficulties and are currently selling large amounts of government bonds. This is the case in the USA, but also in the UK and France, where political uncertainty is also a factor. Investors are unsure whether politicians will get control over debt and large deficits, and are therefore demanding higher interest rates as a kind of risk premium.
Another reason is uncertainty surrounding the US Federal Reserve — and its independence. President Trump wants to appoint people to the Fed board who support his desire for lower interest rates. This increases the risk of monetary policy becoming too loose, leading to excessive inflation — which has also increased demand for both gold and silver. Prices are hitting new records daily.
In early September, the pressure on long-term rates eased a bit, because there are signs of a sudden slowdown in the US labor market. Almost no new jobs are being created at the moment, and unemployment is rising. This gives the Fed an opportunity to cut interest rates multiple times in the coming months — a possibility that both Fed Chair Jay Powell and several board members have mentioned.
However, the weak labor market data in the US has so far had little impact on investors. That’s evident because stock and high-risk bond prices still appear optimistic. Investors seem to believe that the US economy won’t grind to a sudden halt, but is instead in a balanced state where companies can still earn well, while inflation remains low. Good earnings reports from listed companies reinforce this perception.
On the other hand, skeptics argue that the labor market signals in the US are classic signs of an upcoming recession — a recession that could also drag the rest of the world into an economic downturn, with falling profits, declining stock prices, and falling interest rates — which would then push bond prices higher.
The conclusion is, as long as investors believe in a soft economic landing as the macroeconomic scenario, the outlook is good for both stocks and bonds. But rising inflation or declining growth could change that.