Despite a rocky start in August, global equity markets managed to recover their losses ending the month with a positive performance. However, most equity indices still trade below their July 8th peak, notably the Nasdaq 100. Finally, the rotation towards US small caps proved to be short-lived, as the Russell 2000 ended negative in August.
DM equity markets experienced a brutal correction early August, mostly triggered by the massive unwinding of speculative carry trades at a time when liquidity conditions in financial markets are usually quite thin. The trigger was the combination of a surprise rate hike by the BoJ with a disappointing US job report, which led to a sharp revaluation of the JPY against the USD of more than 10% in only few days. However, the sudden surge in the odds of a hard landing in the US was toned down by better economic data released in the following days, in particular the ISM non-manufacturing and retail sales, helping equity markets to rally back near all-time highs at the end of the month. In addition, the BoJ also committed not to take investors by surprise again in order to restore JPY stability, although without ruling out further policy action in the future.
This sequence of events in August emphasizes the shift of investors focus from inflation risk towards growth risk. The next job report released early September will be another major test for investors’ confidence in the soft-landing scenario and the high equity valuation multiples that it has led to. Meanwhile, the Fed has finally committed to enter its monetary easing cycle at the September FOMC, which will mitigate the risk of recession this winter. However, many argue that it is already too late to prevent such outcome given the delay for the monetary policy to have an impact on the economic hard data.
The challenge in Q4 is to find new upside catalysts for US equities as they are still trading at 21x multiples in such macro environment, while the AI momentum fades away as well.

The Fund was up +0.7% (A, USD) in August reaching +7.3% annualized YTD return, still below its annual objective of short-term interest rate + 3%. The early August equity market correction created a negative mark-to-market impact on income notes valuations, most of which was recovered in the following days. Some lag remains in valuations and will be recovered as the income notes approach their expiries (first ones in September). As of 31/08, the Fund’s running yield was stable at +9.1% p.a. (USD, gross), with +17.5% downside protection of the income notes allocation and 4.1-month average maturity.