August 2017
Investors’ appetite for “safe haven” assets rose during August against an increasingly unsettled global backdrop. Sentiment was destabilised by a terror attack in Spain, the devastation of Tropical Storm Harvey on the US Gulf Coast, and a series of increasingly aggressive exchanges between North Korea and the international community.
- Yields of highly rated government bonds fell
- Speculation grew over the US debt ceiling agreement
- Demand for fixed income retail funds remained strong
To view the series of market updates looking at the markets through August, click here
Mounting tensions between North Korea and the rest of the world prompted investors to make a dive for perceived “safe-haven” assets during August. The strained relationship between North Korea and the international community culminated in North Korea’s decision to fire a ballistic missile over Japan, and the yen rose against the US dollar to its highest level for four months, undermining sentiment towards big Japanese exporters and driving up the share prices of more domestically-focused medium-sized companies. As a result, the Nikkei 225 Index fell by 1.4% over August, while the Topix Index edged up by only 0.1%. In contrast, the TSE Second Section Index - which represents Japanese mid-caps – posted an increase of 4.9% over the month.
“The euro strengthened to its highest level against the US dollar since January 2015”
Demand for highly rated government bonds rose during August against an increasingly unsettled global backdrop. Investor sentiment was destabilised by a terror attack in Spain, the devastation of Tropical Storm Harvey on the US Gulf Coast, and a series of increasingly aggressive exchanges between North Korea and the international community, which climaxed with North Korea’s decision to fire a missile over Japan.
The euro strengthened to its highest level against the US dollar since January 2015. The benchmark German government bond yield declined from 0.55% to 0.36% over August, while the yield on the ten-year French government bond dropped from 0.81% to 0.66% .
US Treasury bond yields dipped in August as demand for perceived “safe-haven” assets surged; the yield on the ten-year US Treasury bond fell from 2.30% to 2.13% . The US economy expanded by 3% year on year during the second quarter of 2017, compared with a previous economic growth estimate of 2.6%. US electric car manufacturer Tesla announced plans to raise US$1.8 billion through an issue of “junk” bonds with a coupon of 5.3% and a maturity of 2025.
Credit ratings agency Fitch warned that it would review its “AAA” sovereign rating of the US if Congress does not reach agreement on raising the debt ceiling. Even so, Fitch believes that “considerable uncertainty” will continue to surround the US’s short-term fiscal and borrowing outlook. Meanwhile, Standard & Poor’s (S&P) believes that Congress’s failure to raise the nation’s debt ceiling could prove “more catastrophic to the economy than the 2008 failure of Lehman Brothers”, and could wipe out much of the gains achieved in the recovery that followed.
Elsewhere, Moody’s believes that the US will continue to draw support from its “dynamic and competitive economy and the unique role that the US dollar plays in financial markets and the deepest and most liquid government bond market”. Nevertheless, Moody’s acknowledges the credit challenges faced by the US, particularly with regard to its fiscal position.
Fixed Income was the most popular asset class for UK retail investors during July, according to the Investment Association (IA) , and £ Corporate Bond was the second most popular IA sector, superseded only by demand for Global equity funds. Investors’ appetite for funds in the £ Strategic Bond, Global Emerging Markets Bond, and Global Bonds sectors also remained relatively strong during the month.
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