Market Update

August has been a month of significant market swings, especially in the US and Japan during the first two weeks. After the Federal Reserve chose not to cut interest rates at the end of July, concerns grew among investors that the opportunity for lower rates had passed, particularly in light of a weaker-than-expected labor market report. This uncertainty was compounded by the unwinding of a Japan-focused carry trade, where investors borrow yen to invest in higher-yielding assets.
However, it's important to remember that market volatility is often short-lived, and August has demonstrated this once again. After an initial downturn, markets have steadily recovered, with many closing the month near or above their starting levels. These brief periods of volatility not only present buying opportunities for long-term investors but also emphasize the value of diversification and active management.
This week, all eyes were on semiconductor giant Nvidia’s earnings, which were seen as a key gauge for the health of the AI-driven tech boom. While Nvidia posted impressive results that beat both revenue and profit forecasts, the earnings surpassed expectations by a smaller margin than anticipated, leading to a 6% drop in its stock price. This decline had broader implications, leaving the S&P 500 unchanged and pushing the tech-heavy Nasdaq down by 0.2%. The market’s reaction highlights how investors become more critical following significant gains, even when the underlying performance remains strong.
In a positive development for the US economy, GDP grew at an annual rate of 3.0% in Q2 2024, surpassing the initial estimate of 2.8% and showing a significant improvement from the 1.4% growth recorded in Q1. This robust growth reflects stronger-than-expected consumer spending and upward revisions to import data. The 3.0% growth in Q2 alleviates earlier concerns about the economy's strength, suggesting the Federal Reserve may be successfully steering towards a “soft landing.” Additionally, the core PCE inflation measure, the Fed’s preferred inflation gauge, rose by 2.6% in July, unchanged from June. The market responded positively to this report, fueling hopes that the Fed may begin cutting interest rates next month.
In Europe, inflation showed promising signs of moderation in August, dropping to its lowest level since mid-2021. The Eurozone's annual inflation rate fell to 2.2%, down from 2.6% in July, in line with market expectations. More importantly, the core inflation rate, excluding volatile items like food, energy, alcohol, and tobacco, decreased to 2.8%, its lowest level in four months. This cooling of prices supports the possibility of a rate cut by the European Central Bank, and while policymakers will continue to assess various economic indicators, this data adds to optimism that they may ease monetary policy next month.