August 2018 Market Commentary

September 4, 2018

By Jan Faure

U.S. markets once again made strong gains in August, contrasting sharply with a generally weak showing in European and emerging markets.

Consumer confidence in the U.S. soared to an 18-year high, reflecting surging growth in the U.S. economy and the lowest unemployment rate in almost two decades. A revision in U.S. second-quarter GDP growth to 4.2% further suggests that the American economy has been virtually immune to economic difficulties in other parts of the world.

Emerging markets and their currencies have come under major selling pressure over the past few weeks. President Donald Trump has pushed for sanctions against Turkey, Russia, and Iran, and tweeted about land issues in South Africa. Year-to-date the U.S. dollar has gained 98% against the Argentine peso, 75% against the Turkish lira, 25% against the Brazilian real and 20% against both the South African rand and Russian ruble.

The primary driver of EM currency weakness has been the general winding down of liquidity programs (quantitative easing or QE) by major central banks. The U.S. is now firmly engaged in a monetary tightening phase while the EU has indicated that its QE policy will end in December this year. This has had the effect of reversing some of the carry trade flows that went into emerging market currencies.

What is quite telling is that US equity markets have outperformed emerging-market stocks (as measured by the MSCI Emerging Markets index) by 17.3% this year. This quantum of variance
in returns does beg the question whether emerging markets are due a rebound or are U.S. markets due some form of profit taking.

GLOBAL INDICATORS: Local reporting currencies

Source: Bloomberg,, S&P Dow Jones Indices

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