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During August, equities markets fell. The bearish turn in equity markets was triggered by hardening central bank rhetoric around the requirement for sustained monetary policy tightening. Falls were led by developed markets, with Europe (excluding the UK) performing worst. Conversely, emerging markets delivered positive returns as Brazil, Indonesia, India, Taiwan and mainland China rallied.

Government bond markets also sold-off during August. UK yields experienced the most significant rises as the Bank of England delivered a 0.5% rate hike and a bleak forecast for domestic inflation. Notable rises were also seen in US rates as Jerome Powell reinforced the Federal Reserves hawkish stance at the Jackson Hole symposium. In the Eurozone, the difference between German and Italian yields widened ahead of the Italian election on 25 September. Conversely, yields on Chinese bonds fell in August, as the Peoples Bank of China delivered a surprise cut to the reserve requirement ratio.

Oil markets fell over the month as signs of slowing global manufacturing, and hawkish Fed comments drove fears of a fall in demand. Gold also fell during the period, hit by higher US Treasury yields and a stronger US Dollar.

Central banks have shown a commitment to continued policy tightening, raising the likelihood that inflation will begin to cool towards the end of the year. Tighter monetary policy opens up the possibility of a recession in the US, while the prospect of a winter energy crisis raises the probability of a recession in Europe. It should be noted that that the depth and duration of any recession is likely to be limited as a result of healthy private sector balance sheets and moderate fiscal support.

A total of 3.25% of Federal reserve rate hikes is forecast in 2022, leaving policy moderately restrictive by the end of the year. Further US rate hikes are likely in early 2023 with policy makers adopting a ‘hike-and-see’ approach.  In China, growth risks imply that further policy stimulus will be implemented, including infrastructure investment, and targeted monetary easing. However, policy divergence with the US will act as a constraint.

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