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Capital Markets Update: August 2022

Octopus1 September 2022

Market updates from August

In a Nutshell

While August is typically a quiet month, this year saw some fairly significant movements in various indexes. In particular, bond yields have shown historic rises across the board, as bond prices fell in August. Across the UK, US and Eurozone, inflation issues persisted with energy and food prices continuing to rise particularly sharply. In the UK, the contest for Conservative Party leadership has created some uncertainty as to exactly how the government plans to tackle this issue.

Changing of the guard

The UK equity market has continued to struggle under the increasing pressure of the cost of living crisis. According to ONS statistics for the month, 89% of adults have reported an increase in their household spending, driven in large part by rising food and energy prices. This has particularly affected lower-income households, who spend a greater proportion of their income on these necessities. Many expect Truss, who recently won the Conservative Party leadership contest, to introduce a cap on household energy bills to relieve pressure over the coming winter months, but speculation continues as to exactly how this will be funded. All that we know so far is that the new PM has absolutely ruled out a further windfall tax on energy companies.

Similar problems have persisted across the Eurozone as consumer prices rose by 9.1% (up from the 8.9% increase seen in July). Rising inflation has bolstered calls for the European Central Bank to raise interest rates to stave off recession, which many expect they will do during September. European Union ministers have also been discussing potential solutions to rising energy costs, including plans to introduce an additional windfall tax; mandatory energy rationing; or a price cap on Russian gas.

Across the pond, pressure continues to mount on the Fed to increase interest rates. Despite some recent and fairly dramatic rate hikes, US equities have dropped as the central bank struggles to control rampant inflation. Across the month, the S&P 500 dropped by around 4.24%, bringing its return so far this year to -17.02%.

Bond yields on the rise

UK bond markets are having a fairly turbulent time of late. August saw the largest sell-off for the pound, gilts and UK corporate bonds in years as investors doubt the BoE’s ability to stem the encroaching cost of living crisis. Over the month, sterling dropped around 5% - the largest monthly fall since the Brexit vote aftermath in 2016.

Bond markets have shown fairly similar trends across Europe and North America. Eurozone bond markets have followed similar trends to the UK, with yields showing historic rises. German bond yields have particularly jumped, with the largest monthly increase in over 40 years. In the US, the ten-year Treasury bond yield jumped from 2.64% to 3.13%, and the two-year from 2.90% to 3.45%.

Looking Ahead

While August has undoubtedly been a difficult month - especially when compared to positive returns enjoyed by investors over the last couple of years - it’s important that we maintain a long-term perspective on such trends. Likewise, historic price falls like we’ve seen since the start of the year, are on average followed by very positive returns over the following 1, 3 and 5 years.

Investing inevitably involves moving through peaks and troughs - and persisting through these troughs is vital in ensuring that you don’t miss any potential market uptick. In the meantime, ensuring a diverse portfolio with a range of different assets can limit the impact of these downturns.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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