CFS Market Update: August 2024 

• August commenced with dramatic movements in global markets
• The RBA kept rates steady at 4.35% in August
• Growing expectations the US Federal Reserve (Fed) will make at least two rate cuts before the year is over, and the European Central Bank (ECB) will cut in September
• The RBA holds firm on “no cuts” position, despite a lower July inflation rate
• US earnings season highlights a new challenge with AI investment and the importance of diversification.

The month started with an event that spread across global financial markets, including Australia. But it didn’t take long to stabilise.

You can understand the August market event in more detail via our article, What does down, must go up. Remember, it’s important to stay calm during short term market instability.

The RBA maintained its 4.35% rate on 6 August, followed by commentary that a near-term cut did not align with the board’s current thinking.

There are three more monetary policy decisions left in the year for these central banks. Coming up this month: the ECB takes place on 12 September, followed by the Fed on 17-18 September, and then the RBA meeting on 23-24 September.

While still data dependent, there are strong expectations for two interest rate cuts by the Fed. Minutes from the central bank and comments from Fed chair Jerome Powell are signalling a cut in September.

ECB chief Christine Lagarde’s comment that “what we do in September is wide open” has also spurred further hopes for a rate cut in Europe.

Other central banks, including the Bank of Canada, the Bank of England and Sveriges Riksbank (Sweden’s central bank), have lowered their rates recently.

The latest US earnings season had no big surprises. But it did highlight a new challenge with equity investors now seeking more concrete examples of AI’s financial benefit to companies – both in productivity and profitability. The opportunity cost of not investing in AI is too high, however it’s unclear exactly when the payback is going to be.

At the same time, markets and investors are rotating away from major tech stocks and into other sectors that are producing good earnings, including small companies. It highlights the importance of portfolio diversification and broadening exposures to sectors, as well as geographies.

While significant, the bump in the market was a short-term event. A day after Japan stocks plunged, its sharemarket rebounded strongly. And a number of global financial markets are back to near-record highs. 

Predictions of a US recession also quickly dissipated. At CFS, we believe talk of a US recession is premature. These periods of equity market volatility are inevitable and serve as an important reminder to avoid being reactive to market bumps.

Meanwhile, RBA governor Michele Bullock is staying firm on the central bank’s position to rule out a rate cut before Christmas, despite Australia’s inflation rate falling to 3.8% in July from 4.1% in June. The main drivers of overall inflation are services and housing.

Some experts and banks believe there will be one cut delivered in its November monetary policy decision. The RBA has kept interest rates steady since November 2023. Australians will have to wait and see.

Even in continuing challenging markets, there are still positive growth opportunities when it comes to investments, including technology, healthcare, and the unlisted assets space, including infrastructure.

Historically, the RBA has been aligned with the Fed and ECB’s rate decisions, but it now appears to be diverging. This contrast could widen over the next six months and is due to Australia’s continuing inflation challenge, where it’s just not moving down at the speed seen in other markets.

It could mean that Australia may be in for an extended “higher for longer” interest rate environment. At CFS, we’re keeping a close eye on how this develops and what it could mean for corporate earnings, Australia’s currency values against our key trading partners and overall sentiment.

The US presidential campaigns are also ramping up, as the 5 November election looms closer. The CFS Investment team is looking closely at the inflationary effects of the policies proposed by both candidates.

If you’re wondering about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary.  

 If you don’t have an adviser, you can find an adviser near you using our Find an Adviser service. Call us with any general queries on 13 13 36, Monday to Friday, 8:30am to 6pm Sydney time (+61 2 9197 3050 from outside of Australia).