Markets Update August 2024 - A turbulent summer on the stock markets: markets under stress test

This year's stock market summer will go down as one of the most turbulent in financial history. After doubts about the AI hype and sector rotations had already caused unrest in July, this instability continued in August. A surprisingly restrictive stance by the Japanese central bank led to an appreciation of the yen, which resulted in a massive unwinding of the yen carry trade popular with investors. In this trade, investors borrow in the low-interest currency yen and invest the capital in higher-yielding investments worldwide. However, as soon as the yen suddenly appreciates, as happened at the beginning of August, this trade becomes unprofitable and investors are forced to liquidate their positions. This leads to a sale of the higher-yielding investments, the proceeds of which are converted into yen. The resulting selling pressure eventually engulfed the global financial markets.

The already tense situation has been exacerbated by weak labour market data in the US. A decline in economic activity is becoming increasingly likely later in the year or in early 2025. As the markets anticipate future developments, macroeconomic prospects play a decisive role in current stock market prices. This also explains the largely muted reaction to the current reporting season, in which companies have reported healthy earnings growth overall, but have often given cautious outlooks. These forecasts are understandably more important to investors than the profits already achieved.

Outlook remains uncertain

Although the markets have recovered in the meantime, it remains to be seen whether this stabilization will last. Sell-off phases are rarely linear and predictable. Rather, they are complex processes in which the markets give way in chaotic waves and can rush from low to low over time. It is therefore currently impossible to say with certainty in which direction the markets will develop in the medium term. Against this backdrop, professional investors should reduce their risk for the time being until the fog on the stock markets has lifted and the direction is more clearly recognizable.