There is no such thing as a bad trade; there is only bad risk taking…

– At his speech on August 23^rd at Jackson Hole, FED Chair Jeremy Powell declared that “the time has come for policy to adjust,” referring to the next FED decision on September 18^th noting the easing inflation as well as the slowing job market. Naturally, both equity and bond markets were ecstatic over the news, but for varied reasons. Lower interest rates mean lower cost of capital for corporations and therefore higher profitability in the equity world. For bonds, lower FED rates mean a drop in the short end of the yield curve while lower inflation means a drop in longer maturity rates hence pushing up bond prices across the curve.

– Global equities had a good month on the back of the first potential FED rate cut. As of August 27^th, the US equity index S&P 500 was up by +1.9% on the month, bringing its year-to-date return to +18%. In August bond prices were on the rise. The shape of the US yield curve continued to shift downwards since April. What that means is both the short as well as the longer-term yields have been going down since earlier in the year.

-Given crypto’s status as an alternative or a hedge to equities, crypto currencies had negative performance in August. As of August 27^th, while Bitcoin was down by -4% on the month, Ethereum dropped by a staggering -20%. Despite its weak performance in August, Bitcoin maintained its impressive year to date performance with +45.5% while Ethereum visibly underperformed Bitcoin by retreating to +13.1% since the end of 2023.

-In spite of a slight negative return in June, in August gold continued its upward trajectory that commenced in 2023. This was partially driven by the drop in US dollar against global currencies as FED disclosed that it is ready to finally cut interest rates. Given gold is priced against the US dollar, a drop in the base currency pushed up the gold price which was also supported by the uncertainty due to the approaching US elections.

-Despite the ongoing conflict in the Middle East, a major oil-producing area, crude oil continued its downward streak in August on the back of potential production increase by OPEC+ and weakness in global macroeconomic fundamentals. As of August 27^th, the first month futures contract for US crude oil WTI was down by -3.1% on the month, dragging its year-to-date return down to +5.4%.

-Contrary to the positive outlook in global equity markets, the Turkish stock market dropped in August. As of August 27^th, Borsa Istanbul Index BIST100 was down by -8.4% in local currency terms (-10.7% in US dollar basis) over the month pulling its year-to-date return in local currency terms down to +30.5% (+13.3% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +15.2% since the end of 2023.

-Investors could exploit the imbalance in the markets by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in visible market downturns and during periods of volatility. It is still not too late to get on this train. This is as much about sizing and global macro-outlook as it is about investing in the right instruments. We cannot reiterate enough that a balanced portfolio is key to portfolio success. At the end of the day, there is no such thing as a bad trade; there is only bad risk taking.

It seems like the time for the long-awaited interest rate cut by US Central Bank FED has finally arrived… or so do the markets think after FED Chair Jeremy Powell’s speech on August 23^rd at Jackson Hole, Wyoming. That is where prominent central bank leaders, finance ministers and academics get together annually to exchange ideas and knowledge regarding major global economic issues. Naturally, every year the markets watch this event very closely. At his speech, this year Powell declared that “the time has come for policy to adjust,” referring to the next FED decision on September 18^th noting the easing inflation as well as the slowing job market.

Naturally, both equity and bond markets were ecstatic over the news, but for varied reasons. Lower interest rates mean lower cost of capital for corporations and therefore higher profitability in the equity world. That is great news for equity markets. For bonds, lower FED rates mean a drop in the short end of the yield curve while lower inflation means a drop in longer maturity rates hence pushing up bond prices across the curve.

EQUITIES RALLIED IN AUGUST

Global equities had a good month on the back of the first potential FED rate cut. As of August 27^th, the US equity index S&P 500 was up by +1.9% on the month, bringing its year-to-date return to +18%. The European stock index Euro Stoxx 50 was up by +0.5% over the same period pulling its year-to-date return up to +8.4%. Global emerging market equity index MSCI EM was also up by +1.4% in August bringing its year-to-date return to +8.3%. The global equity market returns also reflected this positive outlook with global equity indicator MSCI All Country World Index (ACWI) gaining +2.3% in August reaching +14.7% since the year end.

BOND PRICES CONTINUED TO INCREASE

Like May, June, and July, in August bond prices were on the rise. The shape of the US yield curve continued to shift downwards (gray line in the graph below) since April (red line). What that means is both the short as well as the longer-term yields have been going down since earlier in the year. We must however note that the drop in the nominal rates has not been equal across maturities as illustrated in the graph below. That is because different maturities across the yield curve (such as say 3 months vs 10 years) are driven by distinct factors. As discussed above, while the shorter durations are driven by the central bank interest rate decisions, longer term maturities rely more on expected inflation and real rates.

Source: Bloomberg

As a quick recap, the reason for the drop in the long end of the yield curve (such as yields at 10- and 30-year maturities) since Q2 of 2024 has been driven by the markets’ expectation of lower inflation… and the confirmation of this by Powell at Jackson Hole just helped support this decline across the yield curve. Let’s take a look at the graph below that shows how the bond markets’ 5- and 10-year inflation expectations have been coming down over the last couple of months.

As our readers may remember from our earlier issues, each implied inflation for a certain maturity is calculated using the US Treasury yield for that maturity which represents the nominal rate and the US Treasury Inflation-Protected Securities (“TIPS”) rate for the same maturity which represents the real rate. Taking the difference between the two (e.g., 5-year nominal interest rate – 5-year real interest rate) then gives the implied (or breakeven) inflation for that maturity expected by the markets (e.g., 5-year implied inflation).

Source: Bloomberg

In line with the drop in long-term bond yields, as of August 27^th, Bloomberg Global Aggregate Bond Index, High Yield Bond Index as well as the Global Corporate Bond Index continued their upward performance. All three indexes were up by +1.3%, +1.6% and +1.5% on the month bringing their year-to-date returns to +3.4%, +7.5% and +4% respectively.

CRYPTO HAD A ROUGH MONTH

Given crypto’s status as an alternative or a hedge to equities, crypto currencies had negative performance in August. As of August 27^th, while Bitcoin was down by -4% on the month, Ethereum dropped by a staggering -20%. Despite its weak performance in August, Bitcoin maintained its impressive year to date performance with +45.5% while Ethereum visibly underperformed Bitcoin by retreating to +13.1% since the end of 2023.

GOLD CONTINUED TO CLIMB IN AUGUST

Despite a slight negative return in June, in August gold continued its upward trajectory that commenced in 2023. This was partially driven by the drop in US dollar against global currencies as FED disclosed that it is ready to finally cut interest rates. Given gold is priced against the US dollar, a drop in the base currency pushed up the gold price which was also supported by the uncertainty due to the approaching US elections. As a brief reminder, investors turn to gold as a store of value and a hedge against uncertainty and inflation. As of August 27^th, the first month futures contract for gold was up by +3.2% on the month pulling its year to date return up to +23.2%.

CRUDE OIL DROPPED ONCE AGAIN IN AUGUST

As a brief recap, crude oil prices are driven by both demand and supply dynamics. Despite the ongoing conflict in the Middle East, a major oil-producing area, crude oil continued its downward streak in August on the back of potential production increase by OPEC+ and weakness in global macroeconomic fundamentals. As of August 27^th, the first month futures contract for US crude oil WTI was down by -3.1% on the month, dragging its year-to-date return down to +5.4%.

TURKISH STOCKS HAD A DIRE AUGUST

Despite the positive outlook in global equity markets, the Turkish stock market dropped in August. As of August 27^th, Borsa Istanbul Index BIST100 was down by -8.4% in local currency terms (-10.7% in US dollar basis) over the month pulling its year-to-date return in local currency terms down to +30.5% (+13.3% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +15.2% since the end of 2023.

INVESTORS WHO REPOSITIONED THEIR PORTFOLIOS RECENTLY HAD A GOOD PERFORMANCE

As we have discussed in our previous issues, the uncertainty surrounding the FED rate policy combined with the looming US elections in early November caused a level of volatility in the global markets over the last couple quarters. We do expect it to continue going into the last quarter of the year. While this kind of an environment calls for caution given the potential drawdown risks, it is also a great time for investors to review and reposition their portfolios.

We had noted in our previous issues that investors could exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in visible market downturns and during periods of volatility. This environment would also allow for credit investments, such as corporate and high yield bonds, which are priced off government bonds, to appreciate particularly for longer maturity instruments. Indeed, investors repositioning their portfolios in line with this advice would have achieved above benchmark and positive performance so far. It is still not too late to get on this train.

Of course, as we have discussed before, this is as much about sizing and global macro-outlook as it is about investing in the right instruments. We cannot reiterate enough that a balanced portfolio is key to portfolio success. At the end of the day, there is no such thing as a bad trade; there is only bad risk taking.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/