Global stocks plummeted as fears that China’s economy may be weaker than previously expected hit every sector of the markets. Financial and consumer discretionary stocks fell the most, particularly those with high exposure to Asia. Defensive sectors, such as utilities and telecommunication services, fared somewhat better. High-grade bonds were essentially flat amid concerns about rising U.S. interest rates. The dollar lost ground against the euro and the yen.
Index Returns (Monthly)
Equities were broadly down in August as events in China upset global markets. Despite a late-month rally the Standard & Poor’s 500 Composite Index declined 6%, pulling its year-to-date return into the red. The Dow Jones Industrial Average fell more than 6% — its largest monthly loss since 2010 — and the Nasdaq Composite Index retreated 7%. The month saw an escalation of volatility in the U.S. market, with the CBOE Volatility Index (VIX) peaking above 53 intraday on August 24 (a reading above 30 is considered elevated).
S&P 500 sectors fell across the board, with defensive sectors experiencing the smallest declines as investors sought safe-haven stocks. Telecommunication services and utilities fell 3% each, while health care and financials had the largest losses, sinking 8% and 7%, respectively.
Mergers-and-acquisitions activity fell off its torrid pace. Among the month’s notable deals, oil field services provider Cameron International agreed to be acquired by Schlumberger for nearly $15 billion. In the utilities sector, Southern Co. expanded its natural gas business with its acquisition of AGL Resources for around $12 billion in cash and assumed debt; when the merger is completed, Southern is expected to be the second-largest U.S. utility, with 9 million customers. Elsewhere, Warren Buffett’s Berkshire Hathaway made its largest acquisition ever, buying airline parts maker Precision Castparts for around $37 billion in cash and assumed debt.
Commodities were also lower on indications China’s economy was slowing. A notable exception was crude oil, which seemed headed for its third consecutive monthly price decline; West Texas Intermediate futures touched a six-year low just above $38 on August 24. But the oil price came roaring back after the U.S. Energy Information Administration reported that U.S. production had fallen in June, alongside signs OPEC might act to stem the price rout and new tensions in the Middle East. U.S. futures soared more than $10 in three trading days, ending the month with around a 4% gain.
Economic data was mostly positive. Second-quarter gross domestic product was revised to 3.7% from the 2.3% advance estimate, with higher exports, consumer spending and state/local government spending offsetting an increase in imports. Employers added 215,000 new jobs in July and the jobless rate remained unchanged at 5.3%. Housing starts reached their highest level in nearly eight years in July, according to the Commerce Department, and home resales showed similar strength. Durable goods orders rose more than expected in July, while the Institute for Supply Management’s Purchasing Managers Index declined unexpectedly in July and fell again in August, though still remained in expansion territory.
Federal Reserve officials indicated the U.S. remained on track for an interest rate increase in 2015 during the annual meeting of global central bankers in Jackson Hole, Wyoming. Minutes of the Fed’s July rate-setting meeting revealed concerns about anemic wage growth and low inflation, but Fed Vice Chair Stanley Fischer’s comment that inflation need not reach its 2% target to prompt a rate hike revived speculation that an increase might come as early as September.
In bond markets, the Barclays U.S. Aggregate Index shed 0.1%. Bonds were volatile, with concerns about China’s economy triggering a wave of buying as investors sought safe-haven assets, before better-than-expected U.S. economic data led to a sharp rise in yields. The benchmark 10-year Treasury note’s yield ended a little lower at 2.22%. Treasury Inflation Protected Securities and high-yield corporates shed 0.8% and 1.7%, respectively, as the low price of crude oil weighed on the outlooks for inflation and the businesses of energy-related issuers. Spreads to Treasuries widened to 163 basis points and corporate bonds lost 0.6%. Deutsche Bank’s $1.3 billion bond sale was among the notable deals in a sluggish month for new issues. Municipal bonds gained 0.2%.
European stocks declined as turmoil in China, slowing economic growth in the euro zone, and ongoing debt troubles in Greece combined to produce losses in every major sector. Companies with significant exposure to China were among the hardest hit in the market selloff, including banks and commodity producers. Overall, the MSCI Europe Index tumbled 7%, its worst monthly decline since 2011.
Euro-zone economic activity decelerated to 0.3% in the second quarter, or 1.3% on an annualized basis, as both Germany and France grew at a slower pace than expected. Deflationary pressures also persisted. Consumer prices grew by just 0.2% in July, far below the European Central Bank’s target of roughly 2%. The disappointing number helped fuel market speculation that the ECB may increase its €60-billion-a-month bond-buying program in an attempt to jumpstart the economy.
Greece’s long-running debt crisis continued to rattle markets, even as a near-term compromise was reached between Greece and its creditors. Greek Prime Minister Alexis Tsipras resigned in a maneuver widely interpreted as a bid to shore up support for an €86 billion bailout plan that he negotiated with European leaders. A snap election is scheduled for September 20 and most polls indicate that Tsipras will return to office with a stronger mandate to implement the terms of the bailout agreement, which includes some strict austerity measures.
All major sectors experienced losses ranging from 6% to 9%, weighed down by a virtual freefall in the materials sector. Shares of Glencore plunged nearly 30% as commodity prices plummeted on heightened concerns about slowing demand from China. Glencore reported a half-year loss of $676 million, missing analyst expectations by a wide margin. BASF shares also slid as falling oil prices hurt profits at its oil and gas division. Meanwhile, Syngenta shares fell after Monsanto withdrew a $46 billion offer to buy the agrochemical company.
Energy stocks declined as Europe’s largest integrated oil companies suffered from a renewed drop in oil prices. Shares of BP, Royal Dutch Shell and Total were among the largest detractors in the index, falling approximately 6% to 9% for the month. In its latest cost-cutting move, Shell said it would eliminate 6,500 jobs from its global workforce. In late August, prices for Brent crude fell below $45 a barrel for the first time since 2009; however, a rebound in the final three days of the month brought prices back above $53.
Financial stocks fell 8% amid investor concerns about foreign banks operating in China and throughout Asia. Shares of HSBC, which generates roughly 70% of its earnings from Asia, moved sharply lower. HSBC plummeted despite reporting stellar earnings earlier in the month, including a pretax profit of $9.4 billion in its Asian operations. Shares of Banco Santander also slipped due, in part, to the bank’s exposure to struggling emerging markets.
In bond markets, yields climbed higher across Europe as an improving U.S. economy triggered worries that the Federal Reserve would raise interest rates. The yield on Germany’s benchmark 10-year note rose 16 basis points to finish the month at 0.8%. The exception was Greece, where borrowing costs declined amid cautious optimism for the Greek bailout plan and investor relief that Greece would likely remain in the 19-member euro zone. The yield on Greece’s 10-year note declined from 12% to 9.3%.
Japanese equities declined sharply along with the broader global market due largely to China’s economic slowdown. Japan was also weighed down by its own poor economic data that showed a contraction in the second quarter amid lackluster consumer spending. The MSCI Japan and MSCI Pacific indexes both shed 8% in the month, with all sectors in the red. The yen gained 2% against the U.S. dollar, dragging down exporters.
Japan’s GDP contracted an annualized 1.6% in the second quarter — the struggling economy’s third contraction in the past five quarters. Exports were the biggest negative factor, falling 4.4% from the previous quarter. Private consumption has also been sluggish as wage increases have failed to keep up with prices since the national sales tax rose last year. Core-core inflation, which strips out volatile food and energy prices, rose 0.6% in July. The unemployment rate ticked down slightly to 3.3% in July, below economists’ forecasts.
Consumer discretionary stocks lagged. Exporters fared particularly poorly due to a strengthening yen and the slowdown in China. Fast Retailing declined 19% after announcing domestic same-store sales of Uniqlo Japan fell for the second consecutive month. Panasonic shares fell as investors continue to wonder if the company can reach its lofty full-year guidance figures. Sony retreated 11%. Shares of Rakuten dropped 13% after the company reported disappointing earnings. Financial shares also struggled. Megabanks Mitsubishi UFJ and Sumitomo Mitsui each lost more than 10%. Plunging commodity prices contributed to trading company Mitsubishi’s 32% decline in net profit in the second quarter.
Japanese automobile sales to mainland China decreased more than 30% in the first half of the year, weighing on the industry. Toyota shares declined after Volkswagen surpassed the company to become the world’s largest automaker by sales. Isuzu Motors faced the steepest losses, retreating 20%. Automobile component manufacturers Denso and Bridgestone also fell.
Nintendo was a bright spot, gaining 15%. Investors were encouraged by a strong earnings release as well as a shift in strategy to embrace mobile gaming. Telecommunication services was the best-returning sector, led by SoftBank, which rallied after reporting strong first-quarter earnings and indicating that struggling subsidiary Sprint may have turned a corner. Japan’s four largest publicly traded construction firms all had strong gains. Shares of several pharmaceutical companies also climbed during the month.
Australian equities lost 8% Oil and gas companies Origin Energy and Santos were the two worst performers as oil prices sank to new multiyear lows during the month. Shares of the four megabanks all declined by double digits as they reacted to stricter regulations on the amount of capital to be held against potential home loan losses. Banks have committed to raising A$16 billion this year, which exceeds the amount raised to bolster balance sheets during the 2008 financial crisis. The Australian dollar depreciated 3% against the U.S. dollar.
Hong Kong was the worst-performing developed market, tumbling 13%. It was the fourth straight month of declines and its steepest monthly loss in nearly four years. More than half of listed stocks fell by double digits, including AIA Group, the index’s largest constituent. Macau-based casino stocks reversed last month’s resurgence, losing more than 20% each.
Emerging markets came under significant pressure amid heightened concerns about China’s economic slowdown and stock market rout. An unexpected devaluation in the renminbi compounded market jitters. Volatile commodity prices contributed to sustained caution around energy and materials companies. The MSCI Emerging Markets Investable Market Index fell 9%. All sectors ended the month lower, with the utilities, financials and energy sectors leading losses. Investor uneasiness also weighed on emerging markets debt. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, ended 1% lower. Local currency debt posted negative returns. The J.P. Morgan GBI-EM Global Diversified Index fell 1% in local currency terms but slid 5% in U.S. dollar terms as emerging markets currencies hit multiyear lows. The renminbi’s decline stoked worries of competitive devaluations.
The MSCI China IMI tumbled 12%. Investors were unnerved by a devaluation of the renminbi as the People's Bank of China changed the way it set the currency’s daily starting value against the U.S. dollar. The renminbi fell 3% over the month. The move would make the exchange rate system more market-based, the central bank said. But markets feared that it signaled a sharper-than-expected slowdown in China. Exports fell 8% in July from the previous year. Manufacturing activity also contracted in August. In a bid to stimulate the economy, the central bank pared its benchmark interest rate for the fifth time since last November and lowered the reserve requirement ratio for banks.
Concerns about China hit other Asian markets. The MSCI India IMI fell 9%. Investors tempered their expectations for reforms in India as the government’s attempt to ease a land acquisition law met strong opposition. In Thailand, stocks shed 5% on concerns that a bomb blast in Bangkok would hurt the tourism industry. Meanwhile, the MSCI Indonesia IMI lost 10%. Indonesia’s second-quarter economic growth slowed from the previous year on weak investment, government spending and household consumption. As the outlook for commodity exports to China weakened, the Indonesian rupiah slumped to its weakest level against the U.S. dollar since the Asian financial crisis. Indonesian local currency debt fell 1%, with the loss deepening to 5% in U.S. dollar terms. In Korea, stocks ended 5% lower. Samsung Electronics pulled back on news that it lost share in the global smartphone market in the second quarter.
Latin American markets struggled. The MSCI Brazil IMI declined 14% amid rising public discontent with the deteriorating economy. Brazil slipped into a recession in the second quarter and the jobless rate climbed in July. President Dilma Rousseff’s approval rating dropped to a record low. Meanwhile, Moody’s Investors Service cut its credit rating for Brazil to the lowest investment-grade level (though it also upgraded its outlook to stable from negative). The Brazilian real sank against the U.S. dollar to its lowest level in more than 12 years in the face of soft commodity prices and potentially weaker demand from China. Brazilian local currency debt fell 8% in U.S. dollar terms. In Mexico, stocks retreated 7%. Shares of cement and building materials company Cemex fell; it said it would sell assets in Europe to help trim its debt.
Elsewhere, Turkish equities and bonds struggled. The MSCI Turkey IMI slumped 11%. Political uncertainty mounted as President Recep Tayyip Erdoğan called a snap election. Erdoğan’s AK Party failed to form a coalition government after losing its parliamentary majority in the last election in June. The Turkish lira plumbed a record low against the U.S. dollar, contributing to a 7% fall in Turkish local currency debt in U.S. dollar terms.
A deepening recession in Russia dented stock and bond markets. The MSCI Russia IMI fell 6% as the economy shrank 4.6% in the second quarter following a 2.2% contraction in the first quarter. The ruble fell against the U.S. dollar, setting a new low for the year. Russian local currency bonds slid 11% in U.S. dollar terms as the ruble’s depreciation magnified losses.
In debt issuance, Saudi Arabia sold $5.3 billion of bonds as falling oil prices and high public spending weighed on its finances. The International Monetary Fund estimates that the kingdom’s fiscal deficit could reach 19.5% of GDP this year. Elsewhere, Brazilian state-run oil producer Petrobras announced plans to raise over $830 million from the sale of local bonds to fund investments and extend its debt maturity.