August is a Wicked Month
Figure 1 Don’t Jump!
It is 53 years since Edna O’Brien published her harrowing novel ‘August is a Wicked Month’ and I have borrowed the title several times over the years. As this month claims more and more casualties it seems appropriate to do so again. My colleague Chris Bailey, CIO of the Dynamic Opportunities Fund, headed his bulletin last week ‘Why I never go on holiday in August’ and described how the month typically brings ‘wild and wacky share prices’. This summer holiday season is certainly going to form so far with the more junior fund managers and traders left in charge having to deal every day with struggling stock markets, recalcitrant bond yields and a stampeding dollar.
It may or may not be significant but the only major stock markets that are higher so far in August are Sydney (winter), Mumbai (monsoon season) and, of course, Wall St or rather some of it, notably the FAAMNGs. In fact, the clear winner so far in August (and effectively since April) is the dollar but even here all is not straightforward. Positive factors include the US economy and US equities’ outperforming most others by some margin in Q1 and Q2, very strong Q2 corporate earnings and Fed rate hikes but it is also the case that after excluding the FAAMNGs the S & P 500 would actually be lower year-to-date, which in turn points to some nervousness amongst investors. Indeed, there is plenty to be nervous about: too much tightening by the Fed, the boost from tax cuts wearing off while the Federal deficit surges, trade and other political tensions created by the Trump Administration. However, the evidence for dollar strength’s being about seeking safe havens is also mixed: longer-term US Treasury yields have actually fallen in August while the yen is the only major currency to outperform the mighty buck and Gold is still heading South. A strong dollar for positive and negative reasons can only be explained by the intervention of FX traders and hedge funds and is unsustainable for long. Perhaps the turning point will be the prospect of the US Mid-term Elections in November with the Republicans already increasingly looking like losing one or both chambers, thereby curtailing Mr Trump’s ability to stimulate the economy with further tax cuts or by browbeating the Fed.
Turning to the month’s big losers cryptocurrencies, the SEC’s further delaying a decision on approving the creation of a Crypto ETF has probably come as a relief to those left manning the pumps. The prospect of Wall St muscling in is double-edged for those already investing in cryptocurrencies. It would bring safety in the form of liquidity and regulation but also the attentions of tax authorities and, of course, small traders would be squeezed out by the professionals. Most cryptocurrencies are having a rough ride in August and have been for much of the year as Figure 2 shows. It is interesting to compare their performance with official ‘fiat’ currencies, some of which are currently in the headlines. At the time of writing, the dollar’s year-to-date performance against major currencies has been: vs. EUR +5.3%, GBP +5.9% , AUD +7%, CAD +4.7% and vs. traditional safe havens: CHF +2.2%, Gold +9.3% with the only exception being JPY at a relatively modest -1.6%.
With most stock markets lower, US Treasury yields misbehaving, Gold drooping, cryptos on the floor and the dollar lording it, August is proving very wicked indeed! We must hope the inner lemming is suppressed until the big beasts return!
Chart 2: Every one of ‘em a loser!
Source: Charlie Bilello
By Alastair Winer
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