August started out on a positive note with equities continuing their rally from July. But mid-month, Russian gas supply disruptions caused turbulent energy markets in Europe. That, coupled with the Federal Reserve’s reiteration of its commitment to hawkish policy, led to volatility in markets. This resulted in bond yields jumping 50 to 70 basis points, and curbed growth enthusiasm from investors. Ultimately, equities and bonds lost ground towards the end of the month and finished negative when compared to prices at the end of July.

Below are total returns in Canadian dollar terms for August, and year-to-date respectively:

Inflation figures for July showed declines for the first time this year in both the US and Canada. Within Europe, however, headline inflation climbed higher. The UK in particular hit double digits at 10.1%. Energy prices remain a volatile factor within the headline numbers. Declining crude oil prices were the main contributor to the decrease in North American inflation, but for Europe, the greater dependence on Russian energy exports has kept prices elevated. Reported higher European natural gas inventories provided some relief toward month end and saw UK natural gas prices within the futures market falling roughly 30%, but remaining higher than July levels.

Jerome Powell, chair of the US Federal Reserve (Fed), spoke at an economic symposium in Jackson Hole, Wyo. on Aug. 26. Markets were awaiting his remarks wondering if the lower inflation print might lead the central bank to ease off on its additional planned interest rate hikes. Powell instead commented that one month of decline was not sufficient enough to pivot from the strategy. Labour markets remained strong allowing the Fed to stay focused on bringing inflation back to its 2% target goal. The Fed meets again Sept. 21 and is expected to hike interest rates by another 0.5% to 0.75%. The Bank of Canada meets Sept. 7, with similar expectations of a 0.75% increase.

Both bond and equity markets had a volatile month with the media continuing to portray conflicting narratives as to whether various developed markets are already in a recession, or heading for one. While the economic debate continues, company fundamentals have not shown signs of deterioration, and are holding up well as evidenced by second quarter earnings releases. Nearly all companies had reported by the end of August showing positive growth to both sales and earnings on average with just over 75% of S&P 500 companies exceeding analyst expectations.

Despite fundamentals holding up, overall equities ended the month with a negative return slightly behind where they started the month. Growth stocks and small cap names were hit harder, as higher interest rates and lowered growth expectations from central bank commitment to fighting inflation dried up investor appetite for risk. The ATBIM funds performed in-line on a relative basis within the US, whereas within Canada, many of the highly cyclical energy and resources names rallied on the month, leading to the Canadian portion of the holdings underperforming by about 1%. On the international stage, European stocks led the way down as volatility from energy prices continue to weigh heavily on growth. This led to about a 1% underperformance for the month within the funds’ international equities, as the holdings overweight European names that underperformed their developed market peers such as Japan.

Bonds similarly saw price declines for the month as yields rose about 0.5%, reversing rate declines from July. Yields for the overall market based on the FTSE Canada Universe ended the month at 4%, and investment grade spreads were slightly lower for the month. The increase in yields left the fixed income within the funds with less duration and performing better on a relative basis by about 1.7%², down 1% compared to 2.7% for the overall Canadian bond market. Fixed-income holdings within the funds continue to have a higher degree of credit and overall yield of 5.3% with a duration of just over four years.