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Gulf widens between US and the rest

By Philip Lawlor, managing director, global markets research

The chasm between the performance of US equities and the rest of the world grew bigger in the month of August, as a strong USD, and fears of a trade war, boosted US stocks and created turmoil in emerging markets.

US stocks fared best among developed markets, buoyed by domestic fundamentals, relatively measured Fed guidance, and the late-month breakthrough in US-Mexico trade negotiations, while Italy and Spain declined the most. Russia, Brazil and China led the emerging-market selloff, while India and Taiwan outperformed with gains.

As the comparison of Russell 1000® vs FTSE All-World® ex US chart below shows, US large cap equities have outperformed the rest of the world since the start of the decade. The gap narrowed in July when FAANG stocks moved lower, but the trend resumed in August.

And, as the chart below illustrates, early summer fears of a trade war and persistent concerns about the dollar financing of debt created turmoil in emerging markets.

EM weakness was reflected in currencies: Turkey (TRY) and Argentina’s peso (ARS) were the weakest performing of any assets in our model, falling 26.6 percent, and 29.7 percent, respectively, against USD.

The US dollar ended the month roughly flat versus the euro, sterling and yen, after weakening from its year-to-date high in mid-August.

US Treasury bonds strengthened, driving further yield curve flattening, as emerging-market turmoil and Italian politics spurred a safe-haven rotation into German and French government bonds. US investment-grade and high-yield credit also rose, while emerging-market sovereign and high-yield bonds fell.

Commodities continued their broad retreat, with slowing China growth and rising US-Sino trade pressures taking a particularly big toll on copper and other base metals. In contrast, oil prices rose, adding to YTD gains.

In the UK, performance continues to correlate closely to GBP, which weakened in August due to fears of a No Deal Brexit.

From a factor perspective there was a reversal from July last month, as growth outperformed value in all regions. Small caps outperformed large caps in the US, UK and Europe, but not in Asia.

 

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Source: FTSE Russell and Thomson Reuters. Data as of August 31, 2018. Past performance is no guarantee of future results. Please see below for important legal disclosures.

 

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