Shares climb a bond market wall of worry

Shares wrapped up the summer break yesterday with broad-based gains for the main equity indices in August.

The S&P 500 added 2.7% during the month, Nasdaq was 4% higher, with Japan and emerging markets more than 3% to the good, and Europe and the UK basically flat.

Those gains came in the face of higher bond yields and rising energy costs. The stock market is climbing a wall of worry amid evidence around the world that the global economy enters the autumn in reasonable shape.

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Energy casts a shadow…

The top geo-political concern over the weekend was renewed hostilities in the Middle East, confirming the view that we are digging in for a protracted conflict in the Gulf. Oil pushed above $90 a barrel, feeding into a persistent inflation narrative and further pressure on central banks to raise interest rates. September brings a string of rate decisions.

….while Kevin Warsh provides some clarity

The future trajectory of US monetary policy was the main focus at the Jackson Hole economic summit, where new Fed chair Kevin Warsh attempted to clear up some of the confusion that has marked his early weeks in the job.

He has deliberately refrained from giving the market much forward guidance on Fed decisions and investors have struggled with that lack of information. Speaking on Friday he provided some clarity, restating the Fed’s commitment to its 2% inflation target and noting the strength of the US economy.

That was taken to be a broad hint that another quarter point interest hike is on its way, possibly as soon as the Fed meeting later this month. Perhaps more likely is the Fed waiting until the November mid-term elections are out of the way.

Bond rout continues

The prospect of higher US rates pushed Treasury yields up a bit, with the 10-year bond now yielding 4.7% and the 30-year paying 5.2%.

But it’s not just an American story. Germany’s 10-year bond yield has reached a 15-year high of 3.3% and the Japanese benchmark bond touched 3% for the first time in 30 years.

That reflects the growing likelihood that the Bank of Japan will also raise rates at its September meeting, in part to support the weak Japanese yen, which has failed to respond to expensive interventions by the authorities in both Tokyo and Washington.

The US Treasury is keen for the Bank of Japan to raise rates. It’s a better way to prop up the yen, from its perspective, because it avoids Japanese sales of US Treasuries to fund purchases of the Japanese currency.

Jobs in the spotlight

This week’s main focus is the jobs market, with Friday’s non-farm payrolls expected to show 50,000 new jobs in August, a recovery from July’s 23,000 contraction.

The market will be looking for a Goldilocks number - not too hot and not too cold. A strong payroll number would imply resilience but increase the chance of a rate hike. Too weak an outcome would raise recession fears.

In Europe, the focus is on inflation, which is expected to bounce back to 3.2% after July’s drop to 2.9%. Higher energy costs are the main culprit, but a hot summer has raised freight costs too, after a drop in the water levels on the Rhine.

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Shein loses its shine

Meanwhile, the big stock story of the week is the flotation of fast-fashion retailer Shein. Having hoped to list in New York or London with a value of up to $100bn, the Chinese company has had to settle for a more modest $25bn valuation and a Hong Kong listing.

Despite its lower ambitions, the shares still fell 10% on their debut, in marked contrast to some recent tech-focused IPOs in China.

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• Read: 5 stocks to watch in September
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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.