Risk assets were stronger mostly through the first half of August as earlier concern that the US Fed might start to taper its monthly bond-buying program from its mid-September policy meeting was allayed by mixed-strength US economic readings. The key July US non-farm payrolls report early in August surprised on the weak side of market expectations showing payrolls up by 162,000 (consensus forecast 175,000) after a downwardly revised 188,000 (initially reported 195,000) lift in June. During the second half of August the rallies in risk assets more than reversed amid renewed concern that Fed tapering might start in September and an escalating crisis in Syria pushing up oil prices. Major sharemarkets fell in August between 1.7% for the Eurostoxx 50 index and 3.1% for the US S&P 500. One exception was the Australian sharemarket where the ASX 200 rose by 1.6% in the month assisted by the RBA cutting the cash rate another 25bp to 2.50% at its early August policy meeting.

Credit markets mostly mirrored movements in sharemarkets rallying through much of the first half of August, but giving up ground through the second half. The Australian Itraxx finished August a little higher (weaker) than where it started the month. Another notable feature of the month was that longer-term bond yields continued to drift higher, notwithstanding still very easy monetary policy settings for the most-part around the world. Despite the cut in the cash rate by the RBA, the Australian 10-year bond yield rose by more than 20bp in August to nearly 3.90%.

Government bond markets may be starting to reflect that the era of very easy monetary conditions, including the use of unconventional, non-interest rate easing may be coming to a close starting in the US. On the economic data front, while US indicators were mixed in August, data released in China and Europe surprised on the upside of general expectations with forward-looking sentiment and PMI readings pointing to China through the weakest point of growth moderation earlier in the year and Europe consolidating a lift out of recession evident in stronger than expected Q2 GDP growth readings.

Looking ahead, consensus global growth forecasts look set in our view for a series of upward adjustments on improving growth prospects in China and Europe and notwithstanding the US Fed starting to taper its bond buying, still barely addressed sovereign debt issues in Europe and budget austerity programs continuing in many parts of the world. It is likely to be a very long time before unconventional monetary policy programs in Europe start to unwind given still huge excess capacity in the region and little inflation risk. In Australia, an overly-glum view of economic prospects developed mid-year that may soon be subject to some reversal as economic improvement in China gathers pace calling in to question whether the resources investment boom will unravel quite as much as feared in some quarters. Evidence has been mounting for several months that low interest rates are spurring home buying activity spilling over to stronger house prices. The imminent Federal election may soon remove another constraint on business and consumer sentiment. We see no more RBA interest rate cuts and the next move will likely be a rate hike in the first half of 2014.