The rally in financial markets in July appears to have been a false dawn based on the misguided narrative that inflation was moderating, and that monetary policy may not be as restrictive as previously thought. During August, these expectations were dashed as central banks continued to tighten policy and reaffirmed their commitment to squeeze inflationary pressures out of the system no matter how severe the economic consequences.
The US market fell 4.2% which mirrored falls in other global markets, however, Australia fared better improving by 1.2% due to a strong energy sector as well as a solid profit reporting season.
Bond markets gave back their recent gains with the US 10-year treasury note closing 49bp higher at 3.2% and the Australian 10-year bond up 54bp to 3.7%.
Commodity markets continued to weaken particularly crude oil which fell 13%, iron ore was down 2.3% however once again natural gas proved to be the exception increasing by 9.6% on growing concerns in Europe of supply restrictions from Russia.
The Australian dollar responded to the risk-off environment by falling 2% to close at just over 68 US cents.