August interrupted the rally on the international financial markets – global stocks finished the month with a loss of 3% (MSCI World index in USD), as investors continued to contend with elevated global inflation, high interest rates, and some renewed worries over the Chinese real estate sector.  On a macro scale, inflation continues to play a dominant role – despite some meaningful declines recently, core inflation remains well above central banks targets (core inflation excludes the volatile prices of food and energy). The delayed effect of the steep increases in global interest rates triggered a sharp selloff at the beginning of the month. With a retracted appetite for risk in August, low volatility and low-beta stocks outperformed. The US economy gave mixed signals – job openings and new jobs both dropped, while consumer spending remained strong. In Europe, published data showed that economic growth was still weak. Oil prices moved higher in August, and aided the performance of the Energy  stocks.  In fixed income, government bonds yields rose (meaning that their prices fell).
   U.S. equities declined during the month. The stocks’ positive momentum over the second half of August was not enough to offset the strong decline earlier in the month, and the broad index S&P500 fell about 1.8%, bucking a trend of five positive monthly results. Several of the large tech giants weighed heavy on the index, as they pulled back. Energy stocks were more resilient over the month, buoyed by oil prices, and produced the only sector among 11 to end with a positive monthly result; Utilities posted the biggest decline. Economic data for the US were mixed, and revealed a robust economy. Retail sales improved in July versus June. Industrial activity slowed in August with the Purchasing managers’ index (PMI) dropping to 50.4 from 52 (any reading below 50 implies contraction; above 50 – expansion). Manufacturing shrank further while the growth of services slowed considerably. Inflation (CPI) accelerated slightly in July to 3.3% – core inflation also went up to 4,2%. The unemployment rate rose to 3.8% (a 17-month high), far above economic expectations. Given the interest rate implications though, such bad news for the economy, might be considered good news for the financial markets: the gradual cooling of the labor market could give the Federal Reserve the rationale to keep interest rates unchanged at its September meeting, and that may ultimately provide the conditions for further equity and bond market rallies.  Remarkably, the S&P500 is up more than 17% since the beginning of the year, despite its August pullback.
   The biggest news on the fixed income front was definitely the downgrade of U.S. government credit rating from the stellar AAA rating to AA+ by Fitch, one of the three major rating agencies. The effects were not large – the 10-year US Treasury yield subsequently rose briefly to a nine-month high (of 4,1%) before falling back to 3,95%. With the 2-year US Treasury yield staying at 4,85%, the yield curve kept its inverted slope (typically, considered a precursor to recession).
   European shares also fell in August on the back of weak data for economic growth.  Business activity showed a deepening downturn as the PMI dropped to 47.0 in August – a 33-month low. Manufacturing activity especially continued to contract. Energy and real estate were the only market sectors to register a positive return, with all others declining. Bank shares sank after Italy announced a tax on banks’ excess profits but shares largely recovered later, when the government clarified that the tax would be negligible amount of a bank’s assets (0,1%). Eurozone unemployment (6,4%) and annual inflation (5,3%) for August stood unchanged compared to July, while core inflation was down slightly to 5,3% (from 5,5% in July). Eurostat data also showed that money supply in the single currency area shrank in the 12 months to July for the first time since 2010. During the month the Bank of England raised its interest rates from 5% to 5,25% and emphasized that rates would need to remain “sufficiently restrictive for sufficiently long” to help tame inflation. In the UK the yields on government bonds rose across the board; while Germany's 10-year Bund stayed unchanged at 2,47%, and the 2-year yield dropped further to 2,98%. The yield curves of all European government bonds remained inverted. Now, markets are looking to the 14 September meeting of the European Central Bank to determine whether another rate hike would be forthcoming.
   In contrast to the declines on the international markets, the Bulgarian stock market posted remarkable growth in August, highlighting its diversification advantage in a global portfolio. The broad BGBX40 index ended the month up nearly 7% and the flagship SOFIX – up by 10%! Cumulatively, since the beginning of the year, SOFIX is already up more than 25% and is one of the best performing indices in the world. The past month was marked by dividend payments from many domestic companies, thanks to the relatively strong corporate earnings last year. For example, the Bulgarian Stock Exchange (the company) voted during the month to pay the largest dividend in its history - a gross dividend of BGN 1.04, representing a dividend yield of over 11%!   Among the Bulgarian companies, the best performer for a second month was the technology company Shelly Group AD (formerly Alterco AD), whose price rose by over 55%, and the worst - the battery manufacturer Elhim Iskra AD, whose share price fell by 10%.