August 2024 monthly update

Read our August monthly update – a roundup of the latest financial news and economic headlines.

Fears of US recession briefly caused global stock markets to fall

At the start of August, a report by the Bureau of Labor Statistics showed that the American jobs market was cooling rapidly, increasing the unemployment rate. Consequently, concerns that the USA could be heading towards a recession accelerated. This led to stock markets around the world falling.[1]

The Topix Index fell by 12.2% (its sharpest sell-off since the Black Monday crisis in October 1987); contracts tracking the Nasdaq 100 were down 4.2% and those related to the S&P 500 were down 3%; and the Japanese index suffered its worst day in 37 years.[2] In turn, London’s FTSE 100 fell over 2% which is its lowest in three months.[3] Elsewhere, South Korea’s Kospi benchmark fell 8.8%; Australia’s S&P/ASX fell 2.5%; India’s Sensex dropped 2.7%; and Europe’s benchmark Stoxx Europe 600 slowed by 2.7%.[4]

Economists worried that the US economy could be weaker than initially anticipated by the Federal Reserve. As such, before the subsequent stabilisation, analysts speculated that the central bank could be forced to cut borrowing costs sharply in September.[5]

After this brief panic, however, the markets rallied. At close on 6 August, Japan’s Nikkei stock exchange saw a monumental 10.2% gain; a record daily points rise.[6] By the end of the month, the markets had largely kept up the momentum. Although Nvidia shares pulled the S&P 500 and Nasdaq down slightly following their recovery periods, the Dow Jones Industrial Average climbed to a record close of 41,335.05 points (29 August).[7] Meanwhile, the FTSE 100, which had plummeted to 7,998.19 points during the earlier turmoil, hit over a three-month high. It ended at 8,412.73 points the next day.[8]

“We might not be out of the woods yet,” commented Fawad Razaqzada, market analyst at City Index, “though conditions could stabilise as the week progresses. With a quieter US economic calendar ahead, there will be fewer new recessionary signals to unsettle traders, and the potential for supportive comments from Federal Reserve officials could ease market pressure.”[9]

Bill proposed to regulate ESG rating agencies

The government is planning to introduce legislation to regulate ESG rating providers. According to a statement by HM Treasury, “the Chancellor sees an opportunity to work with industry to drive more investment and cement the UK as a world leader in sustainable finance, starting by addressing the lack of transparency behind ESG ratings.”[10]

At present, Chancellor Rachel Reeves has decided that the Financial Conduct Authority (FCA) will create the ruleset. Although, the Financial Times reported that a new watchdog may be established for this purpose instead. To prevent new burdens on companies, the ruleset will be like international recommendations.[11]

Moreover, it will take inspiration from the system being built by the EU. Last year, the European Commission proposed separating ESG ratings groups’ provision of data services from their consultancy branches. Agencies were also asked to disclose more methodological details and register with authorities.[12]

Angela Catlin, from The Co-operative Bank, welcomed the proposal. She believes that it will “help issuers understand exactly what ESG rating agencies consider when producing their final scores for companies”. She hopes that the new bill will allow investors to make more informed decisions.[13]

Lindsey Stewart, director of investment stewardship research at Morningstar, echoed the sentiment but cautioned the government against going beyond regulating the ratings. While he views the ESG ratings as “opinions, which are often diverse”, he is against regulating ESG data. He believes that the latter contains “objective” facts via which ratings are calculated. “Restrictions on the flow of ESG data, which encompasses fast-emerging new topics, could negatively affect investors,” added Stewart.[14]

Economists speculate on IHT and CGT rises

In late August, Prime Minister Kier Starmer revealed in an address that he expects the upcoming Autumn Budget to be “painful”. Consequently, expectation is growing amongst economists that Inheritance Tax (IHT) and Capital Gains Tax (CGT) will be up for reform. This is further fuelled by the fact that Chancellor Rachel Reeves will need to fill the £22bn “black hole” in the country’s finances.[15]

While Labour have repeatedly ruled out increases to Income Tax, National Insurance, and VAT, they have not been as clear about their plans for IHT and CGT. “None of our plans require us to look at extra tax but we, of course, have to see what the true state of the public finances is when we get to open the books,” stated John Healey, Defence Secretary. He continued: “The ones that are most important are those that cost working people the most, those that are facing the highest tax burden now for 70 years.”[16]

According to Tina McKenzie from the Federation of Small Businesses, “no government at all serious about growth would hike CGT on entrepreneurs selling a small business.” Instead, she is hoping that the government would continue to work “in partnership” with companies.[17]

Regardless of the eventual outcome, the speculation sparked by government officials has caused a “frenzy”. Accountancy firms, lawyers, and financial advisers reported a skyrocketing number of enquiries about selling assets due to worries about tax rises. James Ward of Kingsley Napley commented that “clients with assets between £2 million and £5 million are particularly worried about losing existing tax exemptions”.[18]

If you are concerned about such potential tax changes affecting you, you should get in touch with a financial adviser. They can analyse your financial situation and provide the best solutions for your circumstances.