Just how nasty was August in the end? Equity investors lucky enough to be returning from a long holiday on Monday will wonder what all the fuss was about. In spite of some stock markets moving around by up to 4 per cent in a day, declines for the month were ultimately tame. Most bourses in Asia fell between 1 and 3 per cent in local currency terms. European equities were pretty much flat. The Dow Jones finished August higher, while Chinese punters, still on planet Zog, pushed Shanghai’s index up 17 per cent.

With the exception of the yen, even currencies finished the month close to where they began. All the action was confined to the carry trade, with the unwinding of short positions pushing the yen higher across the board. Traders on the wrong side of the yen versus high-yielding currencies will be particularly sore – during August, for example, Japan’s currency jumped 10 per cent against the New Zealand dollar.

The story is more mixed for fixed income. A flight to cash meant that yields dropped the most at the short end of the curve. Yields on 10-year securities fell only 10 to 20 basis points in the US, UK and Europe. But three-month Treasury yields plummeted almost 200 basis points on a single day, a fortnight ago, and are now 60 basis points lower than at the beginning of August. In spite of the best efforts of central bankers, overnight interbank rates in the US and UK remain 30-50 basis points above base rates.

This illusion of calm is partly because the pain caused in August is being felt in the non-traded corners of the financial system. Only when hedge funds publish their performance, or if banks issue earnings downgrades, will blood start seeping under the door. Nor should investors concentrate too narrowly on credit troubles. August had enough worrying macroeconomic data to stress even the most rested soul.

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