August 2026 was marked by concerns over the evolution of long-term rates. The deadlock in negotiations between Iran and the United States, punctuated by episodic attacks, led to oil prices remaining volatile throughout the month, with Brent crude ending at $89 per barrel. The persistence of energy prices at high levels continued to fuel fears of accelerating inflation and thus weighed on the bond markets. In response to this rise in long-term rates, U.S. Treasury Secretary Scott Bessent announced that Treasury purchases on long maturities would be at least doubled for the quarter.
The inflation indices published in August, covering the month of July, delivered a mixed message. In the United States, headline inflation (CPI) slowed to 3.4% year-on-year, compared to 3.5% in June, while core inflation fell to 2.5%, its lowest level of the year. In the eurozone, by contrast, inflation accelerated to 2.9% in July, up from 2.8% in June, driven higher by a renewed surge in the energy component (+10.3% year-on-year) linked to the evolution of oil and gas prices. Meanwhile, core inflation came in at 2.5%.
Activity surveys remained generally well oriented despite high energy prices. In the eurozone, the composite PMI rose for the third consecutive month, reaching 52.1 in August, its highest level since November, driven by German industry. In the United States, the ISM manufacturing index jumped to 55.6 in July, its highest level since May 2022, while the ISM services index held steady at 54.1. The July employment report, however, disappointed, with a loss of 23,000 non-farm jobs and significant downward revisions for previous months, even though the unemployment rate fell to 4.1%, a thirteen-month low, due to a further decline in the participation rate. In Japan, the unemployment rate dropped to 2.4% in July, a one-year low, but Tokyo inflation reached a five-month high in August. China continues to stand out, with PMI surveys falling to a four-month low in July, illustrating the persistent gap between sectors linked to artificial intelligence and the rest of the economy.
None of the major central banks held monetary policy committee meetings in August. The month's key event from this perspective was the Jackson Hole symposium, where Kevin Warsh was reassuring about the labor market but concerned about the inflation trajectory. He gave guidance for the first time in his term, saying that the Fed's attention should currently be focused primarily on price stability. In the eurozone, ECB minutes suggested that a majority of Governing Council members would be ready to raise key rates in September to contain the effects of rising energy prices. In Japan, several BoJ officials indicated that the central bank should accelerate the pace of rate hikes, with markets now anticipating a strong probability of a hike to 1.25% as early as September.
Equity markets held up well against oil price volatility, buoyed by renewed strength in the artificial intelligence theme. The S&P 500 set several new all-time highs during the month, approaching 7,800 points before retreating slightly, ending the month up 2.6%. The Eurostoxx 600 also reached a new record before giving back part of its gains, finishing the month up 0.3%. The Nikkei rose 3% over the month, still driven by the semiconductor sector. Finally, the MSCI Emerging also posted a solid performance (+3.2%), again supported by technology stocks.
Bond yields generally increased over the month, particularly at the very end of the month after Kevin Warsh's speech. The U.S. 10-year rate ended the month at 4.74%, its highest level since the start of 2025. The German 10-year rate rose sharply, ending the month at 3.30%, its highest level since 2011, due to expectations of ECB rate hikes. Sovereign spreads in the eurozone widened slightly. In Japan, the 10-year rate also increased, to 2.92%, in anticipation of BoJ tightening. Finally, gold rebounded strongly, rising 9.6% over the month, its best monthly performance since January, supported by interventionist measures from the U.S. Treasury (intervention on the yen and increased Treasury purchases).
The fund rose by 1.42%, compared to 1.25% for its benchmark index. Performance was mainly driven by U.S., global, and emerging equities, with respective contributions of +0.78 point, +0.55 point, and +0.20 point. Conversely, bond positions and government bond futures contracts subtracted about 0.10 point. Equity exposure was slightly increased by 0.40 point, to 88.66% at month-end. We tactically strengthened North America, notably through the Nasdaq, as well as emerging markets. An exposure to the CAC 40 of around 3.1 points was simultaneously replaced by a comparable exposure to the Euro Stoxx 50, in order to reduce specific French risk. After the market rally, we also took profits on half of the September maturity Euro Stoxx 50 calls, while maintaining a residual exposure. On the bond pocket, sensitivity was reduced from 1.94 to 1.53, mainly by lowering exposure to eurozone rates, while positions on the U.S. five-year and North American High Yield credit were rolled. The fund thus maintains a relatively high but diversified equity risk level, and contained bond sensitivity.
Our central scenario remains one of resilient global growth and gradual normalization of energy prices, but with inflation still too high to allow for a rapid easing of monetary policies. We maintain a favorable medium-term view on risky assets, supported by earnings, while adopting a tactically more cautious stance given the level of real rates and valuations. On equities, we favor geographic diversification and broadening performance drivers, while maintaining selective exposure to artificial intelligence across semiconductors, software, and cloud. On bonds, we maintain short to moderate sensitivity and favor credit carry, with increased selection on High Yield given the tightening of spreads. The main risk factors remain the evolution of energy prices, the inflation trajectory, French fiscal risk, the weakness of the Chinese economy, and a possible correction in values linked to artificial intelligence.