Back to School: Markets Prepare for September Challenges

Market Outlook for September

• Political Turmoil in the U.S.: President Trump’s dismissal of Federal Reserve Governor Lisa Cook and ongoing tensions with the Fed raise concerns about market stability. Investors are particularly focused on the upcoming jobs report on September 5 and the Fed's meeting on September 16-17, with an 85% probability of a rate cut anticipated. However, questions about the Fed's independence could undermine confidence in U.S. capital markets.

• French Political Instability: French Prime Minister Francois Bayrou is likely to lose a confidence vote on September 8, which could destabilize the government and impact European markets. The potential for a ratings downgrade from Fitch Ratings on September 12 adds to the uncertainty, with analysts warning of a domino effect on European markets if France's situation deteriorates.

Geopolitical Concerns

• Ukraine Conflict: Following the Alaska summit between Trump and Putin, investors are wary of the ongoing war in Ukraine, as Ukrainian bonds have lost significant value. European defense stocks are gaining traction due to increased defense spending, while Brent crude oil prices remain volatile amid escalating tensions.

• Tariff Implications: The U.S. has imposed a 25% tariff on Indian imports related to Russian oil, adding to existing tariffs on various goods. The potential for new tariffs on Chinese imports remains a concern for global supply chains, as traders await the outcome of temporary tariff extensions.

Investment Caution

• Historical Trends: September is historically a weak month for stock markets, with the MSCI World Index averaging a nearly 4% decline since 2020. This trend contrasts with August, which has typically been strong for U.S. equities, highlighting the need for caution among investors.

• Bond Market Dynamics: Rising government borrowing and the sustainability of public finances are critical as the U.S., Japan, and Germany prepare to issue long-dated bonds. Japan's 30-year bond yields have surged nearly 100 basis points this year, reaching record highs, while European yields are also near multi-year peaks, indicating a shift in investor sentiment.