Recently, the mood in the equity and fixed income markets has remained calm despite the uncertain news flow. The coming weeks have plenty of new economic data in store, however.
Equity and fixed income markets have performed admirably as of late. The best performers in the equity markets come from Asia where Japan’s and especially China’s equity markets have shown positive development. One contributing factor is a kind of AI boom happening in China. A tighter trade policy has diminished US microchip imports to China, which has caused Chinese technology and microchip companies to show positive performance. Also the US equity market, which had fallen significantly behind the rest of the world in the first half of the year, has regained ground, driven especially by tech companies.
The mood in the fixed income market remained calm. US and European credit spreads have fallen during the summer in both investment grade and high yield investments. Especially in the United States, credit spreads are currently low also from a historical perspective. Volatility has also eased in both the equity and fixed income markets.
During the past year, the depreciating dollar has depressed returns on USD-denominated investments. However, the depreciation of the dollar against the euro appears to have stalled for the time being.
The markets are currently speculating over the sustainability of the stock market rally. If signs of slowing growth or accelerating inflation were to appear, it would presumably give the markets a shock. However, to achieve a more permanent turnaround, the markets would require definite signs of a change in the economic outlook.
Although uncertainty has slightly increased in the markets, forecast figures are not indicating a significant weakening of economic growth. The latest economic data from the USA has been more positive than expected and Europe’s figures have slightly exceeded forecasts. There are, however, still risks linked to the possibility that tariffs will slow down economic growth and private consumption.
This week has plenty of economic data to offer, and the labour market data from the United States is of particular interest to investors. If economic development were to weaken and inflation to accelerate at the same time, the combination would prove extremely challenging for the markets.
The Fed is assembling for its September interest rate meeting on the 17th of the month. A rate cut by the central bank is considered very likely as long as no major surprises crop up in the meantime. The Fed has rarely made interest rate decisions that contradict market forecasts, as a decision deviating from the market consensus could trigger significant market volatility. Instead of the rate cut itself, it is more pertinent to keep an eye on the development of the Fed’s forecasts on the future path of the monetary policy.
In addition to the almost certain rate cut in September, the Fed is currently expected to carry out rate cuts totalling one percentage point by April of next year. This is more than what the markets were pricing in at the end of July.
The European Central Bank (ECB) is not expected to make significant changes to its interest rate policy. In a departure from its usual pattern, the ECB initiated rate cuts even before the Fed and has continued them during the current year. With euro zone inflation close to the ECB’s two per cent target, Europe’s need for rate cuts is lower than that of the United States.
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