In recent weeks, the mood on the markets has been calm. Returns from different markets and market areas have also been largely positive.
During September, the markets’ performance has been mostly positive, and price volatility in both the equity and fixed income markets has moderated recently. At the same time, however, the US labour market has shown signs of cooling, which has raised concerns about the economic growth outlook.
The United States is a very consumer-driven economy. The weakening of the labour market, if protracted, could also reduce consumers’ consumption opportunities. On the other hand, if the economy were to weaken and consumption were to diminish, inflationary pressure would presumably also lighten. This, in turn, would give the country’s central bank, the Fed, more leeway to ease its monetary policy. At present, the markets have interpreted the weakening of the labour market mainly from the latter, more positive standpoint – although it has not been met with outright enthusiasm.
Fixed income markets have experienced a relatively calm few months, delivering a strong year – especially for corporate bond investors. Yield curves have also normalised, with a decline at the short end and an increase in long-term yields, especially in Europe. A similar rise in long-end interest rates has not been seen in the USA, but short-end interest rates have come down there too, resulting in a more normalised yield curve also across the Atlantic.
Over the past year, there has been much talk of the dollar depreciating, which has periodically eroded the dollar-denominated returns of euro investors significantly. In recent weeks, exchange rate movements have remained relatively moderate, however, and currency movements like the ones in H1 have not reoccurred.
On the equity markets, the US stock market has regained momentum, driven by tech companies during the summer, following a weaker first half-year. In September, the situation on the equity markets has somewhat levelled out, however, and other sectors, as well as small and mid caps, have also rallied. Another strongly performing equity market is Japan, although there have not been significant differences between geographical areas.
Volatility has eased further in both the equity and fixed income markets. This indicates that the market sentiment has remained calm and the markets do not expect major market movements. Historically, however, it is often the case that when the markets begin to price in a more tranquil period, bigger movements begin to happen. Investors should also bear this possibility in mind, although, as usual, history is no guarantee of the future, especially on the investment markets.
A key upcoming event for the investment markets is the Fed’s interest rate meeting on Wednesday, 17 September. The markets are expecting the central bank to kick off its interest rate cuts with a quarter percentage point. No rate cut would be a huge surprise for the markets.
After July, market expectations concerning the Fed’s rate cuts have risen significantly. While in July the markets forecast a rate cut of two quarter-points by April of next year, they are currently betting on four within the same period. In addition to September’s rate cut (considered a certainty by the markets), the forecast is that another rate cut will be made later on this year.
The European Central Bank (ECB), in turn, lowered its key interest rate several times during the spring, and the markets do not anticipate more rate cuts from the bank.
Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.
