The return to routine that marks the month of September will bring the most anticipated news for investors in a long time: a reduction in interest rates in the United States, the first since the pandemic. There is no longer speculation or doubt, the president of the Federal Reserve, Jerome Powell, himself confirmed that The time has come for a change of course in its monetary policyto start the road back after the lightning increases in the price of money with which the central bank has been fighting inflation since March 2022. This expected rate cut is probably the only certainty in a return to school plagued with uncertainties for the markets. The decisions of the central banks are going to be the obligatory reference, but volatility can explode again at any time in an international context with growing geopolitical tension, with the markets trading at historic highs and with an event of planetary dimension just around the corner, the presidential elections in the United States.
Central banks have set the new course from now on. Since July, The ECB has lowered rates -which is expected to do so again on the 12th-, the Bank of England and the Bank of Canada, this week. But that is by no means a guarantee that the journey will be smooth in the financial markets. Two years of tight-fisted monetary policy, of drastic tightening of financing conditions, raise fears that the damage to economic growth may be excessive and the rate cuts late and even insufficient. This was made clear in the The stock market correction of August 5which has left investors reeling ever since despite the subsequent recovery of the indices.
The market is now closely scrutinizing the US employment data, the great thermometer for anticipating the Fed’s decisions once inflation is under control. The US unemployment data for July, worse than expected, was the trigger for a wave of sales on the Stock Market and this Friday the data for August was released, which leaves inflation below expectations. a reduction of one tenth, to 4.2%, although also a lower job creation than expectedThe labor market has inevitably cooled as a result of interest rate hikes aimed at lowering inflation at the expense of growth and employment. The big question now is whether these signs of weakness are the prelude to a recession, and what the Fed’s response will be. Much of the market is pointing to a decisive rate cut to tackle this threat of contraction: futures give a 40% probability of a half-point cut in September, not 25 basis points, compared to 30% a week ago. That probability soared to 85% on Black Monday, August 5.
The first big question to be resolved will be the magnitude of the rate cut that the Fed will decide on the 18th. Before that, on Thursday the 12th, it will be the turn of the ECB, which is expected to cut by 25 basis points to continue the path it began in June. “The most immediate key meetings are the Fed and ECB meetings. The 25-point cut is assured, but the important thing will be the signals, to see to what extent the central banks are convinced to continue cutting rates. And the Fed meeting could be a disappointment if Powell sends a message of caution, of deciding depending on the data. The market now expects a 100 basis point cut in the US by the end of the year,” warns Roberto Ruiz Scholtes, head of strategy at Singular Bank.
The highs reached by stock indices in the current long bullish cycle can show their fragility at any time, as was seen at the beginning of August. A second-tier economic indicator, as happened this week with the purchasing managers’ indices for the US manufacturing sector in August, can unleash the largest destruction of value in one day seen in a listed company. This happened to Nvidia, with a 9.5% drop that evaporated 278.9 billion dollars (about 252.4 billion euros). “Technology companies are in a process of consolidation, of demonstrating that they can monetize the enormous investments in artificial intelligence,” says Ruiz Scholtes. The high valuations reached by technology stocks and the strong rally they are amassing on the stock market make them more vulnerable these days in times of market unrest. “In mid-August, many markets had partially recovered, but the lesson is clear and should not be forgotten: the stock markets can behave erratically and unpredictably. “Ultimately, storms can break out of a seemingly clear sky. Nor is volatility likely to be a temporary phenomenon,” says Amadeo Alentorn, equity manager at Jupiter.
In his view, there are many risks for the future, starting with the uncertainty surrounding the global economy and the speed and magnitude of interest rate declines. Geopolitics is another major source of risk, with conflicts such as those in Ukraine or Gaza, which have the potential to trigger an escalation of international war; with increasingly polarised societies in which far-right forces are making gains; and with the big electoral event of the year, the US presidential elections on 20 November, in which Donald Trump and Kamala Harris appear practically tied in the polls. In addition to the White House, the US Houses of Representatives are also up for renewal. It is likely that neither Democrats nor Republicans will take control of both, which would lead to legislative paralysis that would in any case neutralise the implementation of the most extreme policies, such as a sharp increase in import tariffs in the event of a Trump victory. His return to the presidency would also risk awakening new inflationary tensions and further inflaming geopolitical tensions with China.
Trump’s victory would be bad news for the European stock market, with large exporting companies having strong ties to China, although it could well be a boost for the US oil industry – given Trump’s climate denialism – for the private health and pharmaceutical sectors, and also for banking and technology, which are likely to be subject to less regulation. Trade and geopolitical tensions could therefore take a very different course depending on who occupies the White House, in a countdown to the November elections that in any case predicts more volatility.
Investors will also have another date before the end of the year with corporate results, which in this last campaign beat expectations in the United States but were overshadowed by fears of a recession. The forecasts point to solid but declining profits, in parallel with the soft landing expected for the economy and which is the main scenario for experts. The probability of a recession in the US has risen; Goldman Sachs has adjusted them twice during last August. It raised them from 15% to 25% after learning the US unemployment data for July and lowered them again shortly after, to a 20% probability of recession, after learning the retail sales data, which were better than expected.
Julius Baer is expecting a 25% chance of a US recession over the next 12 months, but that is no reason for pessimism regarding the stock market: “We continue to view the recent volatility as an intermediate correction in a secular bull market,” says Mathieu Racheter, head of equity strategy at the Swiss bank. The firm maintains that US economic indicators remain solid and that second-quarter business results have largely met expectations, which were already ambitious. But it is treading carefully with its stock market bet. Racheter also believes that there will be more favourable entry points in the coming weeks, implying further declines, and is wary of cyclical stocks, which are more dependent on the performance of the economy. “Although the risk/reward profile for investing in cyclical stocks has become more attractive, long-term investors should nevertheless stick to US large-cap growth stocks, which are expected to remain the market leaders,” he says.
Back to school, despite Wall Street being the epicentre of recent stock market falls, the US stock market remains in favour with investors and analysts, while the European market is more shadowed. Citi warns that geopolitical risks and Chinese weakness weigh disproportionately on Europe compared to other markets, and so it maintains a neutral position on European equities, despite the fact that they are trading at a record 35% discount to the US market. It is overweight on the US stock market. Ahead lies a new year in which to overcome uncertainties and shocks to consolidate the gains from a tireless rally.
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