Strong sentiment on the markets has continued, despite increased volatility. Heading into autumn, the markets are abuzz about the central banks’ key interest rates, economic growth and the stock market rotation that started in summer.
The end of summer was more volatile than the beginning of summer particularly on the equity market, while the fixed income market was more stable. However, many markets are now, measured in euros, already close to or even above the levels when the volatility started in mid-July.
Traditionally, September has been an easy month on the markets, and the same was expected for this year. Things turned out differently, however. The developing markets, which have performed particularly poorly since the beginning of the year, have been in a frenzy for the last couple of weeks, led by China in particular, even beating the US S&P 500 index.
But what else should investors pay attention to in the markets as autumn progresses?
The Western world, with the exception of Japan, shifted in earnest to a period of easing monetary policy when the US central bank, i.e. the Fed, also started lowering its key interest rates as expected in September. The first interest rate cut of 50 basis points, however, was sharper than expected, although as the meeting approached, market expectations also began to lean towards a cut of over 25 basis points.
The decrease in interest rates is underpinned mainly by inflation, which appears to have finally calmed down significantly in both the USA and Europe. For example, the inflation figures for France published last week were lower than expected.
The easing of inflation now gives the central banks room to lower their interest rates. Right now, the markets are pricing in more interest rate cuts by the Fed and ECB alike for both this autumn and next year.
The market’s attention has recently focused particularly on the USA’s economic growth, which still seems to be going strong. The economy is currently resting particularly on the shoulders of American consumers.
However, concerns related to the labour market are not over. The slowdown in the labour market and the possible consequential weakening of consumers’ position and purchasing power might also have a negative impact on economic growth.
The development of the industrial sector has been very sluggish in both the USA and Europe. The situation in Germany is especially weak, and several of the country’s major automotive companies have issued negative profit warnings. The weak situation in Germany is also reflected in other parts of Europe.
The service sector has brighter prospects on both sides of the Atlantic than the industrial sector. However, if the industrial sector weakens significantly, the number of jobs is also likely to decrease. This could also reduce the consumption of services.
Currently, the previously even overheated labour market is slightly declining, but the development is still at a healthy level. The question now is, can the deteriorating labour market figures be stopped in time? Historically, it has been difficult to stop the downward trend of labour market figures once they have started to decline. There are no other signs of economic growth weakening in the United States, so labour market figures will continue to be closely monitored.
The stock market rotation that started in the summer, which saw a shift from large technology companies’ stocks towards smaller companies, has continued in the autumn as well, and the topical themes have changed compared to the beginning of the year.
Changes in monetary policy could indicate that rotation may also be seen in the future. Going forward, the market will certainly be monitoring the risk-return ratio of large tech companies. The collapse of these companies seems unlikely at the moment, but in the future, their dominance could become a thing of the past. It is possible that the best performers in the future will be found outside the group of inveterate winners.
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