Interest rate cuts in the US, Europe and Switzerland and a soft landing narrative that continues to prevail boosted the global financial markets. A continuing decline in inflation, clearer signs of a weakening labor market and a slowing retail boom have convinced decision-makers at the US Federal Reserve that the time has come to adjust monetary policy. An initial “jumbo” interest rate cut of 50 basis points was decided for September. While the future direction is clear, the timing and pace of additional interest rate cuts will depend on incoming data and the resulting assessment of the outlook. However, the central bank's focus has clearly shifted towards the labor market, as inflation risks are now under control. There is a similar tone in Europe and Switzerland, where interest rates have been cut by 60 and 25 basis points respectively. Ultimately, China surprised market participants with the announcement of a stimulus package, just one week before Golden Week, the Chinese national vacation with the largest annual mass population movement in the world. China's stimulus includes various interest rate cuts, measures to support the ailing real estate sector and state funds to support banks, the stock market and share buybacks.
September usually sees the strongest headwinds, as it is traditionally the worst month for the US equity market. The S&P 500 seemed to confirm this narrative for the time being in the first week of the month due to growth concerns. However, if we only look at the years with a very positive performance since the beginning of the year, the historical average for September turns positive. The rest of the month developed accordingly. The S&P 500 reached a new all-time high of 5,762 points in September. This is particularly noteworthy as the index at times traded over 4.3% lower than at the end of August, but ultimately closed over 2% higher. For once, the strongest global sector was not technology, which closed the month up +2.2% in USD terms, but utilities with a return of +5.4%. The only negative sectors were healthcare (-3%) and energy (-3.3%). In terms of countries, China clearly stood out compared to the other country indices with a monthly return on the CSI 300 Index of +22.2% in USD. Until recently, the Chinese stock market was still a clear laggard, but it has now outperformed most other country indices over the year and is one of the strongest performers. It remains to be seen, however, just how sustainable the recent outperformance is.
Interest rates worldwide have mainly moved in one direction, and that is lower. Yields on 10-year government bonds have fallen worldwide. 12bps in the USA, 21bps in Germany and 11bps in Switzerland. The interest rate level in France and Spain is particularly noteworthy. Due to increasing concerns about the French budget deficit and the fragmentation of the new cabinet around Michel Barnier, 10-year French government bonds are trading at the same interest rate level as Spain for the first time since 2008. Previously, Spain had to pay significantly higher interest rates in some cases. Financial markets are now taking note of the improved budgetary discipline and the more positive growth outlook for Spain. Meanwhile, the US yield curve has steepened rapidly in the wake of the interest rate cuts. While the yield on 2-year US government bonds was still one basis point higher than that on 10-year government bonds at the end of August, it is now 15bps lower. Gold had its seventh consecutive positive month in September, closing the month 5.7% higher than at the end of August and 27.6% higher than a year ago. Industrial metals also rose by 3% (lead) to 7.9% (copper) in September, but the price of oil (Brent) fell by over 9% as Saudi Arabia is prepared to abandon its (unofficial) price target of USD 100 per barrel in the face of weak demand. Of the major central banks, the BOE refrained from cutting interest rates in September and the BOJ did not change its monetary policy stance after the latest rate hike. The US dollar index lost 1% in September. Against the Swiss franc, the euro was up +0.3%, the Japanese yen +1.3%, the pound sterling +1.3% and the US dollar -0.5%.
October is usually the classic starting point for a year-end rally in the stock markets, but statistically it is also one of the most volatile months of the year. It is also true for October that a positive year to date is usually accompanied by positive remaining months. The upcoming US presidential elections on November 5 are now likely to come more into focus on the financial markets and could occasionally cause volatility. While the interest rate cuts in September were received positively by the markets, it remains to be seen how the circumstances that prompted them will affect economic growth. We took a slightly more defensive stance in our portfolios in September and built up a modest cash position in order to be able to make purchases when opportunities arise. With our approach of broad diversification, a focus on quality companies and selective hedging, we remain cautiously optimistic about the coming months.
Market Data Chart of the month