The United States is seeking to increase pressure on Iran through tougher economic sanctions following a military conflict that failed to achieve its objectives. The aim is to restrict the country’s trade, financial and oil flows as comprehensively as possible, while also pressuring those countries that continue to maintain close economic ties with Tehran. The US Treasury Secretary described the strategy as an “economic D-Day”. Its success, however, will depend largely on the support of Iran’s key trading partners. While the United Arab Emirates has already scaled back its economic relations with Iran, China, which purchases the majority of Iranian oil exports, has clearly signalled its opposition to potential US secondary sanctions. As a result, Washington faces a potential conflict between its Iran strategy and its ongoing negotiations with Beijing. At the same time, following the breakdown of negotiations, trade tensions between the United States and Canada are also intensifying. The US has announced tariffs of 50% on Canadian cars, trucks and auto parts, in addition to the tariffs already imposed on steel. Canada responded immediately, signalling retaliatory tariffs of up to 50% on approximately USD 20 billion worth of US imports. Hundreds of products are affected, including steel, dairy products and agricultural machinery. Whether the United States will be able to manage several geopolitical and economic conflicts simultaneously remains to be seen, particularly against the backdrop of increasingly scrutinised public debt levels. Regardless of how events unfold, it will be interesting to observe which countries emerge stronger from the current disruptions over the long term, and which do not.
Despite persistent concerns about the sustainability of investment in AI infrastructure, Nvidia once again exceeded high expectations with its latest quarterly results and also provided an exceptionally optimistic outlook. The company forecasts revenue growth of around 70% for the coming year and emphasized that growth could be even stronger given existing supply constraints. This suggests that the AI investment cycle remains firmly intact. That said, a number of challenges can also be identified beneath the surface. Despite strong top-line growth, free cash flow declined, partly because several major customers were granted longer payment terms. Nvidia’s equity investments, guarantees and financing programs designed to facilitate customers’ build-out of AI infrastructure have also come under increasing scrutiny. Some observers argue that these arrangements contain elements of circular financing, whereby demand is indirectly supported by the supplier itself. Overall, however, equity markets remained remarkably resilient throughout August. Virtually all major stock market indices recorded moderate to strong gains and finished the month comfortably in positive territory.
The US Treasury is attempting to reduce sharply elevated long-term interest rates, and thereby the government's financing costs, through buybacks of long-dated government bonds. On closer inspection, however, this policy is partly at odds with the Federal Reserve’s monetary stance, which continues to favour restrictive financial conditions given that inflation remains above its 2% target. Both the announcement of the programme and the buybacks carried out so far have had only a limited impact on long-term yields, which have not declined meaningfully and at times have even moved slightly higher. A further noteworthy development is the changing market structure of US Treasuries. Hedge funds have significantly increased their holdings in recent years and now account for a substantial share of the market. On the one hand, they play an important role in providing liquidity and absorbing part of the continuously rising US government debt issuance. On the other hand, their growing presence increases market vulnerability, as many of these strategies rely on short-term funding and significant leverage. As long as the Federal Reserve continues to act as a stabilising force during periods of market stress, the system is likely to remain functional. Nevertheless, the world’s most important bond market may have become more dependent on risk-seeking investors than many market participants appreciate. Gold also delivered a strong performance in August. The precious metal gained roughly 10%, marking one of its strongest monthly advances in decades. At the same time, the US dollar weakened against most major currencies, reflected in a 0.5% decline in the US Dollar Index. Brent crude oil prices fell temporarily, supported by hopes for a near-term reopening of the Strait of Hormuz. The fact that China, by far the largest purchaser of Iranian oil, has a strong interest in the normalisation of shipping routes increases the likelihood of such an outcome. Nevertheless, oil prices rebounded towards the end of August after renewed tensions between the United States and Iran heightened geopolitical uncertainty.
The primary risks facing financial markets have changed little in recent months. The outcome of ongoing geopolitical conflicts remains uncertain, as do their implications for commodity prices, supply chains and global economic growth. At the same time, government debt levels around the world remain elevated. Little progress has been made in addressing this issue in a sustainable manner. At best, the problem is being deferred, for example in the United States through the previously mentioned efforts to artificially suppress long-term interest rates. Nevertheless, the global economy continues to demonstrate resilience. The corporate earnings season is also virtually complete and has, on balance, delivered positive results. Equity market valuations remain demanding, but so far companies have largely been able to justify these valuations through their business performance and earnings growth. We remain convinced that the current environment is not particularly attractive for nominal assets. Inflation has remained elevated for several years, and current conditions provide little evidence to suggest that this will change sustainably over the coming years. Against this backdrop, we continue to favour real assets and maintain diversified investments within our portfolios to enhance resilience and diversification.