September was marked by an unusual combination of geopolitical uncertainty, rising interest rates and the first signs of easing trade tensions between the United States and China. While tensions between Washington and Tehran escalated once again and a comprehensive agreement on the full reopening of the Strait of Hormuz remained elusive, the United States and China moved closer together on selected trade issues. Towards the end of the month, the two countries agreed to mutual tariff reductions on goods worth approximately USD 30 billion and extended existing transitional arrangements governing bilateral trade. As a result, a further escalation of the trade conflict now appears less likely, at least for the time being. Instead, another topic moved to the forefront of financial markets: monetary policy. The US Federal Reserve raised its policy rate for the first time in several years, citing inflation that remains above target as well as continued economic resilience. For many US households, persistently high prices for energy, food and other goods currently represent a much greater concern than moderately higher borrowing costs. With this decision, the Federal Reserve signalled that restoring price stability remains its highest priority and that it is prepared to respond decisively to persistent inflationary pressures. In our view, this step is understandable. The experience of recent years has shown that premature monetary easing can quickly reignite inflation expectations.
According to the Bureau of Economic Analysis, foreign investors have significantly increased their purchases of US equities, investing a net USD 942 billion during the twelve months through July, the highest figure since records began. The trend accelerated noticeably during the second quarter, with net inflows into US equities and equity funds rising 62% year-on-year to USD 426 billion. This development was driven by the strong performance of the US stock market, particularly within the technology and artificial intelligence sectors, which helped propel the S&P 500 to new highs despite ongoing geopolitical uncertainty. One particularly noteworthy indicator in this context is the sharp increase in the proportion of S&P 500 constituents exhibiting a negative beta, meaning stocks that tend to move inversely to the broader market. Nearly half of the index members now display a negative beta. One possible interpretation is that investors who underweight the major US technology companies risk unintentionally constructing overly defensive portfolios and consequently lagging overall market performance. On the other hand, the trend also highlights the growing heterogeneity within the US equity market. While AI-driven mega-cap companies account for an ever-larger share of economic growth, market capitalisation and investment activity, many other businesses continue to develop independently of this trend. For investors who view the concentration risk associated with large technology companies critically, this environment creates attractive diversification opportunities. Another important factor influencing markets in September was the sharp rise in bond yields, which weighed on equity valuations. Overall, however, the major equity indices proved remarkably resilient and largely absorbed the impact of higher interest rates. This underscores the continued strength of corporate earnings and the global economy.
The most significant development of the month occurred in the bond market. The Federal Reserve’s rate hike, together with the prospect of further tightening measures, led to a substantial increase in long-term US yields. The yield on ten-year US Treasury bonds temporarily reached its highest level since the 2007 financial crisis. While demand for US equities remains exceptionally strong, foreign investor interest in US bonds has weakened. According to the Bureau of Economic Analysis, net purchases of US debt securities declined significantly during the second quarter. China in particular continues to reduce its Treasury holdings while increasing diversification into gold and other asset classes. This development comes at a time when the United States must finance substantial budget deficits and therefore relies on stable demand for government bonds. By contrast, the Swiss National Bank left its policy rate unchanged at 0% and reiterated its willingness to intervene in foreign exchange markets if necessary. Commodity markets were once again dominated by developments in oil. The absence of an agreement between the United States and Iran, coupled with attacks on energy infrastructure in the Middle East, resulted in a renewed geopolitical risk premium. Brent crude temporarily traded close to USD 110 per barrel, marking one of the strongest monthly increases of the year. Gold benefited from geopolitical uncertainty, although gains were partially offset by higher real interest rates.
Financial markets continue to face the same structural challenges that were present at the beginning of the year. Geopolitical conflicts remain unresolved, government debt levels across many developed economies continue to rise, and inflation has proven more persistent than many market participants anticipated. What has changed is the recognition that the Federal Reserve is prepared to maintain a restrictive stance even in an environment characterised by rising government debt and elevated capital market yields. At the same time, the global economy continues to display resilience. Corporate earnings remain supportive, while investment in digitalisation, data centres and artificial intelligence is providing additional growth impulses. During the month, we realised our remaining Brent oil position at a healthy profit and took advantage of higher yields to build an allocation to short-duration high-yield bonds. We also used the strength of the US dollar to reduce our foreign currency exposure. We continue to pursue our long-term investment strategy with discipline. In our view, real assets and broad diversification remain the most effective tools for navigating the current uncertainties, preserving purchasing power and generating long-term capital growth.