Are we facing the storm after the calm? Wall Street strategists are warning clients to expect rising volatility in sharemarkets. Photo: Michael NagleThe first debate of the US presidential campaign. A Group of 20 (G20) central bank interest rate announcement nearly every other trading day. And a key meeting among commodity nations around the world.
With a jam-packed calendar in September, no asset class is immune from potential event risk.
That’s not to mention that the month has typically been the worst one for stocks – the only one in which the median return for Wall Street’s benchmark S&P 500 has been negative going back to 1928, according to Bank of America Merrill Lynch Head of US Equity and Quantitative Strategy, Savita Subramanian.
Now, Wall Street strategists are warning of an end to the unusual calm that’s characterised markets in August, advising clients to expect one thing – volatility.
Of course, there’s no guarantee this volatility will ever materialise: strategists were also warning of a swoon in US stocks and uptick in market swings right before they proceeded to march to all-time highs.
The first major headline event to kick off the month’s festivities is the US non-farm payrolls report for August, slated to be released on Friday. A strong number would potentially set the scene for a rate hike when Federal Reserve officials next meet on September 21.
Investors have been repricing the odds of an increase in interest rates in the run-up to Fed Chair Janet Yellen’s speech at the Jackson Hole Symposium and Fed Vice Chair Stanley Fischer’s comment that Yellen’s remarks were consistent with the possibility of two rate hikes in 2016, though the implied probability of a hike in September has eased in recent sessions.
This argument may be put to rest last Friday, as US job growth in August has come in below analysts’ expectations for five consecutive years. Central banks set the pace
Central bank decisions will drive global markets in September, given the potential for a rate hike from the Fed and the impact of large asset-purchasing schemes in the UK, Japan, and the euro area, for foreign exchange and credit markets, in particular.
The ECB Governing Council meets on 8 September and it faces a make-or-break bid to save its quantitative-easing strategy in the face of self-imposed limits on what it can buy. Analysts say the ECB might extend the horizon of its asset purchase program from March to September 2017.
The next Bank of England meeting is on September 15 – analysts, surveyed by Bloomberg, only see a 6.3 per cent probability of a rate cut at that meeting – and attention will focus on the implementation challenges of the monetary authority’s bond-purchase scheme after a challenging start for the program.
Similarly, fears are growing the Bank of Japan (BOJ) is exhausting its policy arsenal amid weak GDP, stubborn deflationary pressures, and a declining stock of government bonds available for purchase. The BOJ will announce the results of its comprehensive review of its monetary policy on September 21 – the same day as the Fed decision – amid rising expectations it will cut rates further into negative territory.
The G20 Summit will also take place on September 4-5, with China, the host, seeking to focus on global growth and financial-sector issues. There has been a rhetorical shift in recent months among advanced-economy policy makers in favour of looser fiscal policy, given the declining returns from monetary stimulus. Reviewing fiscal tools
Although analysts don’t foresee a coordinated plan at the G20 level for a large fiscal stimulus plan, markets will be keenly focused on the extent to which policy makers talk up the growth-boosting efficiency of fiscal policy, in general, a development that could reshape trading investments over financial assets, particularly high-grade bonds.
And while the Organisation of Petroleum Exporting Countries (OPEC) could be renamed the Organisation Who Cried Production Freeze, analysts at Barclays see cause to believe the threat to maintain output at current levels is more credible this time around, with officials from OPEC member countries scheduled to meet in Algeria from September 26 – 28.
“Non-OPEC countries that many analysts thought could not produce more (Russia for example), as well as some OPEC countries have continued to raise their production,” writes Kevin Norrish, managing director of commodities research. “So a freeze this time could help stem some potential further supply growth.”
September is also the start of the school year in global primary capital markets such as the US and Europe, meaning increased trading volumes as many investors return from their summer break. Analysts expect a busy pace of US investment-grade bond sales despite unusually strong supply in August. Analysts at Bank of America, for example, expect $US120 billion in new high-grade bonds. The ease in which credit markets absorb the supply will serve as an indicator of corporate dealmaking and share buy-back volumes in the second half of year, given the bond market’s outsize role in such corporate financing activities, say analysts.
In sum: Holiday’s over for the big global markets. Report back to your terminal immediately.