The month of September was marked by a change in monetary policy in the United States and by the announcement of an economic stimulus plan in China. Central banks took centre stage again, with the US Federal Reserve beginning a new cycle of interest rate cuts, making a first hard cut of 50 basis points, placing them at 5%. In Europe, the European Central Bank continued its rate cut cycle, reducing the deposit rate by 25 basis points for the second time this year, down to 3.50%, and the main refinancing rate by 60 basis points, down to 3.65%. So, the monetary landscape marked a turn towards expansive policies on a global scale, with the forecast of further gradual cuts by the end of the year.

Although September has traditionally been an unfavourable month for equities, global markets maintained a bullish trend. Despite some initial corrections, most indices closed the month in a positive direction. In Europe, the Euro Stoxx 50 rose 0.86%, while in the US the S&P 500 and Nasdaq 100 advanced 2.02% and 2.48%, respectively. In Asia, markets recorded mixed results. Chinese indices stood out positively, with the Hang Seng rising 17.48% on economic stimulus measures driven by the Chinese government. In contrast, the Japanese Nikkei fell by -1.88%.

Macroeconomics and Monetary Policy

United States: The growth was moderate in the first half of the year and private internal demand remained stable. Growth is expected to continue at around 2% in the second half of the year and a soft landing remains the base case. Even so, the risk of recession remains above average, as the labour market may reach a turning point and a further decline in the demand for jobs may lead to another increase in unemployment.

Labour market in the USA

Source: Multi Asset Solutions Goldman Sachs, Global Investment Research Goldman Sachs

Europe: The economy grew in keeping with its potential in the first half of the year and it is expected to do so in the second half too. The risks are skewed to the downside. Consumer spending has been disappointing until now, although the unemployment rate has remained low (6.4%) within the labour market.

The pressure to secure an aggressive monetary policy is easing; the ECB has already cut its rates twice, by a total of 50 basis points, and it is expected to reduce them twice more this year.

As for the main risks in Europe, we should highlight the downturn in confidence due to the increase in (geo)political risks, which could keep the savings rate high and affect investment.

China: After better than expected growth in the first months of the year, the momentum slowed in the second quarter.

The main short-term obstacles to growth can be found in the property crisis and low consumer confidence.

In September, the People’s Bank of China and the Government adopted a series of measures to boost the economy, with the clear purpose of rekindling the desire to consume and invest among Chinese agents, while supporting the financial and property sectors and the stock market.

Low consumer confidence and a weak property market in China

Source: Multi Asset Solutions Goldman Sachs, Global Investment Research Goldman Sachs

Market Perspectives

As for the stock market, we remain neutral with regard to this asset due to some ongoing resilient activity data, the continuation of the deflation process, profit growth and expectations of further rate cuts. The satisfactory season of results and the expected profits in the second quarter of the year in the United States and Japan also support the asset.

However, the risk is increasing, with an American labour market showing signs of weakening, which could affect the consumption capacity of American households.

On the other hand, global stock valuation metrics are on the high side of the average over the last 20 years, led by the North American market (mainly megacaps). In contrast, outside of the Magnificent Seven, valuations are more in line with the medium-term average. In Europe, the outlook for the euro zone is weaker than for the US.

The weakness of the global manufacturing recovery is proving to be an obstacle for euro zone stocks.

Corporate profits, the solid consumer trend, the labour market and the US elections in the background, will be key to equity in the coming quarters.

As for fixed income assets, the long-term rates have been adjusted considerably due to the rate cuts by central banks. The US 10-year yield dropped from 4.46% in early July to 3.78% at the end of September (-68 bp), and in Europe, the German 10-year yield dropped from 2.60% in early July to 2.12% (-48 bp). On the other hand, the curves have also flattened. The market is discounting major rate cuts.

This movement leads us to change our stance from positive to neutral, although we remain constructive in the medium term. We would take an opportunistic approach and buy if yields bounce back slightly from their recent lows, while maintaining caution in terms of duration.

Our positioning remains neutral for credit in both the United States and Europe. However, the timing of interest rate cuts may generate some degree of volatility if market expectations differ from what the central banks actually do.

In the United States, in an environment of positive growth and a soft landing, rate cuts are favourable for credit.

In terms of credit quality, lower-rated bonds (high yield) and those with a CCC rating carry the highest risk of default. On the other hand, credit spreads, both IG and HY, are very tight compared to the historical average (especially HY).