As the northern hemisphere enjoyed its summer holidays, markets hotted up with global equities rallying in August.  But as the north returns to work – including the central banks – we wonder if volatility will return during September.
During the first week of the month, many central banks will meet – including the European Central Bank, the Bank of Japan, The Bank of England and the Reserve Bank of Australia.  The US Federal Reserve will meet later on in the month.  We are not expecting market moving news from these meetings.
Our expectations for some of these meetings are as follows:
With the risk of deflation increasing in the Eurozone, markets will be looking for signs the ECB is preparing policies to tackle this risk. We expect Draghi to provide strong reassurance that the ECB is prepared to do more if needed. However we don’t expect him to take any action at this point.  The ECB will cling to the hope that previous measures will soon bear fruit.
The BoJ meeting is unlikely to result in any policy changes.  Policymakers may even upgrade their assessment of the economic outlook. Whilst this would lower the chances of additional easing this year, we still think more stimulus will be required.
The RBA has kept the cash rate on hold. The market is now beginning to expect that interest rates in Australia will not move for over 12 months.
The other market moving event for Australia could be the release of GDP data. This is likely to show the economy slowed during the second quarter. It will get lots of media attention, however we believe this is backward looking and that the Australian economy will pick up going forward.
People seem to have forgotten that 12 months ago the market thought the slowdown in the Australian economy would be worse than it shaping up to be.  The economy here is still transitioning from mining investment to construction.
Also in September fund managers adjusting their asset allocation for the final quarter of the year. This has the potential to add to volatility during September. However, we don’t expect any impact to be significantly on the downside.
When you look at current asset allocations, you see that many managers already have large cash positions.  Bonds aren’t attractive at current yields. As such, they may increase their exposure to equity markets, rather than decrease, on the expectation of a strong fourth quarter.
In our view, the big risk for September are the issue in the Ukraine.  The risk of increased Russian involvement is rising. However, we expect it would only cause a setback in markets rather than a complete derailment.  This is the hardest risk to manage and predict.