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Cat on a hot tin roof

Market snapshot

Insight
6 September 2024 |
Macro
Investors have been on edge as they look to upcoming US jobs data and the US Fed policy meeting

Fast reading

  • Unwinding of the yen carry trade and a mixed earnings season spark capital flows
  • Upcoming jobs data and the 18 September US Federal Reserve policy meeting seen as a catalyst for future volatility
  • Political risk and the prospect of a hard landing add to an uncertain mood

Markets were all of a jitter this week as macro- and sector-specific themes played on investors’ minds. Among these, the risk of a US recession, global currency moves, and doubts about the earnings power of tech firms all helped to drive a spike in volatility.

Equities fell through the week, with the S&P 500 losing c.2% by market’s close on Thursday’s (5th September) with the decline partly driven by IT behemoth Nvidia’s most recent earnings update. In fixed income, the yield on 10-year Treasuries fell to 3.7%.1 

Against this backdrop, Steve Auth, Chief Investment Officer for Equities at Federated Hermes, highlights a series of factors he believes investors should keep an eye on as the clock ticks down to the next US Fed policy meeting on 18 September.

“We’re watching five big things,” he says. “The yen carry trade is slowly unwinding, the un-inversion of the yield curve toward more normal levels continues, the relative earnings growth advantage of large cap growth stocks continues to shrink, labour market data continue to soften, and the election outcome is reaching peak uncertainty.”

Given this, says Auth, current valuations reflect more the experience of the past three years, rather than the future. “Growth stocks, for instance, trade at 27x forward 2025 earnings, while value stocks are at only 16x, even while the growth gap between the two is likely to reverse next year due to these five big things,” he says. “While the election uncertainty could cause volatility in the weeks ahead, we expect that by year-end small caps and value stocks will continue to move ‘rockily’ higher.”

Figure 1: Yield Curve ‘un-inverts’ on September 4, 2024

Figure 2: US jobs data

The emerging markets view

James Cook, Investment Director for Emerging Markets at Federated Hermes Limited, highlights a mood of anticipation in developing countries as US monetary policy comes into focus. Here, he says, China and Yuan would be helped by a falling dollar and an appreciation of the Yuan, while Turkey, South Africa and SouthEast Asia would all benefit from looser monetary conditions.

“Brazil, Mexico, and Chile all have room to cut interest rates aggressively once the US Federal Reserve moves if the fiscal situation permits,” he adds. “Apart from the macro and monetary policy situation, emerging economies also have their own idiosyncratic drivers. These include the corporate ‘value up’ programme in Korea and property stabilisation in China. Elsewhere, India continues to progress steadily with focus on infrastructure, jobs, and reforms.”

The global equities view

For Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes Limited, the fundamental question for investors is whether the US Fed can find a sweet spot for interest rates policy that helps facilitate a soft landing.

“In the current environment, bad news is bad news,” she says. “Although sticky inflation has fallen and is retreating to more comfortable levels, there are signs of contraction as jobs figures weaken and manufacturing output softens. Stability for job openings, unemployment, and manufacturing output would buy time for the Fed to gently find an equilibrium for growth, but the latest data points suggest a soft landing will be harder than currently priced in, and that has hurt equities.”

For more macro views, read the latest update from our fixed income team: School’s in session

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