A month ago, markets were caught off guard by the fallout of a Japanese interest rate hike that sent shockwaves through the financial world, triggering a massive unwinding of the yen carry trade.
The Tokyo stock market plunged 12% on that Monday, at one point dropping by a staggering 17%. Other markets followed suit, and bears eagerly predicted the imminent collapse of the global economy.
However, these dire predictions proved unfounded. The bears were forced to retreat as stock markets ended August in strong form, surpassing their July levels.
While the threats haven't entirely disappeared, they have been mitigated by summer trading desks and the absence of more experienced market participants on holiday.
The likelihood of rate cuts in the US and Europe has increased significantly since last month, when "emergency" between-meeting cuts were being discussed. This Friday's US jobs report will be closely watched. A figure significantly below the forecast of 175,000 jobs could reignite fears about the US economy and lead to renewed calls for aggressive rate cuts from the Fed.
After the carry trade stabilized and the market ignored the misguided predictions of certain experts, stocks staged a strong recovery in August. The S&P 500 rose 2.3%, the Dow gained 1.8%, and the Nasdaq added 0.66%. Globally, stocks increased by 1.7%, while European markets surged 5.76%, with further gains potentially in store.
The most remarkable performance came from the Nikkei in Tokyo. After plummeting 12% on August 5, the index ended the month up 7.65%, easily outperforming Wall Street, Europe, and Chinese markets.
Australian shares remained relatively flat, despite a 0.85% rise last week. However, the ASX is expected to start the Spring session on a negative note, based on overnight futures trading.
A Cautious Outlook
"The equity markets are behaving as if everything is rosy," said Michael Green, chief strategist at Simplify Asset Management. "There's more evidence for a soft landing, and there's less evidence that the Fed is going to cut aggressively."
While rate cuts are now seen as almost certain in the US and the EU, the market remains at risk of further declines and volatility in the coming months. Valuations remain stretched, and the recent performance of megatech companies has raised concerns.
The growing skepticism about the long-term viability of the AI boom, as evidenced by the increasing popularity of the phrase "AI, where's the ROI," further adds to the uncertainty.
Recession risks persist in the US and Australia, and geopolitical tensions, particularly surrounding the US election and the Middle East, continue to pose a threat. September is historically the weakest month for stocks, as northern hemisphere holidays end and trading activity picks up. However, Goldman Sachs's recent announcement of job cuts may temper enthusiasm.
