Risky stretch for markets

MARKETS are heading into a potentially volatile stretch, with investors facing a mix of geopolitical uncertainty, central-bank decisions and growing concerns over government finances.

The next few weeks could test whether markets can continue to absorb these risks without a sharper repricing of bonds, currencies and equities, according to a Reuters report.

A key question is how long the global economy can withstand the inflationary effects of the war with Iran, particularly if oil and gas prices remain elevated.

Energy markets have been swinging as traders assess when key waterways, especially the Strait of Hormuz, might reopen, with each move creating winners and losers across financial markets.

Higher energy prices have supported energy stocks but weighed on large energy-consuming companies. At the same time, the inflationary hit has put pressure on government bonds.

So far, global growth has proved relatively resilient despite higher prices. sBut the buffers that helped markets absorb the initial shock are starting to run thin, Reuters reports.

Oil prices jumped last week after the United States attacked an Iranian island in the Strait of Hormuz, highlighting how quickly geopolitical developments can feed through to markets.

For longer-term investors, the disruption is also raising questions about how the global energy system could be reshaped.

Possible responses include pipelines designed to bypass the Strait of Hormuz and new regional alliances, including closer ties between Saudi Arabia, Pakistan and Turkey.

Rate decisions

Monetary policy could provide another source of volatility, with the US Federal Reserve (Fed) and the Bank of Japan (BoJ) both meeting in the same week.

Markets are already focused on the Fed’s next move after Fed chairman Kevin Warsh’s hawkish speech at Jackson Hole fuelled expectations of a possible rate hike on Sept 16.

Investors will nevertheless be watching closely for clues on how the central bank intends to communicate its policy outlook.

The Fed’s credibility is also in focus following recent US Treasury intervention in bond markets, which can dilute the signalling coming from market prices.

Warsh did not directly address the intervention at Jackson Hole but said the Fed “needs clear market signals” to set monetary policy properly.

“How the Fed is going to communicate going forward is important because it impacts their overall credibility and global interest rates,” Reuters quoted St James’s Place chief investment officer Justin Onuekwusi as saying before Warsh’s speech.

Japan presents a similar test.

Markets expect the BoJ to raise rates on Sept 18, following recent intervention to strengthen the yen.

For investors, the immediate question is less about the size of any move and more about the message coming from the central bank.

“It’s all about the narrative and how hawkish the governor sounds,” Hank Calenti, chief strategist, global markets at SMBC EMEA, told Reuters, adding that the tone could influence the shape of Japan’s bond yield curve.

AI test

The market’s enthusiasm for artificial intelligence (AI) is also approaching another potential pressure point as Anthropic prepares for what could become one of the world’s biggest technology listings.

The AI company could seek to raise as much as US$100bil, according to reports cited by Reuters, following SpaceX’s huge initial public offering (IPO) in June.

A blockbuster Anthropic listing would come as investors are already digesting a surge in bond issuance by major technology companies to fund capital expenditure.

That could make the IPO an important test of how much appetite remains for AI-related investments.

Anthropic was valued at US$965bil in May, meaning a valuation of US$1 trillion at listing would put it among the world’s largest listed companies.

“When it comes to Anthropic and OpenAI, there will probably be massively frothy valuations,” Rory Dowie, multi-asset portfolio manager at Marlborough, told Reuters.

The risk extends well beyond the new listings.

If enthusiasm for AI stocks weakens, companies that have already benefitted from expectations of sustained infrastructure spending could also come under pressure.

“If investor appetite for this theme falters even briefly, there is no diversification cushion,” said Violeta Todorova, senior research analyst at Leverage Shares.

“The read-through hits Nvidia, Microsoft and every stock already priced for AI infrastructure demand, not just the new listings.”

Fiscal pressure

Investors will also be watching France as the government prepares to submit a draft budget to the National Assembly in the coming weeks.

The government faces a difficult balancing act as it tries to bring the deficit under control ahead of the 2027 presidential election.

Political pressure could make fiscal consolidation harder, creating a potential risk for French government bonds.

“There is risk of OAT (French bond) yields moving up,” Zurich Insurance Group chief economist Guy Miller told Reuters.

“But we don’t think it’s to the extent that really undermines the construct of euro debt.”

Germany’s bond market could face its own political test as Chancellor Friedrich Merz confronts a series of state elections. His popularity has fallen following several political setbacks, while the far-right AfD could outperform his party in some contests.

Britain is another market to watch as the new government tries to boost growth while dealing with constrained public finances.

Prime Minister Andy Burnham’s policies have so far generated limited market concern, but that could change if efforts to stimulate the economy are seen as stretching the government’s fiscal position.

The Labour Party Conference in September and October’s budget will therefore be important tests for Burnham and new Finance Minister John Healey.

Britain’s 10-year borrowing costs remain elevated, although they have fallen from the 18-year highs reached in May.

The experience of the 2022 mini-budget crisis could act as a constraint, with Burnham saying he intends to stick to the UK’s fiscal rules.

“There is a risk they try and push the envelope, and I think that would be a mistake,” Berenberg senior UK economist Andrew Wishart said, according to Reuters.

US midterm elections

Political risk is likely to become more prominent as campaigning for November’s US midterm elections traditionally accelerates in September.

One pressure point is the price of petrol. Average US petrol prices have risen above US$4 a gallon amid the Iran war, compared with less than US$3 in January.

US President Donald Trump has told Americans that paying higher prices is worthwhile to defeat Iran, but some analysts believe his administration will want fuel prices to ease before voters head to the polls.

The elections could also influence the government’s approach to borrowing costs.

Jefferies chief European economist Mohit Kumar links the political calendar to Treasury Secretary Scott Bessent’s efforts to lower long-term yields.

“The Trump administration cannot afford higher long-term rates going into the midterms as mortgages are tied to the long end of the (Treasury) curve,” Kumar told Reuters.

For markets, that leaves the coming weeks unusually dependent on how geopolitical developments, inflation, central-bank signals and political decisions interact – with moves in one market increasingly capable of spilling into another.