Cat on a hot tin roof?

Markets exhibited heightened volatility this week, influenced by concerns over a potential US recession, global currency fluctuations, and uncertainties regarding tech companies' earnings. Stephen Auth of Federated Hermes identifies five critical factors for investors to monitor ahead of the US Fed's policy meeting on September 18: the unwinding of the yen carry trade, normalization of the yield curve, decreasing earnings growth advantage of large-cap growth stocks, softening labor market data, and escalating election uncertainty. He notes that current valuations reflect historical trends rather than future expectations, predicting a reversal of the growth-to-value gap next year, despite anticipated election-related volatility.

In emerging markets, James Cook sees optimism, particularly for China and the Yuan, which could benefit from a declining dollar. Countries like Turkey and South Africa may gain from looser monetary conditions, while Brazil, Mexico, and Chile have potential for aggressive rate cuts post-Fed action, depending on fiscal capacity. Additionally, region-specific factors such as corporate initiatives in Korea and stability in China's property market are noteworthy, alongside India's ongoing infrastructure and reform progress.

Louise Dudley emphasizes that a key concern for investors is the Fed's ability to navigate interest rate policy to achieve a soft landing. Although inflation appears to be declining, the economy shows signs of contraction, particularly in job growth and manufacturing. Stabilization in these areas could provide the Fed with leeway, but current data suggests that achieving a soft landing may be more challenging than anticipated, negatively impacting equity markets.