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August may not have started very well, but it ended on a high note: Stoxx 600, DAX, and Dow Jones reached record highs just before the expected Fed rate cut.
Macroeconomic data, such as the upward revision of second-quarter GDP, suggesting that the economy remains robust with little risk of recession, boosted the upbeat mood.
Sure, things could still take a turn but hopes for a smooth landing keep the appetite for risk assets vital. At the same time, US Treasuries have become more appealing.
And even though Nvidia stock dived—despite being a key driver of market optimism and the AI boom—it didn’t spark a wave of panic selling. Instead, we saw a shift in asset allocation.
Looking ahead, the market could face another scare similar to early August, whether from disappointing economic data or the “buy the rumor, sell the news” phenomenon.
Seasonality could also play a role; historically, September is usually the weakest month for the S&P 500, and this trend tends to continue in election years, although the impact could be less dramatic.
In Europe, the situation is not entirely positive either.
Although the DAX and Stoxx 600 have reached new highs due to falling inflation in August and the expectation that the ECB may cut rates this month, there are risks.
Let’s start by saying that German and French manufacturers recorded a sharp drop in new orders, which has caused the Eurozone manufacturing sector to extend its prolonged recession to some 26 months.
In addition, China’s economic slowdown could dampen Europe’s recovery. Europe’s significant financial ties with China seriously affect growth, inflation, and central bank policies.
What to expect from the markets this week?
The week starts with US markets closed for Labor Day, which could reduce volatility. Overall, positive sentiment seems to prevail, although there is always room for surprises.
On this occasion, that factor could be the August US employment report. Powell indicated in Jackson Hole that interest rate decisions depend more on the labor market than inflation.
