by Michael Msika and Jan-Patrick Barnert, Bloomberg Market Live commentators and analysts
After August’s selloff, there are plenty of signs to suggest that September may be even worse for equity markets.
Until now, heavy selling by long-only funds and retail investors has been absent, meaning full capitulation has yet to be reached. To that can be added above-average investor positioning, a bunch of upcoming risk events, and September’s historically weak seasonality.
“Given the near-term risks, we continue to recommend investors keep a defensive tilt,” says Mathieu Racheter, head of equity strategy at Julius Baer. He’s overweight on Swiss, health care, and high-dividend stocks, but also sees a “good tactical opportunity” in selective growth names after the style underperformed significantly in August.
Seasonally, the coming month is the worst of the year for equities. Over the past quarter of a century, the Stoxx 600 Index has shown a negative average return of 1.3% in September.
Meanwhile, risks are piling up. With inflation showing no sign of peaking in Europe after a record print yesterday, ECB hawkishness is unlikely to change, mirroring last week’s Jackson Hole reality check. And according to Barclays strategists, investors aren’t positioned for it, with equity allocation above average for mutual funds and retail.
“Central banks’ acceptance of economic pain as the price to pay in exchange for lower inflation may accelerate the rotation from equities to bonds and cash, while quantitative tightening is about to gather pace too,” say the strategists led by Emmanuel Cau.
Julius Baer’s Racheter says weakness could be further accentuated by an upcoming blackout period for buybacks, which starts in mid-September and will last about four weeks. Especially as stock repurchases have been a large source of equity demand this year.
Technically, the picture is far from rosy. Stocks have surrendered more than half of the summer rally, while Euro Stoxx 50 futures trade back inside their 2022 downtrend, removing all upside momentum.
Talking of oversold, a look at the Stoxx 600 Index’s market breadth suggests that the relative strength of index members is not yet at a point that signaled a bottom during earlier declines of this year.
A pivot point for markets might come toward the middle of September with US jobs data and a scheduled speech from Fed Chair Jerome Powell on Sept. 8, followed by the next CPI print just five days later.
“There’s a confluence of negative factors that are all hitting the market at the same time, and it’s timed with the September seasonality,” says Standard Chartered chief strategist Eric Robertsen.
