Market Reawakens in September
Market Commentary by Michael Brown, Senior Research Strategist at Pepperstone
Daily Recap – Markets kicked back into gear on Tuesday as US traders returned from the long weekend. Equities declined, developed market (DM) government bonds sold off, the US dollar strengthened, and gold surged to fresh record highs. As we move further into September, attention today shifts to PMI data, US job openings, and commentary from Bank of England officials.
A Predictable Shift in Market Tone
With US trading desks back online after the Labor Day break, the energy in the markets has returned—something that seems to play out every year. August often drifts by quietly, fostering complacency, only for September to jolt everyone awake with renewed volatility.
Despite this recurring pattern, we all seem to get caught off guard. The seasonal pickup in activity makes sense, though—investors come back from summer breaks, reassess positions, and align for the final quarter of the year.
UK Assets Struggle Amid Structural Challenges
Tuesday’s session delivered a harsh verdict on UK markets. Sterling dropped more than 1%, and Gilts came under pressure again. Yields on 10-year Gilts hit their highest levels since January, while 30-year yields reached highs not seen since 1998.
The macro backdrop hasn’t changed much: the UK remains stuck in a fiscal feedback loop, driven by rising taxes to fund unsustainable welfare spending, with the Treasury seemingly committed to continuing this cycle with fresh tax hikes this autumn. It's difficult to be optimistic about long-duration Gilts under these conditions, and the recent strength in the pound appears fragile. A move in GBP/USD towards the low-1.30s seems likely, though positioning short GBP via the crosses may be more prudent to sidestep USD-related risk, including potential volatility from the US election cycle.
Global Bond Markets Also Under Pressure
Importantly, the Gilt sell-off wasn’t a UK-specific phenomenon. Long-end yields in developed markets broadly ticked higher, notably as the US 30-year Treasury yield approached the 5% mark again, with heavy investment-grade issuance adding pressure.
This is essentially a continuation of a curve steepening trend as markets price in a September rate cut from the Fed. While this pivot is dovish in tone, it raises concerns about inflation expectations becoming unanchored. Meanwhile, political pressures—particularly from former President Trump—are weighing on confidence in the Fed’s independence, which is further boosting the appeal of hard assets like gold. The metal hit fresh all-time highs yesterday, and the bullish outlook remains compelling. The bearish case for the dollar, built on the same risks, is also gaining traction.
Broad-Based Risk-Off Sentiment
Tuesday saw declines across virtually every asset class once US markets reopened. G10 currencies fell, equities lost ground in both the US and Europe, and crude oil dropped as well. It was one of those days where cross-asset correlations surged toward 1, and algorithmic-driven selling took over, sidelining rational analysis.
That said, it’s worth keeping perspective. Much of this intraday volatility is noise. Given that the macro picture hasn’t materially changed, I’m not inclined to revise my broader market outlook.
Staying Bullish on Equities
I continue to hold a constructive view on equities and remain a buyer on dips. Economic growth remains solid, corporate earnings are holding up well, trade tensions have eased, and the Fed looks set to resume its easing cycle. Additionally, with the summer lull now behind us, retail investors are likely to re-engage, and corporate buybacks should pick up.
All things considered, the medium-term outlook still favors a gradual upward trajectory for equities—though, as always, the path won’t be perfectly smooth.
What’s on the Radar Today
Today’s calendar is relatively full, though it’s questionable whether any event will significantly shift market sentiment.
The main highlight comes this afternoon with testimony from several Bank of England policymakers, including Governor Andrew Bailey, before the Treasury Select Committee. With the MPC deeply divided—last month's 25bps cut passed by a narrow 5-4 vote—and July’s inflation data looking problematic, policymakers are in a tough spot. Don’t expect much clarity on the Bank Rate path, though we may get some hints regarding quantitative tightening, especially given the current fragility in the Gilt market.
We’ll also see final services and composite PMI readings, along with US factory orders and JOLTS job openings—both of which are dated and unlikely to move markets meaningfully. Similarly, the Fed’s Beige Book, due this evening, is expected to offer little new insight or anything that might derail the now-consensus September rate cut.
