September’s Bringing Tons of Catalysts to Shatter Market Calm

  • Debt ceiling ‘brinkmanship’ looms along with German election
  • Cascade of central-bank decisions due amid tame inflation

Why Stock Markets May Be Headed for a Selloff

Welcome to the cruelest month for U.S. equities.

The S&P 500 Index limps into September after stalling amid heightened tensions on the Korean peninsula and historic flooding in Texas. Those broke a stretch of calm that’ll be hard to replicate in a month loaded with major events that could set the tone on financial markets the rest of the year -- from a dozen G-20 central bank decisions to a deadline on the U.S.’s ability to pay its bills and elections in Europe and Oceania.

Here’s what’s coming.

Central Bankapalooza

The fate of currency and bond markets will hinge on a slew of central bank policy meetings and speeches, with the euro the most likely to get jostled as the European Central Bank decides the timeline for ending its unconventional easing. President Mario Draghi said officials will discuss potential tweaks in autumn and refused comment when asked if that included Thursday’s meeting. They’ll have to contend with a euro that’s now at its highest level in more than two years.

Treasuries, meanwhile, have been on a tear -- something that’s got to start to concern Federal Reserve officials looking to begin the process of balance sheet normalization as soon as on Sept. 20. The move has been well-telegraphed in order to avoid a repeat of 2013’s taper tantrum. 

So far, so good as 10-year yields hover near 2017 lows and U.S. equities sit within spitting distance of all-time highs. But don’t get too complacent that will endure, warns Deutsche Bank AG chief international economist Torsten Slok.

“Now, when QE is about to be reversed, I don’t see any papers or speeches talking about the coming big negative impact on equities, widening credit spreads, and boosting yields,” he wrote of monetary policymakers who championed the benefits of asset purchasing programs. “It cannot be asymmetric such that QE only has positive effects and reversing QE will have no negative effects.”

While no Canadian monetary policymaker has spoken publicly since the Bank of Canada delivered its first hike in almost seven years, another surprise could be in the offing at its meeting Wednesday, as CIBC chief economist Avery Shenfeld now expects.

“The bank can clearly argue that the economy simply doesn’t need rates as low as they have been to generate decent economic growth,” he wrote on the heels of a release showing rapid second-quarter growth of 4.5 percent.

The pound’s got the opposite problem of the euro, and its descent to the lowest since October 2016 in trade-weighted terms surely has got the attention of the Bank of England nine days before it convenes. The problem is, the rollover in U.K. economic data and negative real wage growth has tempered any expectations for a meaningfully hawkish shift.

September will also see central-bank meetings in Japan, Australia, Russia, Mexico and Brazil.

Full Faith and Credit

September’s been tough on equity investors, delivering an average loss of 0.7 percent and falling 60 percent of the time since World War II, according to S&P Global. This year, the month also brings a showdown on whether the U.S. will pay its bills. U.S. Treasury Secretary Steven Mnuchin declared Sept. 29 to be the "critical" deadline by which Congress must raise the debt ceiling.

“Gear up for a bumpy September, as brinkmanship is likely to be the driving force behind debt limit negotiations,” said Ward McCarthy, U.S. economist at Jefferies.

Mnuchin insists there is “no scenario” in which the government wouldn’t pay its bills. Judging by the kink in the Treasury bill curve, traders are at least a little skeptical.

Wall Street’s already prepping for a doomsday scenario. And U.S. President Donald Trump has complicated the situation by threatening to shut down the government if Congress doesn’t approve funding for a wall along America’s southern border, while Mnuchin has said the relief aid for Hurricane Harvey should be tied to a bill raising the limit.

Vote, Vote, Vote

Constant vigilance from market-watchers is warranted as a handful of nations head to the polls during September -- even if the results don’t produce a surprise in the order of Brexit or Trump.

Chancellor Angela Merkel’s party is widely expected to win Germany’s Sept. 24 election but will need to form a ruling coalition -- with whom?

The outcome will go a long way toward shaping the path forward for Europe’s biggest economy, and Oskar Niedermeyer, a political scientist at Berlin’s Free University, warns that all potential partners “have their pitfalls” -- some of which could complicate Brexit talks.

Elections in Norway and New Zealand on Sept. 11 and 23, respectively, may see current opposition parties form coalition governments. Any effects stemming from these votes will likely be contained to domestic financial assets.

Wait, There’s More…

  • A summit of BRIC leaders hosted by China just ended -- days after tensions between the world’s second-largest economy and India caused a standoff in the Himalayas
  • The Trump team will continue to renegotiate NAFTA
  • Brexit talks are scheduled to continue
  • Initial jobless claims will give the earliest indication of Hurricane Harvey’s potential economic toll. Judging by past storms, the peak effect will occur three weeks after the disaster, according to economists at Morgan Stanley.
  • @realDonaldTrump will surely tweet
  • On a lighter note, the Apple’s new iPhone 8 debuts

Oh, things won’t get quieter once the calendar flips, either: the Catalan independence referendum is scheduled for the first day of October.

— With assistance by Lorcan Roche Kelly, and Alex Harris

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