What’s driving markets in the final part of the year?

The odds of a US government shutdown appear to be rising. Bookmakers see a three-in-four chance. Congress hasn’t passed any of the 12 funding bills it needs to approve before 1 October, the start of the US fiscal year. If legislators don’t act, non-essential government functions will go offline. From an economic perspective, we expect only minimal economic impact if the shutdown is brief, which remains our base case scenario. Obviously, the longer it lasts, the greater it may weigh on growth. But there could be ripple effects even in short shutdowns, as it would impact economic agencies such as the Bureau of Labor Statistics, in charge of many key data. As a result, we might not get the September jobs report or inflation data on time, for instance. These are two pieces of information the US Federal Reserve (Fed) is watching closely ahead of its 29 October interest rate decision, and so are investors. A delay in releasing key data could spur market volatility if investors remain in the dark for too long.  

From a market and investment perspective, we don’t recommend overreacting. We’re already positioned to cushion bouts of volatility. We own a minimum-volatility index that tends to fall much less than the broader market in case of a setback. We’re overweight gold, a position that could benefit in case of growth worries. We’re also underweight in US sovereign assets such as the US dollar and US Treasuries.  

We think it can. Our expectation is still for the dollar to weaken over time, which should support the euro, pound sterling, Japanese yen and a range of emerging market currencies. The logic is straightforward: the US is heading toward wider fiscal deficits, and the Fed looks set to cut rates while other major central banks are holding steady.  

Overall, the euro has held up quite well, hovering near year-to-date highs, even with political and fiscal noise out of France. That said, the dollar appreciated last week on the back of stronger-than-expected US data. Second-quarter economic growth was revised upwards, driven by solid consumer spending and investment. Investment in AI infrastructure, such as data centres, has been increasing rapidly, and this AI-driven investment cycle is one reason we strategically hold US equities (although we’re ‘hedged’ on the currency side to protect euro and sterling portfolios against dollar weakening). 

This week’s focus is on the US labour market, if we get the data. After the Fed cut rates by 25 basis points in September, markets are leaning towards another rate cut in October. The upcoming jobs data could seal that decision. The consensus sees a moderate rebound in job creation (Friday), following a weak print in August after the sharp downward adjustments we've seen in recent months. Still, employment growth remains weak. Here’s the thing: if the data confirms that the labour market is losing steam, it gives the Fed the green light to cut again. But, if revisions are smaller than expected or wages surprise to the upside, that could complicate things. Either way, investors will be watching this report closely. 

On the other side of the Atlantic, inflation is due across the Eurozone (Wednesday). It may have picked up but should remain close to the 2% target. Therefore, we don’t see the inflation data altering our view that the European Central Bank will likely maintain its policy rate at 2% for the remainder of 2025.