Monthly report

CIO Report - August 2025

Markets

Global financial markets started August on a nervous note. New US tariffs and a weak labour market report fuelled concerns about an economic slowdown, causing equities to fall and bond yields to drop. However, a recovery soon set in, buoyed by hopes of interest rate cuts. Fed Chairman Powell emphasised the risks to the labour market in Jackson Hole and held out the prospect of monetary policy easing, which reinforced expectations of an interest rate cut in the near future. As a result, financial markets performed well overall during the month. Politically, the Fed remained the focus of attention. President Trump ousted the head of the Bureau of Labour Statistics and attempted to remove a Fed governor. This fuelled doubts about the institution's independence and led to rising inflation expectations and a steeper yield curve. In Europe, France took centre stage: the vote of confidence against the government scheduled for early September caused noticeable volatility and rising risk premiums. Geopolitically, speculation about a possible ceasefire in Ukraine caused movement, especially in commodities and European defence stocks. President Trump first met with President Putin in Alaska and then separately with European heads of state. However, the talks ended without the hoped-for breakthrough. The US dollar lost ground against all G10 currencies as markets priced in additional interest rate cuts. Bitcoin fell sharply after several positive months. Commodities performed mixed. Gold benefited from inflation concerns and rising liquidity, while copper came under pressure from new US tariffs.

Outlook

The US Treasury and the Fed have for some time been attempting to push down long-end yields. Several measures are being deployed. In addition to the increased issuance of T-Bills (which, given their cash-like nature, raise liquidity in the financial system), long-dated Treasuries are being repurchased in the market, pushing up their prices and lowering yields. Moreover, public pressure is being exerted on the Fed and even the Bureau of Labor Statistics (BLS), with the aim of influencing the bond markets. It is also expected that the Supplementary Leverage Ratio (SLR) will be relaxed in the near future, enabling the US banking system to purchase more government bonds. In parallel with the Treasury’s actions, the Fed is injecting targeted liquidity to dampen volatility in bond markets and reduce spreads in money markets. The MOVE volatility index for US Treasuries has declined accordingly in recent months. All these measures aim not only to lower long-term yields but also to increase liquidity in the financial system, thereby supporting equity and credit markets for the time being. This is also likely to exert downward pressure on the US dollar, a development welcomed and encouraged by the US government and the Treasury. This American money-printing machinery is influencing global financial markets – amplified by the fact that many other central banks are also easing their monetary policy. China alone has injected the equivalent of more than USD 1.5 trillion into its financial system in recent months. In addition to fuelling financial markets, global economic activity is also benefiting. GDPNow estimates point to robust growth in the US and a moderate recovery in Europe (despite US tariffs). These feedback loops reinforce the positive trend in equity and credit markets but also contribute to upward pressure on long-term government bond yields and inflation. In sum, global financial markets are sitting on a powder keg. Yet the prevailing uptrend remains intact, as long as global liquidity continues to rise. Nevertheless, there is a risk of a short-term seasonal correction in US equity markets.

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