Monthly report

CIO Report - September 2025

Markets

Global financial markets continued their upward trend in September. Sentiment was driven primarily by the US Federal Reserve, which cut interest rates by 0.25% for the first time this year and signalled the possibility of further easing. Fed Chair Powell pointed to rising risks in the labour market, reinforcing expectations of a more accommodative monetary policy and supporting both bonds and equities. In Europe, however, fiscal concerns dominated. Following the failed no-confidence vote against the French government and Fitch’s downgrade of France’s credit rating to A+, long-term government bond yields rose significantly. Nevertheless, equity markets were largely buoyant. In the US, the S&P 500 reached new all-time highs, led by technology stocks. Japan and emerging markets also posted strong gains, while the European STOXX 600 recorded only modest advances. In Washington, the threat of a government shutdown caused some short-term jitters but did little to alter the markets’ overall positive tone. On the currency side, the US dollar index stabilised after sharp declines in previous months. Among commodities, precious metals stood out, with both gold and silver posting strong gains. Oil prices, by contrast, declined amid concerns over global demand and ongoing discussions within OPEC+ about a possible easing of production cuts.

Outlook

The global liquidity cycle is now well advanced and nearing its peak. However, liquidity continues to expand — albeit at a slowing pace — providing a tailwind for equity and credit markets. As a result, global growth remains supported, though it is driven almost entirely by the aforementioned liquidity expansion and elevated fiscal spending, rendering it unsustainable. Meanwhile, a power struggle between the US Treasury and the Federal Reserve is intensifying. The Treasury is increasingly assuming functions traditionally performed by the Fed — including yield curve management through T-bill issuance and purchases of long-dated Treasuries. This interference is unprecedented in modern history and risks undermining confidence in institutional independence. This ongoing tug-of-war remains unresolved and continues to unsettle markets. There is a growing risk that investors lose confidence in the Fed’s ability to control interest rates and inflation. In this context, the Fed is actively draining liquidity through the continuation of its Quantitative Tightening (QT) programme and related measures, in an effort to offset the expansionary impact of its recent rate cut and the Treasury’s liquidity-boosting T-bill issuance. The Fed’s liquidity withdrawal directly affects equity and money markets, while the new Treasury-generated liquidity — via T-bill issuance and higher government borrowing — primarily stimulates the real economy. Consequently, the coming months are likely to bring stress in equity and money markets, but continued support for US growth. However, the risks associated with this are currently being ignored by financial markets: equity and bond markets remain robust. There has not yet been a collapse of the dollar or a significant rise in long-term interest rates. The current high level of liquidity, combined with high government spending in both the US and Europe, is also fuelling economic growth and thus inflation. This is also putting upward pressure on long-term interest rates.

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