The September Effect
At a Glance
In light of historical trends, September has consistently shown a tendency for stocks to underperform, posing potential implications for currency markets as well. Per the full note from J.P. Morgan, the S&P 500 has declined by an average of 0.6% in September since 1945, making it the worst-performing month for equities. This seasonal phenomenon, driven in part by post-summer rebalancing, raises questions for FX traders about risk sentiment and asset allocation. With no significant calendar events impacting the immediate future, the focus shifts to how these trends may affect investor behavior and positioning in foreign exchange markets.
Key Takeaways
- 01September historically leads to declines in the S&P 500, averaging a drop of 0.6%.
- 02The month has shown only a 44% positive performance rate for equities since 1950.
- 03Currency markets may reflect increased volatility as equities falter.
- 04September could trigger a major reallocation of portfolios across asset classes.
Full Analysis
What the desk is arguing
The desk asserts that the historical declines seen in September for equities could signal a shift in market sentiment that might spill over into currency markets. According to J.P. Morgan, the S&P 500's average drop of 0.6% during this month since 1945 highlights a broader pattern of risk aversion that we may see reflected in currency pairs as investors adjust portfolios.
Investors typically return from summer breaks and may readjust their risk levels, often leading to increased volatility. This potential shift in positioning could impact major currency pairs as traders respond to the turbulence seen in equity markets. Given that September shows a positive return in U.S. stocks only 44% of the time since 1950, caution is warranted going forward.
Where it sits in our coverage
Our current consensus target for the EUR/USD is 1.075, with a range spanning from a low of 1.04 to a high of 1.12. Notable firms include: - J.P. Morgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
The desk's view aligns closely with J.P. Morgan, which is positioned in the middle of the spread, reflecting broader caution in the market as we enter September.
How other firms see it
Firms such as J.P. Morgan are aligned in expecting cautious sentiment to dominate, whereas BofA adopts a more bearish stance, featuring a lower target. The divergence in targets raises important considerations for FX positioning in the context of equity performance.
Monitoring the correlation between U.S. equities and major pairs like EUR/USD is essential, especially considering potential investor sentiment shifts as September progresses.
Market Implications
Watch for the EUR/USD to react to fluctuations in risk sentiment emanating from stock market performance, particularly as September progresses. A key level to monitor will be 1.075, where a breakout or retracement could signal a broader trend in investor positioning.
From the original
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Related speeches
4 itemsHouse Call: Talking Equity Markets with UBS Asset Management
The desk interprets the recent volatility in equity markets as a significant yet typical correction phase, emphasizing the importance of historical context in understanding the current dynamics. Per the full note [source], Jeremy Zirin from UBS Asset Management highlights that the S&P 500's recent 10% drop occurred over just 22 days, which is notably faster than the historical average of 75 days. This rapid decline reflects heightened market sensitivity, suggesting traders should brace for more instability in equities, which may spill over into forex markets as investor sentiment shifts. The next major focal point for the market is potential resilience indicators from equities that could trigger a tactical recalibration for USD pairs.
Halftime Report
The desk highlights the ongoing economic tension between energy supply shocks and resilient growth patterns as pivotal in shaping FX markets through the second half of the year. Per the full note from J.P. Morgan, these dual forces are expected to impact momentum, which is driven notably by AI-related capital spending rather than robust economic indicators. Given J.P. Morgan's upward revision of the S&P 500 target to 7,800, traders must also be aware of how the equity market's strength could influence broader FX trends. The consensus view appears closely aligned with resilient equity performance despite underlying inflation concerns.