September is living up to its reputation as the worst trading month of the year. Not only has the volatility in the DAX increased noticeably following yesterday’s trading session, but implied volatility is also on the rise. When professional investors begin to price in higher volatility, it often signals that something is amiss. Indeed, there are concrete reasons for concern.
The pressure is coming from the bond market. Firstly, U.S. Treasury yields have been rising, and there are legal challenges potentially requiring the U.S. to refund over $170 billion in tariff revenues. A U.S. appeals court has ruled that large portions of these tariffs are unlawful. Secondly, unrest is brewing in neighboring France, where investors are concerned about a potential government collapse. A financial crisis in the Eurozone could ensue if the second-largest economy requires stabilization by the International Monetary Fund (IMF). This panic has led investors to sell off French government bonds, pushing yields to their highest levels since 2009.
European Central Bank (ECB) President Christine Lagarde has stated that IMF intervention in France is not necessary. While this may be factually accurate, it may be prudent to add a “not yet” to that statement. Concurrently, the gold price has surged, increasing by $100 in a single day. This is not a positive sign; the gold price often acts as a barometer for the global financial system’s health.
However, the current environment has its silver linings. As global markets react in unison to falling prices, the previously overheated sentiment—especially on Wall Street—appears to be cooling, albeit still overly optimistic. This indicates that further declines may be needed before a genuine market correction occurs. With plenty of reasons to worry, it seems that the necessary catalysts for a substantial adjustment are already presenting themselves.
By Jochen Stanzl, Chief Market Analyst at CMC Markets
