What Could Shake Up Markets in September?

**Andrew Sheets** (0:00)
Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, several catalysts for more volatility later this month. It's Friday, September 4th at 2 p.m. in London.
Over more than a century of market history, Septembers have tended to see more volatility than the average month. You can't exactly set your watch by it, but the trend is definitely there. As investors come back from summer and capital market activity restarts in earnest, things, historically, tend to move.
This idea seems especially relevant this year. Despite the headlines, it was a pretty calm summer for markets. Since early June, US stocks, yields and credit were all modestly higher, and they got there with minimal movement. The realized volatility, that is how much these markets are moving on a daily basis, has been historically low.
September offers a number of catalysts that could test that. First and foremost is the Fed. Inflation remains above the Central Bank's target, and markets are pricing a roughly two out of three chance of a rate hike on the September 16th meeting. That's more uncertainty this close to a meeting than we've had in a while, and the impact goes far beyond a single decision. Live meetings from the Bank of Japan and the European Central Bank also loom in September.
September is also a month that historically sees unusually heavy capital market activity. That makes sense. If you're a corporate and looking to raise money, it's often better to wait until investors are back from the summer before going out looking for those funds. But this September could be unusually active given a growing IPO pipeline and continued funding needs from AI-related construction. So it's fair to say that even adjusting for September's usually heavy pace, there's an unusually wide range of outcomes around where capital market activity could land this month. Investors are also coming back from the summer with major uncertainty still hanging over global energy markets. Morgan Stanley's commodity team still sees global energy flows as severely restricted, and recently raised their forecast for oil prices, seeing them reach about $100 a barrel in the fourth quarter of this year.
The price of what's in that barrel is becoming even more extreme, with the price of diesel fuel in Europe up 140% since January 1st. And so as inventories continue to draw down, and questions around the duration of this conflict persist, both factors could drive more market movements. The good news is that while Septembers have historically been more volatile months, they're not necessarily a bellwether. And that could apply again. By month end, we should have a much better idea of the Fed's path, the scale of capital market activity, and the state of energy supply. But until then, the level of expected volatility across many markets, particularly interest rate and foreign exchange markets, remains unusually low. Given this backdrop, we think those levels of expected volatility can rise. Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also, tell a friend or colleague about us today.

**SPEAKER_2** (3:13)
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