(Bloomberg) — A “Goldilocks summer” is all but over, according to Goldman Sachs Group Inc., and mounting concern about the US economy is yanking markets from their seasonal slumber.
As they come back to their desks, investors will be confronted by tepid US data prints, concern about US trade tariffs and President Donald Trump’s latest broadsides against the Federal Reserve, according to strategists at Goldman and Deutsche Bank AG.
“It will be quite a difficult return,” said Christian Mueller-Glissmann, head of asset allocation research at Goldman, in an interview with Bloomberg TV. “I’m not sure that we can sustain that type of Goldilocks momentum we’ve had.”
For now, the CBOE VIX index, a key measure of market nerves, is near its lowest levels of the year. The dollar, meanwhile, has recovered from the three-year low it hit in July.
There’s plenty to suggest the calm won’t last.
A buoyant stock market over the summer months was based on bullish views about the earnings of the biggest US tech companies — rather than fundamental optimism about the economy, Mueller-Glissmann said.
“Part of the Goldilocks momentum has not been that the economy has been doing really well, because actually labor markets in the US have been softening,” he said. “It’s really been earnings and in particular a few very specific companies — the Magnificent Seven and some of the financials — that have been leading the market higher.”
According to George Saravelos, global head of FX research at Deutsche Bank, markets have also been “too complacent” about threats to the Fed’s independence.
In his latest step, Trump moved to oust Fed Governor Lisa Cook as he seeks to ensure aggressive interest rate cuts from the US central bank. The yield on 30-year bonds rose as much as five basis points to 4.94% on Tuesday, while the Bloomberg Dollar Spot Index was down 0.2%.
“We can find no convincing argument as to why the market should not be pricing more of this risk in,” Saravelos wrote in a note.
In Europe, meanwhile, France’s latest call for a confidence vote was a reminder of the potential for fraught politics to revive market swings. Local stocks tumbled amid concern a fresh budget spat could lead to the collapse of another French government, while one-week euro volatility headed for its biggest jump in a month.
Traders will be watching this week’s auctions of shorter-dated Treasuries, but US payrolls due next week could be the data trigger that marks the end of the summer doldrums.
“Equity investors will no doubt keep track of the long end of the Treasury market this week,” Chris Turner, head of FX strategy at ING Bank NV wrote in a note. “A selloff could pressure global equities after a good run in August.”
–With assistance from Joumanna Bercetche and Alice Gledhill.
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