A summer of low volatility

The summer season tends to have lower trading volume and liquidity in the financial markets, so small pockets of instability tend to escalate rapidly, and volatility spikes are frequent. We only have to look back to August 2024 to recall how the depreciation of the yen sparked a massive global equity sell-off which knocked more than 8% off the main indices in just a couple of days. However, the summer of 2025 has been a period of relative calm in the financial markets, with the main measures of volatility remaining contained, despite the underlying instabilities of the macroeconomic environment: uncertainties over tariff agreements, the risk of erosion of the independence of institutions in the US, doubts about the direction of monetary policy, concerns about the fiscal outlook in the developed world and geopolitical risks, with a new source of instability in France.

Summer brings a change of gears between the Fed and the ECB

Whereas the ECB entered the summer cutting rates to neutral territory (depo rate at 2.00% since June) and the Fed did so maintaining a restrictive monetary policy (stable fed funds rate in the 4.25%-4.50% range since December 2024), the last few weeks have brought a certain shift in the outlook for September. According to financial market expectations, in the coming weeks it is likely to be the Fed that will cut rates and the ECB that will keep them unchanged. Specifically, for September the money markets are anticipating a 25-bp cut in the US with around a 90% probability, while they assign an almost 100% probability to a scenario with no change in the ECB’s rates and the depo rate remaining stable at 2% through to the end of the year. This shift in market expectations is linked to the messages conveyed by the Fed and the ECB in recent weeks. On the one hand, when the Fed held rates in July, most of its members were more concerned about inflation risks than employment risks and only two members supported a cut. However, the publication of weaker-than-expected labour market data (see the International Economy – Economic Outlook section) led Chair Powell to acknowledge at the annual Jackson Hole symposium that «the shifting balance of risks may warrant adjusting our policy stance». Powell thus opened the door to a rate cut in September, without making any commitments and still awaiting the inflation and employment data for August. Within the ECB, meanwhile, President Lagarde acknowledged that the recent trade agreements have eased global uncertainty (but not eliminated it) and highlighted the resilience of the euro area economy. More emphatically, Isabel Schnabel explained that she sees no need for any changes in monetary policy stance in September. In addition, the latest data reflect an encouraging view of inflation (practically at the target rate since June), which, according to the ECB’s messages, reinforces an approach of waiting and seeing how the data and uncertainty evolve.

In the US, sovereign yields are in line with monetary policy expectations but they do not seem to fear institutional risk

The growing expectation that the Fed will resume rate cuts from September and maintain the path of monetary easing through to the end of 2026 drove down treasury yields in the short ends of the sovereign curve (between 6 months and 5 years). This was particularly the case for the 2-year benchmark, which is especially sensitive to monetary policy and fell more than 30 bps in August. On the other hand, the longer sections showed a more stable pattern of behaviour: the 10-year benchmark fell by around 15 bps, while the 30-year one closed the month practically flat. This differential performance between short and long yields partly reflects the expectation that, even if the Fed lowers rates, underlying fiscal pressures will keep long-term yields high. Also of note is the almost complete lack of reaction in the long-term references to the growing pressures from the White House on the Fed’s independence. These pressures intensified with Trump’s dismissal of Lisa Cook, a member of the Federal Reserve Board of Governors, accusing her of mortgage fraud; a decision which Cook has already challenged in court, where her future in the role will be determined.

France emerges as a new source of instability

With no surprises from the ECB nor any major changes in monetary policy expectations in the euro area, the region’s sovereign yields went through the summer with little change, and the euro-dollar continued to trade in the 1.16-1.17 dollars per euro range. France stood out as an exception within this scenario of relative stability: following the announcement of the vote of confidence, its risk premium surged more than 11 points in just three days, approaching the levels of the Italian premium, and with the 10-year sovereign yield around 3.50% (the highest level since March this year). The contagion effect on the rest of the periphery remained contained, without any shocks in the other risk premiums. Nevertheless, there has been a recent rebound in long-term sovereign yields, as September began with global sovereign bond sales on the back of growing concerns about the fiscal outlook in developed economies.

Another month of gains in the stock markets

The global stock index climbed 2.3% in August and has accumulated gains of 13% so far this year, despite the challenging economic context. In the month, the gains were particularly pronounced in the IBEX 35, driven by the good performance of the banking sector, and in the S&P 500, where the good earnings season and hype around AI once again boosted the performance of the US’ stock market. France’s CAC 40 lagged behind, as the political instability ended up weighing down share prices and the index slipped 2% in the last three days of the month alone, following the announcement of the confidence motion.

Crude oil stable while gold continues to «shine»

The cessation of the air strikes between Iran and Israel, as well as the various tariff negotiations between Trump and other countries, favoured a reduction of the risk premium imposed by investors on the price of oil during much of August. Adding to this situation was the continued expansion of oil production by OPEC countries. However, the price of the Brent barrel stabilised and was trading between 66 and 68 dollars. This trend was maintained during the opening sessions of September, pending the decision from producing countries on potential further production increases and amid the IEA’s expectation of excess oil supply over the coming quarters. The price of gold reached a new high (3,500 dollars per ounce) amid heightened uncertainty among investors regarding inflation, debt and fiscal discipline.