After a summer of resilient growth, shifting political winds, and volatile commodity markets, investors are turning their attention to the U.S. Federal Reserve. According to Dr. Claudio Wewel, FX Strategist at Bank J. Safra Sarasin, the Fed is likely to deliver a series of rate cuts into the coming year, following the soft August job report – a move that could reshape the outlook for risk assets, currencies, and global bond markets.
Fed under pressure
In August, U.S. economic momentum showed signs of softening. Employment data surprised on the downside, unemployment ticked higher, and inflation, while still elevated, rose less than expected given the surge in tariffs. Fed Chair Jerome Powell’s remarks at Jackson Hole added fuel to the debate. “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he noted.
Gold shines, oil falters
August was a strong month for risk assets, but gold was the standout performer, gaining nearly 4%. The driver? Renewed political attacks on Fed independence. “Gold continues to play its traditional role as a safe-haven hedge,” Wewel explains. “Against a backdrop of political uncertainty and rich equity valuations, it is no surprise that investors increased their exposure.”
Oil, by contrast, gave up July’s gains after U.S. sanction threats on Russia, underscoring the fragility of energy markets.
Global divergences
Outside the U.S., growth paths diverge. In the eurozone, consumer sentiment remains weak, though a large German infrastructure and defence package could support activity later this year. “The strong euro has been a headwind for manufacturers,” Wewel says, “but we expect appreciation to slow from here.” With inflation pressures easing, he sees another European Central Bank rate cut before year-end.
Switzerland, meanwhile, was jolted by Washington’s surprise 39% tariff on Swiss exports (excluding pharmaceuticals). The move sparked fears of slower growth and raised the likelihood of the Swiss National Bank cutting its policy rate back into negative territory.
Elsewhere, the Bank of England faces the difficult mix of high wages and sluggish growth, while in Japan, populist gains in the Upper House elections have made further tightening by the Bank of Japan more difficult. China, too, is slowing, with weak loan demand offsetting a positive credit impulse.
Investment implications
Against this backdrop, yield curves are expected to steepen further. Wewel recommends focusing on intermediate bond maturities: “They offer enough duration to benefit from falling yields, while still providing carry to cushion against volatility.”
Equity markets remain supported by strong earnings, particularly in the U.S. technology sector, though valuations are stretched. “We continue to favour defensive sectors such as healthcare, staples, and utilities,” Wewel adds.
On a broader level, Bank J. Safra Sarasin’s asset allocation remains balanced. Equities are neutral with no regional bias, while emerging market bonds and commodities have been nudged higher following attractive corrections.
The bottom line
Markets are delicately balanced between optimism and caution. A Fed rate cut in September could provide short-term support, but longer-term challenges remain. As Wewel concludes: “Investors should prepare for steeper curves, more selective opportunities, and an environment where policy moves—not just fundamentals—drive market sentiment.”
