Global Markets’ Summer Lull to End as Volatility, Risks Mount

(Bloomberg) -- Global financial markets already under strain from a bond selloff and sharp currency swings face the risk of more volatility in the months ahead with the prospect of interest-rate hikes, mounting concerns over fiscal deficits and the ongoing war in the Middle East.

The challenges will come to the forefront as US investors return Tuesday from the Labor Day holiday, marking the end of the northern hemisphere's traditional summer lull. Despite numerous headlines featuring government interventions to support the yen and restrain US bond yields, last month was one of the quietest on record, with the euro trading in its tightest range since 2012 and even gyrations in Treasuries falling the most for any August since the 2008 financial crisis.

Bond and currency investors face a packed calendar, including the potential for higher rates from the Federal Reserve as well as more increases by the European Central Bank and Bank of Japan. European politics and spending priorities may also be reshaped, while US President Donald Trump faces a key test in November's midterms. Brazilians also are going to the polls.

"It's going to get funky," said Charlie Jamieson, chief investment officer at Jamieson Coote Bonds in Melbourne, who's positioned "cautiously". "Running through it all is Trump and oil, so volatility is probably the only certainty."

Key macro events facing markets through year-end:

The ECB may find itself cornered by expectations as soon as Thursday's meeting. Investors anticipate a quarter-point hike, have almost priced in one more by year-end and see about a 25% chance it comes in October. But updated growth and inflation projections may leave officials wary of signaling the additional tightening markets expect.

The following week also brings the biggest test for the yen-funded carry trade since a tumultuous unwind about two years ago, as the Fed and BOJ deliver policy decisions.

Fed Chair Kevin Warsh struck a more hawkish tone on inflation in late August, but doubts remain over whether action will follow. Swaps traders are pricing a hike on Sept. 16 as a coin-toss, a probability that may fall further if Friday's US consumer price index reading comes in cool.