Probable air pockets ahead, seatbelt signal on.

September 29th, 2025

As the party goes on, there are various "traps" ahead which could create short-term turbulence in equity markets. For one, another US government shutdown is looming tomorrow night, new labor market data are going to be published which could affect market pricing for rate cuts and above all the Q3 results are coming up soon and the corporate share-buyback blackout period has started. The latter takes a significant amount of dollars off the bid side. If we combine this with the fact the algorithmic, momentum chasing funds are already at max allocation and the previous two weeks saw massive inflows from retail investors according to the available data, one realizes that the party might run out of booze in the coming days or weeks. This is not to say, of course, that the plane will crash, we just need to be careful and sit tight through the potential turbulence.

As mentioned, a potential US federal government shutdown is an imminent risk, as funding authorization ends at midnight tomorrow. None of the 12 appropriations bills for fiscal year 2026 have passed, and failure to pass a continuing resolution to keep the government funded would result in a broad shutdown of government activities. Only those workers deemed essential by the administration would continue. Last Friday, House Republicans approved a continuing resolution to avert a government shutdown at the end of the month and extend government funding at current levels through November 21, sending the bill to the US Senate, but it failed to pass. Separately, the US Senate voted Friday on a Democratic continuing resolution to fund the government through October 31, which failed to pass 47-45. Note that a continuing resolution would need to clear the 60-vote threshold in the Senate, which means it requires support from at least seven Democrats.

The FED's inflation gauge rose in August, but in-line with expectations. Core PCE prices rose 0.23% in August and the 12-month core PCE price inflation edged up to 2.91% from 2.85% in July. Headline PCE prices which is the FOMC’s official target rose 0.26% in line with consensus. That pushed the 12-month headline PCE price inflation up to 2.74% in August, from 2.60% in July. The FED and the markets for now think that the continuing rise in inflation is transitory and after the impact of tariffs fade, it will go back closer to the central bank's target of 2%. This sounds more or less correct, but the market choses to forget that at the same time and due to rate cuts any acceleration of the US economy will bring higher wages' growth again, higher rents and eventually higher consumer goods prices. Interesting to watch as the FED for now is focused on maintaining full employment.

An important week for the US labor market's health check lies ahead. Apart from the JOLTS job openings and ADP private payroll numbers, on Friday the nonfarm payrolls and the unemployment rate are to be published (if there is no government shutdown). Note that September is a month of acute seasonality in government employment. Nearly a million workers are added to government payrolls on net in September, over a million in education. Small shifts in the timing of those flows for unpredictable reasons can have a profound affect on the seasonally adjusted change which will be announced at 14:30 CET on Friday. Also note that there are many questions whether federal employees who opted into the Deferred Resignation Program would lead to job losses in the report on Friday. For now, expectations are for +80k for the headline number.

Eurozone's September PMI reports were a mixed bag. The recent trend of better manufacturing and worsening services was reversed. The Services index jumped to 51.4 from 50.5 and much better than expectations, while the Manufacturing index dropped below 50 again, at 49.8 and worse than expected. The overall PMI index for the region edged up however to 51.2 from 51. Looking at the country details, Germany's Services jumped 3 points to 52.5 from 49.3 while manufacturing dropped more than expected to 48.5. In France and due to the political uncertainty during the dates of the survey, both manufacturing and services dropped more than expected.

Following six consecutive rate cuts, the Swiss National Bank kept rates on hold at 0%, as expected. The policy statement maintained the sentences that "The SNB remains willing to be active in the foreign exchange market as necessary" and that "The SNB will continue to monitor the situation and adjust its monetary policy if necessary, in order to ensure price stability." The inflation forecast was essentially unchanged with a clear upward slope and the CHF strength was not mentioned in the statements. Chairman Martin Schlegel reiterated that the hurdle for rate cuts into negative territory was higher than for rate cuts in positive territory and that current policy rates were already supporting growth, but he also clearly stated that negative rates remained an option and that they had "worked in the past" (including by reducing the attractiveness of the CHF).

Global equities had a mixed week. The US indices retreated from the record highs, with Nasdaq falling 0.7% and the S&P500 down 0.3%. In terms of sectors, Energy (+4%) was the best performer, as oil prices spiked after Trump's comments on supporting Ukraine. All other sectors finished lower for the week, with notable laggards Staples (-1.8%) and Healthcare (1.5%), because who needs safety these days. Europe, on the other hand, had a mildly positive week with the Euro Stoxx 50 up 0.8%, as consumer names and previous winners (financials/industrials) rebounded at the same time. We maintain our positive stance on select consumer names (Richemont, Adidas, BMW, Diageo).

Bonds continue to be unloved in Europe and last week also in the US. The US 10yr yield spiked to almost 4.20% from the recent low of 4%, as the recent macro data were better than expected and the FED's potentially aggressive rate cuts until year-end were questioned. The rise of the PCE index (inflation) also helped for the mini sell-off. The German yield curve has remained pinned with the 10yr trading in a rather tight range for many weeks now (2.65%-2.80%). We still want to avoid taking duration bets and stick to parking the cash in shorter maturities until the situation clears somewhat.

Chart of the Week : Euro Stoxx 50's concentration has surpassed the high of 2007 , just before the crash.

The above chart shows the weight of Financials and Industrials in the Euro Stoxx 50 index since 2000, which is now north of 40%. For those who remember the early years of this century, European banks was the place to be, as the introduction of the euro and the significant drop of interest rates for many countries that had joined the common currency meant lucrative profits as credit expansion went through the roof. Banks were virtually begging people to borrow. We all know what happened next. Then for almost 10 years shares of Eurozone banks were the plague. Chronically cheap with price-to-book valuations at distressed levels of 0.5 and below and investors were ridiculed for owning them. Right after the sell-off of 2022, shares of banks became attractive again as for the first time in a decade the ECB was hiking rates aggressively which means a huge boost to banks' profits. The rally in the European banking index in this period has outperformed the Nasdaq rally by many many percentage points. Industrials joined the party in late 2023 and 2024, as the AI and EV themes powered the electrification beneficiaries, and the defense spending spree poured fuel into the fire (both these industries belong to the Industrials super-sector). What happens next is anybody's guess. History has shown that nothing can defy gravity for long and a reversion to more normal weights in the index is probably going to happen sometime, which means underperformance for Financials and Industrials ahead.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : UBS, Photo: