The Month Ahead

August was an up and down month for global financial markets. US share markets initially moved higher, with some major indices reaching record highs, supported by strong corporate earnings and encouraging developments in the Middle East.

However, the early-month rally lost momentum as equity markets later retreated. Hopes of a lasting resolution to tensions in the Middle East once again proved short-lived, while concerns about the scale of US government debt re-emerged and weighed on sentiment.

Despite the softer finish to the month, US equity markets, as of 28 August, remained on track to deliver positive returns for the month. Markets closer to home were also on track to end the month higher, with New Zealand's NZX 50 Index and Australia's ASX 200 Index both trading in positive territory.

Bond markets also experienced periods of volatility during August. Concerns over the mounting US government debt burden pushed the yield on the 30-year US government bond to its highest level since 2007. However, yields generally moved lower in the closing days of the month, helping to ease some of the earlier pressure on fixed income markets.

In August, US government debt surpassed US$40 trillion, drawing increased attention from investors and contributing to periods of volatility in bond markets. Federal debt has roughly doubled over the past decade as government spending has consistently outpaced tax revenues. The cost of servicing this debt has also risen sharply, with annual interest payments now exceeding national defence spending and ranking as the second-largest item in the US federal budget, behind only Social Security.

While US Treasuries remain among the world's most liquid and widely held assets, the steady rise in government borrowing will continue to attract attention, particularly given already elevated borrowing costs. Persistent budget deficits require the US government to issue increasing amounts of debt, resulting in a growing supply of Treasuries entering the market. If concerns about the long-term sustainability of US fiscal policy continue to build, investors may demand higher yields to compensate for the perceived fiscal risks.

As a result, fiscal dynamics are becoming an increasingly important influence on long-term interest rates and bond market performance.

In response to higher borrowing costs, the US Treasury recently said it would increase its purchases of longer-dated government bonds and manage the mix of debt it issues. These measures can provide temporary support to bond markets. However, the underlying issue of mounting debt and debt-servicing costs remain.

September will see many of the world’s most influential central banks convene. With no resolution to the conflict in the Middle East and ongoing concerns about persistent inflation, these meetings are likely to attract significant market attention.

The US Federal Reserve (Fed) meets on 16 September. As of 28 August, interest rate markets were pricing around a 60% probability of a 25 basis point rate hike. Expectations shifted higher following comments from Fed Chair Kevin Warsh at the annual Jackson Hole Symposium, where he noted that underlying inflation pressures had not materially improved and that the Fed still had "work to do" to return inflation to its 2% target. Warsh’s comments took on extra importance after his decision to do away with forward-guidance and advocating for a “quieter” Federal Reserve.

Meanwhile, the upcoming Reserve Bank of Australia (RBA) meeting has taken on increased significance. For much of the year, interest rate markets had been pricing in the view that the RBA's tightening cycle was complete. However, July inflation data suggested price pressures remain persistent, prompting markets to price in around a 50% probability of a further rate hike as of 28 August.

Elsewhere, the European Central Bank (ECB) and the Bank of England (BoE) are also scheduled to meet. Markets are fully pricing in a rate hike from the ECB, while the BoE is widely expected to leave rates unchanged.

At a tactical asset allocation level, we maintain our overweight positions in long-dated US and UK government bonds. Despite the recent sell-off in bonds (and rise in yields) the move by the US Treasury to increase its purchases of long-dated bonds could provide support, while a softening labour market and weakness in interest-rate-sensitive sectors should also benefit bonds.

In currency markets, we remain overweight the New Zealand dollar relative to the Australian dollar. New Zealand appears to be in the early stages of if its rate-hiking cycle, while Australia’s is likely at or near its peak, meaning there is improving yield differential. Additionally, the housing market in Australia peaked in December 2025 and is beginning to rollover, led by the major east coast cities. On the other hand, despite a weak period for housing in New Zealand, prices have stabilised.

In equities, our positioning remains broadly neutral, though we hold a modest constructive bias into year-end. However, at current levels, the risk/reward is less compelling. The macro backdrop is relatively supportive, earnings continue to surprise to the upside, and AI momentum remains. The main risk is rising Treasury yields, which could weigh on valuations.