After the volatility in July and August, some traders had their worst summer in years, being forced out at the bottom or in at the top, ,while those who went to the beach may have returned to find their portfolios little different than they left them. Under the surface however, things are changing, politics in the US are developing fast while the anti Globalist populism in Europe has got stronger in the face of attempts to suppress it. The Fed has acknowledged that the time has come for lower rates, which is switching attention to the prospect of a weaker US$ and the idea that the monopoly profits that underpin the S&P earnings may come under treat from both regulators and global competition is starting to shift the focus from momentum and memes onto cash flow, yields and diversification.

Having initially decided the early August sell off was all about Economics, the pundits were forced to concede that it was actually market mechanics - in this case the partial unwind of the Yen carry trade, leading to a surge in Google searches for the term. We see this more as an unwind of the three big anomalies from the summer- concentration risk in US equities, repressed levels of volatility and an ultra cheap Yen. Traders are nevertheless nervous of past August analogues, particularly August 2000, when a similar small increase in Japanese rates burst the Dot Com bubble, but we also see echoes of August 1998, when the Russia default blew up LTCM and triggered a similar flight to safety in US bonds that was mis-interpreted as a signal of an upcoming recession. Indeed we see the latest calls for a recession and a Fed pivot driving US 10 Year below 4% as a new anomaly.

The US Political drama arrived months early, forcing markets to adjust for the 'known unknowns' of Trump and the previously 'unknown unknowns of Harris' - in effect a deleveraging has taken place. In doing so it has exposed the Yen carry trade which is likely to continue to complicate markets during August. Medium term, Silicon Valley is picking sides and lining up behind its preferred candidate, highlighting the importance to tech earnings of a US discretionary spending Budget the size of the UK Economy, while longer term the threat of currency realignments, including a weaker $ and perhaps an end to the HK peg, remain.

The habit of spending long periods underground before re-emerging is not limited to the Cicada, for while this year sees the coincidence of the 13 year year Cicada cycle and the 17 year one, something that last happened 221 years ago, it is also 17 years sine Tony Blair was last in power and 13 since Francois Holland (likely PM in the French Hung Parliament) was. Both now look to be re-emerging to ensure continuity of policies that never really went away. The key sources of protest across Europe - crippling expensive wars against Russia and Climate change as well as uncontrolled immigration have only been addressed in the doubling down - the first thing UK PM Starmer did was fly to Washington to offer more money to NATO, while his Chancellor promised more money for Net Zero. Meanwhile, the left alliance put together to thwart Le Pen is even more pro immigrant than Macron. For markets, there is no prospect of lower spending and every prospect of higher taxes - the only 'Change' visible but not the one promised. The Technocrats and Globalists expecting this 'democracy' means that the populous will go quietly will be disappointed, especially with the arrival in the Autumn (once the Cicadas have gone) of the great populist, anti open border, anti net zero and anti war populist Donald Trump.

The scorecard for the first half puts Equities, commodities and Gold in the top half of the table, with cash and fixed income in the lower half. This is consistent with the steady but uninspiring macro backdrop and positioning ahead of a tricky H2 from a political perspective. The anomaly of the Market Cap weighted SPX out-performing the equal weighted SPW by over 10% points tells us both that the SPX is no longer telling us anything about the US economy and that this excess return is for taking (considerable) concentration risk. Meanwhile, with Bond analysts 'pivoting from the Pivot' the fixed income markets have calmed down a little and leaving The Donald' rather thna 'The Fed' as likely the biggest policy influence on Markets over the next 12 months. In particular, we would look out for a 'Trump Plaza Acord" early next year, 40 years after the last one- something the FX markets aren't talking about, but the asset allocators seem to be (at least subconsciously) pricing in.