The Multi-Asset Process

October 2017 market review

October proved to be yet another month fitting the 2017 template, with political volatility – this time in Spain – and broadly flat markets. The FTSE 100 started the month at 7440 and ended slightly higher at around 7490, having traded in a fairly tight 100-point range.

As has been the case for several months, monetary policy continues to dominate the agenda, with a rate hike from the UK widely expected (and therefore discounted) and confirmed in the first few days of November. Given the level of certainty about this rise, another stalemate from policymakers would have been a greater surprise and potentially damaged the credibility of both the central bank and Mark Carney as governor.

This was the Bank of England's first interest rate rise since 2007 and debate has turned to whether this marks the start of a sustained tightening cycle or simply represents a reversal of what critics now largely consider a premature cut in the aftermath of Brexit.

For my part, I would veer towards the latter. Despite some initial panic after the Brexit vote, the rate cut increasingly seemed unnecessary based on the market and economy's subsequent performance. With unemployment at a 40-year low and improving data, the economy appears more than capable of coping in a higher interest rate world.

Against such a backdrop, the Bank of England was clearly keen to get the level back up to 0.50% at the earliest opportunity, seeking to strengthen the currency among other things, and a pick-up in inflation has provided this. When announcing the hike, the Bank said any future increases will be at a gradual pace and to a limited extent, but as ever, we will have to wait and see.

We remain comfortable in the prevailing Goldilocks conditions as low inflation and slow but steady growth persist. The key question now is what exactly is making up that growth and how this rate hike might affect it – and that is likely to dominate sentiment in the final months of the year and beyond, particularly with the Brexit clouds showing no sign of abating.

Staying on that subject, although thousands of miles to the South, ugly events in Spain surrounding Catalan independence show the hugely damaging impact of political bullying can have on the global stage. I remain convinced a hard Brexit is far from political certainty – particularly with the Conservative Party struggling with scandals – and expect the debate to rumble on for months and possibly years to come.

As we noted last month, attention is increasingly turning to the fact Janet Yellen’s term as chair of the Federal Reserve is up in February. Reports suggested President Trump was unlikely to nominate Yellen for another four-year term and would select Republican Jerome H. Powell as the next chair and, again, this was confirmed in the early days of November.

Powell has been a governor on the Fed's board since 2012 and was assigned to lead the Bank's Wall Street oversight committee back in April. While every Fed chair since 1979 has been an economist, Powell's background is in investment banking.

He has steadily supported Yellen’s approach to monetary policy and financial regulation, suggesting he would be unlikely to attempt large or sharp changes in the Fed’s course.

As with any change of leadership, we would expect a change of rhetoric as the new person in possession looks to make their mark but any move to stop an ordered path out of quantitative easing (QE) would be ill advised.

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Friday, November 10, 2017, 8:14 AM