The Multi-Asset Process

September 2017 market review

Pinpointing the exact cause of market volatility is never an exact science.

Ongoing Brexit and Korea concerns may have been behind choppy conditions in September but so might the growing focus on policy normalisation, of which more to come. In any case – as has become the norm – malaise proved short lived and equities were climbing again by month end.

The S&P 500 set yet another record high in the last days of the month, breaching the 2500 level.

As we have said before, intermittent 5-10% corrections are a function of healthy markets and, despite countries threatening to destroy each other, another month passed without such a pullback.

Bears are increasingly talking about complacency and markets running out of steam but we continue to believe there could be plenty left in the tank. The last sustained bull run stretched for 12 years, from 1987 to 1999, during which the FTSE 100 rose close to 340%.

In the current post-2009 run, the index is up around 90% so no one can claim we are in a situation without precedent, at least when it comes to rising markets.

Where we are without precedent, and what is drawing an increasing level of market attention, is on the monetary policy front. September finally gave us some certainty here, at least as far as the US Federal Reserve is concerned, as it announced the first stage of the great unwinding plans. The Bank will start cutting its $4.5 trillion balance sheet in October, initially by $10bn per month, and Fed chair Janet Yellen said the normalisation process would be gradual and predictable.

On interest rates, the Fed was slightly more hawkish than expected: guidance from the committee members suggests we could see a hike in December and potentially three more in 2018 as the economy improves. Rising rates are an obvious negative for bonds but improving growth should be a plus for equities.

This announcement has been trumpeted as historic in some quarters but we would highlight the fairly muted reaction from the market – ending quantitative easing (QE) is a major shift in policy but it has long been signposted as due to start in Q4 so cannot be a surprise to anyone.

If people do want something Fed-related to get excited about, we would note the fact Yellen’s term as chair is up in February and given her remarks on financial regulation and defending free trade at Jackson Hole in August, it remains to be seen whether she will continue in the role.

Adding to the sense of unpredictability, Fed vice chairman Stanley Fischer resigned effective mid-October. This means an ordered transition, as from Ben Bernanke to Yellen, is unlikely and it will be interesting to see who we have in charge of tapering and rate policy by next summer.

Elsewhere, at the Bank of England’s Monetary Policy Committee (MPC) meeting in September, chairman Mark Carney said policy may need to be tightened by a somewhat greater extent than current market expectations. The MPC is operating under different circumstances than its American and European peers with a giant Brexit cloud on the horizon but we cannot remain in limbo for the next two years.

Prime Minister May’s call for "imaginative and creative" solutions to the country's future relationship with the EU made headlines over the month but as before, we remain in a wait and see situation on this front.

We are a long way short of being able to declare monetary policy normalisation is under way on a global basis but do finally look to be approaching an inflection point, with the BoE hinting at a rate rise in November and the European Central Bank (ECB) expected to announce a tapering strategy at its October meeting.

Meanwhile, Angela Merkel won a fourth term as Germany’s Chancellor as expected in September but the hard-right Alternative for Germany (AfD) became the third-largest group in the national parliament as populist voters again delivered a blow to traditional parties.

Merkel's centre-right Christian Democratic Union (CDU) and its sister Christian Socialist Union (CSU) saw their share of the vote fall while Germany's oldest party, the centre-left SPD, was consigned to opposition. This leaves Merkel scrabbling to put together a coalition and could unsettle the relative calm across Europe since Macron’s victory in France.

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Monday, October 9, 2017, 12:13 PM