Domestic and global political risks remain at heightened levels during September. In response to slowing global growth and weakening inflation global central banks eased monetary policy. Whilst all major stock markets generated positive returns over the month this obscures a change in the underlying market leaders and increased volatility across capital markets.
The yield on the US 10 year bond rose to 1.7% at the end of the month from below 1.5% at the start. The market had over extended in the hope of a 0.5% cut by the Federal Reserve (Fed) in September following its 0.25% cut in July. Investors had to settle for a 0.25% cut, with a forecast for no more cuts in the remainder of 2019. In response, the US Dollar strengthened 0.5% against a basket of currencies. Financial, Utilities and Energy sectors helped the S&P 500 to a 1.8% gain in the month as value style stocks outperformed growth and momentum which had been the main drivers of performance over the past year.
The protracted slowdown in the Eurozone and ongoing weakening in global trade continue to overshadow European markets. The European Central Bank (ECB) cut their deposit rate by 0.1% to -0.5% and announced they would restart quantitative easing through their asset purchase programme at €20bn per month for “as long as necessary”. A ‘hard’ Brexit, which is not in the ECB’s forecasts poses further downside risk. The Euro continued its decline against the US$ to below 1.09 (€ to $), having been 1.25 (€ to $) in January 2018. German, French and Dutch sovereign bond prices fell, whereas Greek and Italian debt prices rose. The MSCI Europe ex UK index gained 2.7% during the month, driven by value biased stocks which outperforming growth stocks by 2.5% in September.
The Sterling exchange rate was volatile throughout September, following the political turmoil within Westminster and the Courts. After falling to below 1.20 (£ to US$) at the start of the month, Sterling rallied to over 1.25 (£ to US$), before falling back to finish the month 1% stronger. Government bond yields followed a similar pattern to Sterling, with the 10 year bond rallying to 0.75% mid-month, from 0.41% at the start, before falling back to 0.48% by month end. The UK stock market recovered some of the losses of the previous month in September, returning 3.0% over the period resulting in a 1% return for the last 3 months. In capital terms the FTSE 100 has lost 1.4% over the past 12 months, however with income included has delivered a positive total return of 3.2%.
The Asia Pacific region followed a similar pattern of the other stock markets as value stocks outperformed growth. The MSCI Japan index being the best performing developed world market during the month in local currency terms, with a return of 5.9% in September, paring back its losses over the past year to -9.3%. The MSCI AC Asia Pacific ex Japan index grew 1.4% over the month, resulting in a positive 0.2% return for the past year.
Gold gave back some of the gains from the previous month, finishing September 3.5% lower at $1,469 (per oz), still up +30% over the past year. Following the attacks on the Saudi Arabia processing facility Brent Crude rose to above $70 a barrel, before declining below $60 a barrel at the end of the month, a rise of 1.7% over the period but 22% below the price from a year ago.
Chief Investment Officer