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Stewart RobertsonSenior Economist (UK and Europe)
Global equities experienced a mixed month in September with the US market reaching new highs, despite escalating trade tensions between Washington and Beijing, and the Federal Reserve’s decision to raise interest rates for the third time this year.
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The MSCI World index returned 0.77 per cent in local currencies, which equated to a 0.27 per cent return in sterling terms.
Japan saw very strong returns, supported by a weaker yen, which should boost exports, and hopes that trade tensions between the US and Japan could be resolved.
However, new fears over the Italian economy weighed on European equities, which barely moved over the month, while emerging markets lost further ground.
Emerging markets have been under pressure for much of the year and the downward trend continued in the first half of the month. The asset class subsequently rebounded only to surrender some of these gains in the latter part of September.
There was a wide divergence in terms of individual markets. Strong oil and commodity prices supported the likes of Russia and Latin America. But the surge in energy costs weighed on Indian equities and the rupee, both falling sharply, while trade fears undermined the Chinese market.
The ebb and flow of the Brexit negotiations continues to exert a major influence over UK equities. Fears that London and Brussels would fail to reach a settlement on the UK’s departure from the EU caused the pound and UK equities to come under pressure in the first half of September.
However, encouraging economic news and increased hopes that an amicable solution could be reached on Brexit boosted sentiment in the second half of September, and the FTSE All-Share ended the month 0.7 per cent higher.
Government bonds experienced a mixed month. The yield on 10-year US treasuries rose by twenty basis points, the largest monthly increase since April. However, a rout in Italian bonds, following the government’s poorly-received budget, drove investors towards the safety of German bunds.
The extra level of interest investors demand to hold Italian ten-year government debt relative to comparable German bonds widened sharply towards the end of the month.
Investors are worried that the Italian administration’s plans to sharply increase spending and the budget deficit will place it on a collision course with the EU and could precipitate another euro zone crisis.
However, there was little sign of contagion in September. A sharp sell off in Italian bonds had little impact on ten-year yields in Spain and Portugal, key barometers of investor sentiment towards peripheral euro zone countries.
