September saw markets enter a phase of discombobulation as investors sought reasons as to why bourses would move higher against what were headwinds of geopolitical risk alongside European election doubts. It was pleasing to see Chancellor Angela Merkel making her way back into power, however the Christian Democrat party’s (CDU) support fell to its lowest level since 1939 and she will now have to forge a coalition whilst facing resistance in the house from the far right Alternative for Deutschland party (AFD), and also a possible slowing of the Franco-German drive to promote deeper Eurozone integration.
As a result the UK world index fell 1.95% in sterling terms. The UK top 100 companies declined -0.67% which was impacted by sterling strengthening over 3% vs the US dollar as many short currency positions were closed out. There is the possibility of a rate increase by the end of 2017. The more domestically focussed UK top 250 shares proved more resilient with a 0.65% return. In the US, the S&P 500 and Dow posted very strong US dollar returns of 2.06% and 2.16% respectively,which were translated into -1.98% and -1.88% in sterling terms. The tech driven Nasdaq was in negative territory returning -0.12% in US dollars, vs -4.07% in sterling terms.
Across Europe markets were strong in euro terms, the MSCI Europe ex UK returned 3.9%, while Germany, France, Italy and Spain returned 6.41%, 4.94%, 4.52% and 1.48% respectively, however due to sterling strength against the euro, sterling returns were -0.77%, 1.62%, 0.22%, -0.18% and -4.07%. Japan posted a positive month returning 4.28% in yen which was -2.07% in sterling terms. In the month Prime Minister Shinzo Abe announced a snap election a year earlier than planned on the back of fresh support following his strong stance against North Korea. China was slightly negative -0.35%, while Asia ex Japan and Emerging markets were also weaker with -0.11% and -1.03% returns.
Bond markets were negative over the month, particularly in the longer maturities. The US Treasury 10 year yield rose to 2.33% from 2.12% at the start of the month following announcements by the US Federal reserve to reduce its balance sheet whilst also seeking to normalise interest rates. Similarly in the UK, the 10 year gilt rose to 1.4% from an earlier figure of 1.08%. In performance terms, 15 year plus UK gilts declined 4.06% while similar dated corporate bonds declined 3.31%. At the shorter end of the maturity scale losses were far less with gilts declining 0.94% and corporates 0.56%. In Europe, it was a similar story as 7-10 year sovereign’s declined 0.43% and 10 year corporates declined 0.69%. It is no surprise that fixed income markets took a step back in anticipation of imminent interest rate rises, balance sheet reductions and also reductions in the levels of quantitive easing, however there are segments of the fixed income market that have been defensive and that we continue to support.
In the alternative space, gold dropped 1.44% in US dollar terms, oil rose 9.85% and the UK property index managed another positive month of 0.37%.
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