Politics Front and Centre:

The quarter kicked off with the UK general election and a Labour Party landslide, closely followed by Emmanuel Macron’s snap French election resulting in a hung parliament. This was soon followed by Joe Biden suddenly stepping down from his US Presidential re-election campaign, despite months of insisting he would not and the reigns being handed to Vice President Kamala Harris. None of these events appear to have had a particular impact on investment markets, although the Pound has strengthened against the Dollar and the Euro due to the UK now being seen as having high political stability, compared to the US and major EU countries.

Although the new UK government has not given the market any surprises so far, obviously the upcoming Budget on 30th October has potential to deliver some. Hopefully, they have learnt from the tumultuous events resulting from Liz Truss’ Mini Budget surprises, and tread carefully.

The upcoming US election on 5th November has an uncertain outcome, given how close the two candidates are in the polls. However, barring any eruption of violence over the results, the markets appear comfortable with either candidate winning.

Central Bank Decisions Driving Markets:

Markets have been closely watching every comment and move from the world’s central banks, particularly the Federal Reserve (Fed) in the US.

The Bank of England started cutting interest rates in August from a 16 year high, with a ¼ per cent reduction to 5 per cent. This gave a boost to UK equity and bond markets. Although they held rates steady at their September meeting, they did confirm that Interest rates are “now gradually on the path down”. Further interest rate cuts will be based on future inflation figures, which have been reducing nearer to the Bank’s 2 per cent target, albeit very slowly.

The US went one further in September, when the Fed cut their interest rates by an unexpectedly large ½ per cent to 5 per cent. Markets were taken by surprise on the day and did not know how to react, but eventually took the news positively, seeing it as a sign that inflation was finally under control and that it would help boost the US economy.

The European Central Bank also cut their interest rates in September, for a second time this year, by a ¼ per cent to 3 ½ per cent. This was fully expected by markets.

The Outlier was the Bank of Japan, which actually increased their rates by ¼ per cent at the end of July. However, this was from 0 percent, as they have not had the high inflation problem most of the world has seen. Quite the opposite in fact, they want to try and ensure that inflation does not fall from its current low levels.

Global Picture:

The general outlook is still one of moderating inflation and slowly rebounding growth, across the globe. This benign backdrop is normally seen as a good one for investment markets. Obviously, there are still the ongoing uncertainties over the Ukraine war and its potential to impact commodity prices (as has happened previously). There is also the potential for further impact on oil prices from the unrest in the Middle East, as we have seen recently with some increase to oil prices.

However, barring unforeseen shocks, the Global economy does still appear to be continuing on a path of gradual recovery and moderating inflation.

Sources: Office of National Statistics, Reuters, BBC.
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