Global Market Background – October 2018

Global equity markets recorded a modest rebound in September, though emerging markets continued to underperform amid US dollar strength and ongoing risks to global trade. The MSCI World Index returned 0.6% over the month, with European stocks lagging UK and US equities. In this context, the Reuters monthly asset allocation poll of more than 50 global wealth managers showed investors increasing their holdings of US equities to the highest level since May 2015, while trimming exposure to emerging markets.

The UK’s FTSE All Share benchmark delivered returns of 0.5% in September. In a month typically dominated by the annual conferences of the main political parties, Brexit uncertainty remained a key drag on investor sentiment. Warnings of a ‘no-deal’ Brexit grew louder after Prime Minister Theresa May’s ‘Chequers plan’ for withdrawal was rejected by EU leaders and a significant faction within her Conservative Party. As the government released information on how a no-deal scenario would affect day-to-day activities across the country, the International Monetary Fund, Bank of England (BoE), and Confederation of British Industry all stressed the dire consequences this would have for businesses, jobs, and trade.

The month’s economic news was more positive. Output growth for the three months to end-July came in at 0.6%, the fastest pace in a year, as a hot summer supported accelerating retail and construction activity. Annual wage growth also increased to 2.9%, and the unemployment rate remains at the lowest level in four decades. Inflation rose unexpectedly to 2.7% in August; but the BoE’s Monetary Policy Committee unanimously voted to hold interest rates at 0.75% at its September meeting, citing “greater uncertainty” at home and abroad.

European markets struggled in September, with the regional STOXX benchmark ending the month with returns of -0.3%. Italian equities – particularly the banking sector – suffered heavy losses after the new government coalition presented a budget plan with a significantly higher deficit target than that set by the previous administration. Trade concerns also weighed on sentiment, while soft data for industrial production and consumer confidence pointed to weakness in the Eurozone economy in the third quarter of the year (Q3). The European Central Bank lowered its growth forecast for the region in 2018 and 2019 but reiterated its plan to phase out its monetary stimulus programme by the end of the year.

The US economy continued to shine, with annualised second-quarter growth confirmed at 4.2% and positive labour market and retail sales data releases in September. With consumer confidence at an 18-year high and company profits soaring, the S&P 500 posted a monthly return of 0.4% and locked in impressive returns of 7.2% for Q3. Against this backdrop the Federal Reserve raised interest rates for the third time this year, taking the policy rate range to 2-2.25%. The Federal Open Market Committee reaffirmed its plan to continue with gradual rate hikes in 2019, though Chairman Jerome Powell noted growing concern from businesses about the risks of new US trade tariffs.

The MSCI Emerging Markets index ended September with returns of -1.4%, as trade fears and US monetary tightening put more pressure on economies with high levels of dollar-denominated debt. Chinese equities were hit after President Trump announced another US$200bn of tariffs on imports, but authorities are moving to stimulate domestic growth and the Shanghai Composite benchmark returned 3.5% over the month. Brazil’s Bovespa also posted returns of 3.5% after ex-president Lula formally dropped his presidential bid, providing a boost to far-right candidate Jair Bolsonaro, who has pledged deep economic reforms.

All figures total returns in local currency, unless otherwise stated.