A rate hike from the Bank of Japan at the end of July and a couple of weak US data prints, caused the yen to jump and Japanese stocks to crater. Along with rotation out of some of the technology stock froth, this all combined to deliver some sharp summer volatility as the market threw a tantrum. The VIX measure of volatility spiked to levels not seen since 2020 but then swiftly fell back to normal levels. Stock indices and credit spreads followed a similar path but in the context of coming off all-time highs and multi-year tight spreads. We have then seen a steady recovery and, as I write, US stocks are again exploring all-time highs with the rally broadening out a little, away from the Magnificent Seven.

As the Middle East appears to be sliding towards all-out war, markets still appear to construe the situation as localised. The oil price finally took notice, but only regained levels seen in late August. Meanwhile, the Chinese economy still appears to be stuttering, prompting the authorities to unveil the most wide-ranging set of monetary stimulus policies since 2015. A cut in the reserve ratio for banks, mortgage rates, deposit levels for second home buyers (now 15%) are all intended to give a defibrillatory jolt to their moribund economy. They also introduced a scheme allowing funds to borrow from the central bank to support the stock market, they have tried this before, but it did prompt a dramatic rally of 35% in their stock market before falling back a little. The Chinese monetary stimulus is worth $560bn according to Bank of America, hopefully enough (but possibly not) to stabilise their economy, which otherwise risks heightened internal tensions and potential (although now structurally reduced) consequences for global supply chains. Post their Golden Week, markets are already expressing disappointment that there is no fiscal stimulus follow up.

US politics pushed President Biden aside and the race now between Harris and Trump has a pretty bleak geopolitical backdrop. Kamala Harris did appear to be making some headway against Donald Trump causing his utterances to become even more random, but the race appears to be wide open. More considered was a 50bp cut (apparently a hawkish one for some members of the FOMC) by the Federal Reserve, kicking off their easing cycle, which they managed to achieve without unsettling markets, no mean feat in the midst of accusations of being behind the curve.

‘Fedspeak’ following their cut has gone into overdrive. Powell, Bostic and others pushed back against the next cut being another 50bp and then a strong Non-Farm Payrolls report put the cat amongst the pigeons moving the concept of a ‘soft landing’ to ‘no landing’, causing some to change their minds to speculate that the Fed were actually ahead of the curve(!). Inflation fears have not quite gone away and the US Treasury curve bear-flattened as the ten-year bond regained 4%, from 3.60% just a couple of weeks ago; the market reassessing the pace and depth of this cutting cycle. We have only a few weeks until the US election, the result of which might determine whether Jay Powell is still Chairman at the FOMC’s next meeting (three days later).

In contrast, Europe is still experiencing difficulties in its two largest economies. Recent German and French Purchasing Manager Indices were weak and contractionary, especially in manufacturing, and Eurozone PMI’s as a whole are also weak as the boom in the periphery moderates. The ECB delivered another 25bp cut in September, but the Eurostoxx has traded sideways for the last six months.

The ECB’s focus is shifting from persistent inflation worries to disinflation and stagnation, a cut at their next meeting looks likely. A shift in some analyst’s forecasts has cuts at every meeting until the middle of next year, reaching a terminal rate of 2%. The Parisian Investment Banking party looks to be over as new PM Michel Barnier gears up to tax those that were unfortunate enough to make the move disproportionately.

UK Plc remains regarded as a better option, at this time, for outside investment and the new government eventually realised that trying to talk us into a downturn is not such a good idea. Their plans must entail more borrowing but with debt to GDP hovering at around 100% there is not much room for large-scale borrowing.
The Bank of England kicked off their easing cycle too, delivering their own hawkish 25bp cut and money markets now discount two more cuts this year and 4% by June next year. The MPC is at pains to stress that rates will be lowered slowly so will remain restrictive and our Governor ‘won’t cut too much or too quickly’. The Bank of England therefore remains in no hurry to cut rates further and at their last meeting stayed on hold with a decisive 8-1 vote.

Bear in mind that whatever measures are put in place in the imminent Labour Budget they will not be enough to plug many holes in our finances, whatever their size, and certainly not enough to fund prospective spending plans, especially the sillier environmental ones. Therefore, the strain, once again, will fall on the Gilt market (i.e. more borrowing), making longer-dated yields especially vulnerable, again.

The primary market for corporate bond issuance remained active despite the volatility and the summer months. Corporate borrowers have raised more than $1.2 trillion from sale of investment grade bonds so far this year, making it the second busiest ever. Sterling markets did go on holiday and there was a near three-week drought of issuance, which only served to underpin credit spreads and keep secondary markets well bid. September saw a renewed burst of activity and some high-quality issuers accessing the market and meeting strong demand, helping to keep sterling credit spreads well supported and recently they have comfortably outperformed euro and US dollar spreads.

The full Quarterly Review is available here. 

October 2024

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The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.

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