As the third quarter drew to a close, many international equity indices were reaching new high levels despite a serious escalation of the conflict in the Middle East and an imminent US Presidential Election. On the other hand, the US Federal Reserve (the Fed) has begun to cut interest rates with a surprise half per cent move in the wake of a quarter-point move from the Bank of England and the Chinese authorities appear to have recognised the difficulties for their domestic economy and have introduced a massive stimulus package.

Domestically, our new Government has had a poor few months. Having touted the importance of growth and a stable government why on earth they thought it was a good idea to ‘talk down’ the economy so aggressively is hard to fathom. An encouraging business investment outlook was quickly thrown into doubt and a nascent recovery snuffed out. A seemingly interminable wait for the budget and scares over ‘black holes’ in the finances has given space for mounting fears over what might be unveiled. Hopefully, the event might prove to be an anti-climax.

Equity markets in general are at or close to all-time highs, though the leadership has changed. All the markets convulsed in the early days of August following weaker than expected US employment figures and volatility has remained elevated since. Japan saw the most violent swing with a 20% fall over just a few days as the Bank of Japan also raised its base rate to 0.25%(!) but most of this has been recovered since.

Inflation has continued to fall in the Western economies, it is now below 2% in the eurozone, and at just 2.2% in the UK (though we seem to be convincing ourselves that it is higher really) [just released at 1.7%}. The Fed’s half-point move in rates could be construed as more political than they like to be in front of an election. For their sake, let’s hope that Kamala Harris wins, Donald Trump is not a fan of the Fed and, as somebody who considers himself to be uncommonly good at predicting interest rates, he is likely to want to interfere in the Fed’s decision-making (and independence).

It is hard to know what best to say about the situation in the Middle East, which appears to be escalating yet again. Beside the dreadful situation that so many civilians find themselves in, this still feels like a serious risk to wider stability. I am concerned as to what could happen in the ‘lame duck’ period between the election of a new US President and he/she actually taking office in January.

But, this is to focus on the negatives. Interest rates have peaked, we expect further cuts from the Bank of England and the other major central banks over the next few months. Inflation is back under control and there is a good chance that the Fed will have achieved a ‘soft landing’ for the US economy, while the UK looks ever more like a beacon of stability in a troubled Europe.

The full Quarterly Review is available here.

October 2024

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