Market Overview

Summary of world markets in September

Fed continues to tighten: September was dominated by the US dollar, which was boosted by expectations of further increases in US interest rates that also drove the two-year Treasury bond yield to its highest level since 2007.  During the month, the federal funds rate was raised by 75 basis points to a range of 3% to 3.25% – its highest level in more than 14 years. Federal Reserve Chair Jerome Powell commented: “We have got to get inflation behind us. I wish there were a painless way to do that, (but) there isn’t”. Consumer price inflation eased from 8.5% year on year in July to 8.3% in August, but remained high, underpinned by rising prices for housing, food and medical care. Over September, the Dow Jones Industrial Average Index fell by 8.8%.

Mid-caps take a hit: UK markets fell heavily in September, with mid caps faring particularly badly as sentiment towards domestically focused stocks turned sour. Over September, the FTSE 100 Index fell by 5.4% while the FTSE 250 Index tumbled by 9.9%. Since the beginning of 2022, the FTSE 100 Index has dropped by 6.6%, while the FTSE 250 Index has fallen by 26.9%.

Interest rates rise again: The Bank of England (BoE) raised the UK’s key interest rate from 1.75% to 2.25% during the month, taking them to their highest level since 2008. The BoE’s Monetary Policy Committee (MPC) confirmed that it would implement further increases as necessary. The rate of consumer price inflation eased from 10.1% year on year in July to 9.9%, dampened slightly by lower fuel prices. However, food price inflation surged to its highest level since August 2008. Looking ahead, inflationary pressures are expected to intensify, underpinned by “domestically generated inflation”. The BoE now predicts inflation will peak at just under 11% rather than 13% following the announcement of the Government’s Energy Price Guarantee.

Pound under pressure: Sentiment towards UK plc was undermined by a controversial ‘mini-budget’ announced by the new Government’s Chancellor of the Exchequer, Kwasi Kwarteng. The mini-budget – described by the Institute for Fiscal Studies (IFS) as “the biggest tax event since 1972” included a raft of controversial tax cuts funded by borrowing, which triggered a sharp decline in the value of the pound – which fell as low as US$1.04 – and plummeting gilt prices. Having begun September at 2.81%, the yield on the benchmark UK gilt spiked at 4.54% before ending the month at 4.09%.

Emergency bond purchases: Speculation that the BoE might be forced to take emergency action in response to the mini-Budget was quashed by the central bank, which nevertheless confirmed that it “will not hesitate” to change interest rates “by as much as needed” to return inflation to its 2% target. The next scheduled meeting of the MPC will take place on 3 November. Nevertheless, in a move designed “to restore orderly market conditions”, the BoE announced an emergency programme of bond purchases, commenting: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability”. The strategy provided a boost for the pound, which rallied to end the month at US$1.12.

Eurozone facing recession: In Europe, concerns over the deepening energy crisis sent the euro to a 20-year low against the US dollar during September. Credit ratings agency Fitch warned that the intensifying crisis was likely to result in recession in the eurozone – an opinion that was echoed by European Central Bank (ECB) President Christine Lagarde, who commented that “skyrocketing” gas prices were likely to prove “recessionary”.

ECB takes action: The ECB raised its key interest rate by 75 basis points to take it from zero to 0.75% and confirmed that it expects to implement further increases “to dampen demand and guard against the risk of a persistent upward shift in inflation expectations”. The eurozone’s rate of inflation rose from 8.9% in July to 9.1% in August but is estimated to have breached double figures in September. The ECB expects the eurozone’s rate of inflation to average 8.1% in 2022 and 5.5% in 2023 before easing to 2.3% in 2024. The Dax Index fell by 5.6% during September.

Japanese policymakers buck the global trend: unlike most major central banks, the Bank of Japan does not appear to envisage an end to its ultra-loose monetary policy for some time to come; however, this stance has undermined the yen. Although the yen picked up against the US dollar following intervention from Japan’s Ministry of Finance to shore up the currency, it has weakened substantially over the first nine months of the year from around Y115 against the dollar to Y144.76. Over September, the Nikkei 225 Index fell by 7.7%.