Market Overview

Summary of world markets in September

September was a fruitful month for investors, with equities, bonds and commodities achieving positive returns.  The performance of US equities was impressive, thanks to renewed enthusiasm for technology stocks, reduced tariff noise and expectations of easier monetary policy.  Strong returns from Asian and emerging market indices also contributed to the positive outcome, while UK and European equity returns were more sedate.  Precious metals roared, building further upon this year’s already sparkling returns.  UK and US bond yields fell, with the weakening US economy outweighing concerns about ever-growing debt burdens.

For the third quarter overall, most markets delivered strong gains, with large-cap US equities close to posting a double-digit return, and Asian, Japanese and emerging market indices also performing particularly well.  The blue-chip UK index registered its best quarter for three years, thereby keeping up with global equities, while small and mid-cap indices underperformed.  Similarly, European indices delivered modest returns, with German equities stalling after a strong first half of the year. the broad gilt market lost ground, particularly longer maturities.  Corporate bonds registered modest positive returns and were outpaced by high yield bonds.  While the starting yields in credit continue to attract investors, credit spreads have fallen below their medium-term averages over recent months, thanks to strong demand for the asset class, a situation that can persist while credit fundamentals remain supportive.

There was an enforced cabinet reshuffle in September after Deputy Prime Minister, Angela Rayner, was forced to resign after admitting that she had underpaid taxes on a property purchase.  Later, Peter Mandelson was sacked as US ambassador due to the extent of his links to Jeffrey Epstein.  For Labour Party members, these events added to the sense of dissatisfaction about Keir Starmer’s record as Prime Minister.  President Trump visited the UK on a state visit, using the opportunity to announce a series of business deals, including investment from Nvidia to support the UK’s AI industry.  Attention turned to the upcoming Autumn Budget, where Chancellor Reeves is attempting to balance the challenges of raising taxes to meet fiscal targets, whilst also encouraging economic growth.  A larger-than-expected £18bn budget deficit in August did not help her case.  At the Labour Party Conference, the political threat from Reform UK loomed large.

During September, investors became increasingly preoccupied by possible measures in the forthcoming Autumn Budget. In particular, concerns over the state of the UK’s public finances and worries over the possibility of tax increases pushed up the yield  on the 30-year gilt to its highest level since 1998. Having grown by 0.4% in June, the UK economy  stagnated in July as growth in the services and construction sectors was more than offset by a sharp contraction in the manufacturing sector. Meanwhile, the Office for National Statistics revealed that government borrowing  had hit £18 billion – its highest August level since 2020.

Record gold  prices drove up share prices in the mining sector  during September, propelling the FTSE 100 Index  to a new high. Over the month, the FTSE 100 Index  rose by 1.8%, while the FTSE 250 Index  climbed by 1.9%. In the quarterly review  of FTSE 100 Index constituents, luxury design house Burberry and Metlen Energy & Metals were promoted to the blue-chip index, replacing housebuilders Taylor Wimpey and student accommodation provider Unite Group.

The Bank of England (BoE) maintained its key base rate  at 4% in September. In an interview with West Midlands Life, BoE Governor Andrew Bailey  commented: “I think there is still some further journey down in interest rates to go. But exactly when that will be and how much it will be will depend on the path of inflation going down.” The annualised rate of inflation  remained at 3.8% in August. Although food price inflation rose by 5.1% – its fastest pace since January 2024 – this was mitigated by slower growth in prices for clothing, footwear and transport.

The Organisation for Economic Cooperation & Development (OECD)  predicted that a tighter fiscal stance, higher trade costs and uncertainty are set to hamper external and domestic demand, causing UK growth to slow from 1.4% this year to 1% next year. The OECD also raised its forecast for average UK inflation during 2025 from 3.1% to 3.5%, representing the highest rate of any of the G7 countries. Elsewhere, having improved slightly in August, UK consumer confidence deteriorated once again in September, according to a survey by GfK  that highlighted the impact of high day-to-day costs on UK households.

Second-quarter US corporate earnings generally proved stronger than expected, providing a boost for investors. The Dow Jones Industrial Average Index  rose by 1.9% during September and registered six new closing highs  over the month. As September ended, however, the prospect of a US government shutdown  loomed, sending the price of the price of gold  to a fresh record.

Interest rates took centre stage in September  as the US Federal Reserve (Fed) finally delivered a much-anticipated cut  of 25 basis points, taking the key federal funds rate to a range of 4% to 4.25% – its lowest level  since December 2022.  Policymakers expect  rates to ease to an average of 3.6% at the end of this year, 3.4% at the end of 2027, and 3.1% at the end of 2027. Fed Chair Jerome Powell  commented: “It’s not a bad economy … we’ve seen much more challenging times”, but also warned: “There are no risk-free paths now.”

European markets registered positive results but lagged global equity returns, with the technology theme much less dominant. Japanese stocks also performed well, with the technology-driven rally on Wall Street boosting sentiment towards the sector.  In addition, President Trump cut tariffs on Japanese cars to 15% (from 27.5%), while the market also responded positively to the Prime Minister’s resignation.  Investors continue to be attracted by the country’s structural reform agenda and the scope for earnings recovery.

There were impressive positive returns from the larger Asian markets, notably China, Taiwan and Korea, which were boosted by the latest technology/AI wave of enthusiasm.  A sense of progress on US-Chinese trade negotiations also lifted sentiment, also helping to attract capital to this previously unloved market.

Globally, growth outpaced value, with strength from technology stocks boosting the growth side. The UK was an exception, where value continued to outperform thanks to sectors such as basic materials, banks and other cyclical areas.

Given the spotlight upon the UK’s fiscal situation, sterling weakened.  This boosted the returns from some unhedged overseas portfolio holdings.