The headlines this week have once again been dominated by interest rates in the UK, Europe and the US.
The Bank of England surprisingly kept our base rate on hold when financial markets had set the likelihood of a rise at 65%. The vote was 7 to 2 to keep rates low, despite their predication that inflation will peak at 5% next April. The bank said that they expect inflation “to dissipate over time, as supply disruption eases, global demand rebalances, and energy prices stop rising”, before falling back in the second half of next year.
What is also likely to have influenced thinking was that our Gross Domestic Product (the total value of all goods and services produced) proved to be a little lower than they thought at the end of the summer and with supply chains tight, future growth would also trend lower. Although keeping interest rates low is not welcomed by many savers, it is seen as critical to keeping our recovery on track.
The US Federal Reserve maintained its interest rates at near zero with Chairman Powell saying it was time to ‘taper’ but not to raise rates in response to a question about the market expecting rates to go up. However, he went on to say that he was prepared to react quickly as needed and so left himself very firmly sat in the middle of the fence.
So, what is the so-called ‘tapering’? Well in times of economic stress governments want to support their economy and one of the best ways of doing this is to make sure companies have access to the funds they need. It is common practice for a company to borrow money in the bond market, ideally at the lowest possible rates of interest. The government can ensure that there is a continuing flow of cheap capital available by buying these bonds themselves. Tapering is the reduction in the amount that the government buys so returning the market to more normal conditions. In the UK we call it quantitative easing.
In Europe, Christine Lagarde, President of the European Central Bank, said it was very unlikely that interest rates would rise in 2022 as inflation is not yet well set to remain high. Eurozone unemployment fell marginally in the most recent update, leading Blue Sky to remain keen on Europe as an investment choice.
Japan’s ruling coalition secured an election majority and, in response, markets there rose in expectation of economic stimulus. The Prime Minister has talked about a new capitalism to help redistribute wealth which was seen as negative for business with higher taxation but, as ever, the market is looking for certainty and continuity and the decisiveness of his win has meant a period of stability is now likely.
One of the most interesting stories about China is the growing intervention of the government in how companies are allowed to operate, especially in the technology and financial sector. On 1st November a new law was passed which restricts the way internet companies store and use personal data, giving China some of the world’s tightest regulation of its type. This follows the ban on crypto currency trading and mining, a crackdown on gaming and the aborted public sale of ANT Group which was set to be the world’s largest new offering. China is the world’s second largest equity and bond market, and these are huge developments that will leave many western companies assessing the risk vs return of doing business in China. This week Yahoo has decided to pull out of this “challenging market”.
Will November buck the trend?
I am not sure too many of us will remember 2021 very fondly but historically the last couple of months have tended to be positive for investors and the following are the thoughts of LGT Vestra:
Investors are weighing whether momentum from the stock market’s record-breaking rally will continue in the last two months of 2021, a traditionally strong calendar period for equities but a stretch that may carry more risks than usual this year. The S&P 500 has rallied nearly 25% year-to-date, its best January through October performance since 2013, and historical data shows that November and December tend to be among the strongest months for stocks.
October has had its fair share of bear markets, picking up its reputation from the crashes of 1929, 1987 and during the global financial crisis in 2008 – although, markets have entered November relatively unscathed.
In fact, it was September that provided the turbulence. With October firmly behind us, we may see markets ending the year strongly as they have done in the past.
November has been strong historically
S&P 500 Index average monthly returns (1950 – 2020) |