Market update – October 2016

Stock Exchange web sitesUS monetary policy remained firmly in the spotlight during September. Stock markets were volatile in the run-up to the Federal Open Market Committee’s (FOMC’s) meeting amid speculation that policymakers might decide to increase US interest rates. In the end, although most FOMC members appear to anticipate an increase in interest rates before the end of the year, they left the Fed’s key rate unchanged at 0.25%-0.5%.

The Fed conceded that “the case for an increase in the federal fund rates (had) strengthened” but decided to “wait for further evidence of continued progress towards its objectives”. The Dow Jones Industrial Average Index fell by 0.5% during September as a whole.

In Europe, German bank Deutsche Bank absorbed much of the limelight during September. The bank’s share price fell by over 20% during the month following the news that the US Department of Justice planned to impose a US$14 billion fine on the bank. Although Germany’s benchmark Dax Index fell by only 0.8% over September as a whole, this relatively muted drop did not reflect some pronounced daily swings exacerbated by concerns relating to the banking sector.

Elsewhere, France’s CAC40 Index edged 0.2% higher over the month. The European Central Bank (ECB) kept its key interest rate at zero for another month during September and maintained its programme of asset purchases. According to ECB President Mario Draghi, policymakers continue to monitor developments in inflation very closely, and remain ready to take action. The ECB’s target rate for inflation is 2%, whereas the eurozone’s annualised rate of inflation is expected to have risen from 0.2% in August to 0.4% in September. In comparison, the ECB predicts an annualised inflation rate of 0.2% this year and 1.2% next year.

Oil also managed to garner a fair amount of attention during September, following the news that oil cartel Opec (Organisation of the Petroleum Exporting Countries) had reached a preliminary agreement to reduce output. The price of oil surged, providing a boost for share prices in the oil and mining sectors. The price of a barrel of Brent Crude oil ended the month at almost US$50, having fallen below US$28 per barrel as recently as January 2016.

In the UK, the FTSE100 Index rose by 1.7% over September as a whole, while the FTSE 250 Index edged 0.8% higher. Although sentiment towards the banking sector was clouded by Deutsche Bank’s predicament, the overall performance of the blue chip index was boosted by an oil-driven rally amongst energy and mining stocks. The BoE left its key interest rate unchanged at 0.25% at its September interest-rate-setting meeting, citing “a number of indicators of near-term economic activity (that had) been somewhat stronger than expected”. The MPC expects less of a slowdown in UK economic growth during the second half of 2016 than before. Nevertheless, the BoE stated that a further cut in rates remains a strong possibility, particularly if its economic projections in November prove consistent with those released in August.

The FTSE100 hit its highest ever level during trading of 7,129.83 on 11th October, but fell back to miss its highest ever closing high of 7,103.98 (on 27th April 2015). Meanwhile the pound fell to a 31-year low of $1.22 against the dollar, down from around $1.46 prior to the Brexit vote. With the fall in the value of sterling, some economists now predict that inflation will hit 3% by the end of next year as imports of products such as food and fuel become more expensive. The governor of the Bank of England Mark Carney agrees that inflation will rise, but made clear that sterling’s fall “helps the economy adjust”.

According to a survey undertaken by MNI, business sentiment in China rose during September to reach its highest level since August 2015, underpinned by strengthening confidence in the manufacturing sector and a rise in new orders. The Shanghai Composite Index fell by 2.6% during September. Elsewhere, the International Monetary Fund (IMF) added China’s yuan to its basket of reserve currencies. This “SDR” – or “special drawing rights” – basket already contains the pound, the US dollar, the euro, and the yen. This is the first time that a new currency has been added to the basket since the euro was adopted.

Policymakers at Russia’s central bank voted to reduce its key interest rate from 10.5% to 10% at their September meeting. They cited a “noticeable decline” in inflation – Russia’s annualised rate of consumer price inflation fell from 7.2% in July to 6.6% in September – but emphasised that this slowdown was primarily caused by currency factors. In order to allow inflation to achieve a sustainable decline, therefore, policymakers expect to leave its key rate unchanged at 10% until the end of the year. Looking ahead, the Bank of Russia expects the annualised rate of inflation to reach its 4% target in late 2017. The Micex Index rose by 0.3% during September.

During September, Japan’s Foreign Ministry published a report warning that the UK’s exit from Europe could motivate Japanese companies to shift their UK-based European head offices out of the UK and into Continental Europe, if EU laws cease to apply in the UK after Brexit. Meanwhile, the Bank of Japan (BoJ) adjusted its stimulus package during the month: although its key interest rate remained unchanged at -0.1%, it announced plans to keep yields on ten-year Japanese Government Bonds (JGBs) at around zero percent. Over the month, the Nikkei 225 Index fell by 2.6%.

Closer to home, NICEI (Northern Ireland Composite Economic Index) figures show that the Northern Ireland economy grew by 1% in the second quarter of 2016, its highest quarterly growth since 2013. Growth was driven by the private sector where output increased by 1.6% in real terms over the quarter, while the construction sector continues its recovery.

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