This continues to be a quiet, steady period for stock markets. Although September saw the UK FTSE 100 dip to its lowest level since May, and inflation is ticking along higher than the Bank of England’s 2% target, the outlook remains cautiously optimistic.
There’s no doubt the momentum has slowed of late when compared to the sharper market rises at the start of the year. But markets continue to rise and offer investors a level of insulation from recent political events, rather than displaying any significant signs of panic.
North Korea’s war of words
This is despite the fact much of the month’s news headlines were devoted to the North Korea situation and rising threat of war with the US. The North Korean leader, Kim Jong-un, has been unperturbed by threats (from US president Donald Trump) and economic sanctions (from the United Nations). North Korea has continued to test missiles in the Pacific Ocean, as it seeks to develop its nuclear weapon programme.
Clearly, if the situation escalates beyond a war of words, and into direct actions, there would be economic implications. But for the moment, markets have shrugged off such concerns, suggesting they believe the fallout between Trump and Kim Jong-un won’t develop beyond talk and bluster.
No change in Germany
Markets were even more unconcerned about the German general election held in late September. There was no surprise that Angela Merkel remains in power, but the margin of victory was the slimmest of her 12-year tenure as chancellor.
The month ended with Merkel’s CDU/CSU party looking to form a coalition with other German parties, with the majority of Germans supporting a so-called ‘Jamaika Koalition’ of joining forces with the Free Democrats and Greens. Whatever the outcome, for markets, it remains business as usual.
Rate rise on the cards?
But if North Korea and Germany aren’t weighing on markets, what other areas is their attention devoted towards? The answer includes central banks around the globe, who are increasingly taking steps to scale back policies they introduced in response to the global financial crisis, nearly a decade ago.
With economic data increasingly pointing to revivals of most nations, which have helped to buoy returns so far in 2017, central banks are attempting to remove the life support mechanisms that helped markets through choppy times.
In the US, for example, we’ve already seen three interest rate rises in the past 12 months, with a fair expectation of another to follow by the end of 2017. The US Federal Reserve’s quantitative easing programme (effectively the pumping of new money into the economy, to encourage lending and growth) has been scaled back. US economic growth hit a two-year high in the second quarter of 2017, suggesting these measures aren’t derailing progress.
Closer to home, the Bank of England’s governor, Mark Carney, has begun to speak in bolder terms about interest rates in the near future. He told the BBC at the end of September, “In the relatively near term we can expect that interest rates will increase”. Providing he doesn’t step back from these comments, a first rate rise in a decade could occur as early as November. Other members of the MPC committee – which votes on rates – have openly discussed unravelling the Bank’s own quantitative easing strategy.
Controlling inflation – which in August crept up to 2.9%, its joint highest level in five years – could prove to be a factor in whether a rate rise does happen this year. But the fact the Bank of England appears more willing to increase rates than at any time since 2003 has helped to boost the value of UK Sterling (over the month).
Markets will be watching with interest to see if central banks in the UK, USA and Europe continue to relax previous measures, and how their respective economies fare. But even if interest rates increase in the near future – over the long-term – this low interest rate environment is likely to continue for years to come.