The equity market recovery from the July selloff continued in September, although volatility remained high. The equity market optimism is in contrast to fixed income, were yields remain suppressed, confusing the outlook. Lower yields are representative of continued concern around the health of the US economy. While more recent data for the US has been more encouraging, the rapid increase in the unemployment rate remains a concern. Investors are attempting to judge if the economy is at the start of a significant slowdown or recession, or that the change in the labour market is part of a natural easing after a period of tightness. New data out in October will re-enforce this concern, or potentially contradict it.
With the US election on 5th November, the coming month will be dominated by speculation over who the victor will be. Polling remains tight, with both candidates well within the margin of error. Given the US electoral system, the Presidential election will be won on the results of a handful of swing states, namely Arizona, Georgia, Nevada, North Carolina and Pennsylvania. Often overlooked is the Senate and House contests, which may prove as important as the Presidential Election, particularly when it comes to passing key legislation. As it stands, it is either likely to be a Republican clean sweep or split control between a Democrat President and House, with a Republican Senate. Market moves are possible following the result, as full Republican control could lead to further tax cuts and a rollback of regulation, which would be equity market positive. Conversely, the Democrats have focused on revenue raising measures, particularly on large businesses and the wealthy.
A bright spot for UK investors has been the steady appreciation of Sterling against major peers. Over the year-to-date, the Pound has risen around 5% against the Euro and USD, taking the currency to the highest relative level for over 2 years. The rise has been driven by an outperformance of the UK economy, coming from a period of weakness into a cyclical acceleration. This is in contrast to the US, which has been strong, and is now weakening. Europe continues to suffer from manufacturing recession and high energy prices.
As ever, central bank actions remain in focus, with decisions from the Federal Reserve and Bank of England were announced in September. A modest surprise came from the Fed, cutting by an outsized 0.5%, while the BOE held rates steady. Interest rate divergence may be an increasingly important theme for investors across regions, impacting currencies, GDP growth and investor sentiment.
