This was another quarter where actual market developments failed to match the amount of political news. This commentary should be read with that in mind. Small changes are not a solid foundation for large conclusions, especially when those changes reversed direction in the last week reviewed.
As it is we have a healthy but unexciting quarter for developed market equities and two opposite stories in interest rates. Long term US interest rates fell while Euro rates rose, although this divergence only materialised in the last week and is small.
US movements have been led by the bond market but are now being matched by fading expectations of further Federal Reserve policy tightening this year.
The turnaround in euro rates over the last week in the period, in contrast, was triggered by comments from Mario Draghi. He was interpreted as suggesting an increased likelihood of a reduction in the rate the ECB buys bonds coming as soon as next year.
In both equities and rates the UK was somewhere in between. European equities did better than their US counterparts with the UK in the middle, although closer to the US.
The story in rates is superficially similar – euros up, dollars down, sterling somewhere in between. However, uncertainty in the UK is high as the economy faces inflationary pressures not apparent elsewhere but also the threat of a significant shock to the economy. This makes life for policy makers very difficult.
The Bank of England’s monetary policy committee came as close as it has in a decade to voting to raise rates only for the governor to tell the market not to hold its breath while waiting for a rise.
The picture of the US moving in one direction, the EU in the other while the UK does something in between is familiar. Despite a large dose of Brexit uncertainty it was repeated this quarter so the news is that the EU and US swapped roles.
UK rates are up all along the yield curve and so, therefore, is the overall level of returns. The amount is modest but noticeable and has lifted all asset classes.
Equities didn’t do well enough to compress fundamental ratios and overall returns are up roughly in line with the rise in rates. There is some relative movement in prospects, more or less the inverse of the quarter’s relative performance, so US equities show a small relative improvement in outlook while EU equities outperformed and their prospects are depressed to a similar degree.
An exception is the outlook for emerging markets where fundamentals have more than kept up with strong performance over the quarter and prospects continue to catch up with their developed counterparts.
Property prospects have also improved a little.