Markets ended a quarter plagued by interest rate worries on unstable ground, as the possibility of a government shutdown in the US added to investor concerns.
By the same token, the early indications are that US markets could open the new quarter in more positive territory, as US legislators were able to enforce a temporary measure to avoid shutdown over the weekend. While the measure effectively kicks the can down the road in terms of the final decision, there could well be some shorter-term relief following the announcement.
Even so, sentiment remains brittle as evidenced on the final day in the quarter, as early gains evaporated. The latest release of the Personal Consumption Expenditures Index, which is the Federal Reserve’s preferred measure of inflation, rose by 0.1% in August and by 3.9% on an annual basis at the core level, which strips out energy and food prices. The data was much in line with expectations and also underscored that decelerating inflation was on track, although the fact that the headline number remains almost double the Fed’s 2% target suggests that the mantra of “higher for longer” rates is becoming entrenched.
Quarter end volatility was also exacerbated by the investor window dressing and repositioning which inevitably comes into the play at key calendar moments, with the possibility that some profit taking to lock in gains was also partly responsible for the weakness later in the trading session.
The main indices all ended lower for both the month and the quarter, with the previously high-flying Nasdaq losing almost 6% in September and over 4% in three months. Nonetheless, markets remain comfortably above the waterline in the year to date despite these dips, with the Dow Jones having added 1.1%, the S&P500 11.7% and the Nasdaq 26%.
An early test of investor resolve in the last quarter of the year comes at the end of the week with the release of the latest non-farm payroll figures. The current consensus is that 158,000 jobs will have been added in September, as compared to 187,000 the previous month. Unemployment is expected to improve slightly to 3.7% from a previous 3.8%, all of which could suggest that the economy is still nearing the soft landing which the Fed has desperately been trying to engineer.
Any figures which imply weakness, however, could upset the investor applecart if there is any possibility that the consumer is beginning to buckle under the weight of monetary tightening over recent months.
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Asian market volumes were light, with national holidays in China, Hong Kong and India. The Nikkei index surrendered earlier gains which had been prompted by improved business sentiment and continuing weakness in the yen, which both boosts the value of Japanese overseas earnings while also providing a boost to its important export market. However, a further fall in factory activity took the sheen from sentiment, with the reading remaining the wrong side of the level of 50 which separates economic growth and contraction.
UK markets kicked off the quarter in undecided fashion in the absence of any particular catalysts. One bright spot was provided by a £4 billion contract win for BAE Systems (LSE:BA.), propelling the shares higher and adding to previous strength, with the stock now ahead by 20% so far this year.
More broadly, the FTSE100 has recently been shielded from some of the weakness seen in the high growth sectors in the US, with its own exposure to oil stocks which have seen some benefit from rising prices and some tentative recovery in an embattled house building sector. The average dividend yield for the index, which currently stands at 3.8%, has become less of an attraction recently given the availability of higher yields across other asset classes.
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The UK nonetheless remains something of a pariah in global investment terms, despite valuations which are becoming increasingly attractive on both a historic and comparative basis to other international peers. The FTSE100 has managed to eke out a gain of 2% in the year to date, although the ongoing pressure on the UK economy has been more sharply felt in the FTSE250, which has lost 2.5% so far this year.
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