September Market Update: a new era

Bunches of flowers laying at the gates of Buckingham Palace in tribute to Her Majesty the Queen. One man knelt down placing his bouquet
For financial professionals only

What's moving markets

The UK entered a new era in September. Our longest reigning monarch Queen Elizabeth died on 8th September, and everyone came together in a period of national mourning. Two days before her death, her Majesty met Liz Truss and asked our new PM to form a government. New Chancellor Kwasi Kwarteng responded to the energy crisis via a mini budget on Friday 23rd September, which proved anything but mini. By Monday 26th, the Pound had declined to just over $1.03, its lowest value against the dollar since Britain went decimal in 1971.

We also experienced more of the forces that have dominated this year – additional rate rises to combat inflation and further declines across most major asset classes. Inflation across the 20 leading economies averaged over 13% in August, and in September these economies have collectively raised rates 15.55%. This has been the most widespread tightening of monetary policy on record, with the most extreme rate rises and minimal rate cuts globally.

The Bank of England raised interest rates in its monetary policy meeting for the 7th consecutive time, this time by 50bps to 2.25%. The minutes noted that the introduction of the Energy Price Guarantee meant that CPI inflation was expected to rise by less in the near term, peaking at just under 11% in October.

Meanwhile, the Federal Open Market Committee voted unanimously to raise rates by 75bps for a third consecutive meeting - a pace of tightening faster than at any other time in modern history. Fed officials project short-term rates will rise above 4.25% by the year's end.

Asset class implications

Aggressive rate rises and dollar strength brought further pain to risk assets. The ICE U.S. Dollar Index (DXY) – a gauge of the currency’s strength against a basket of rivals including the euro, yen and British pound – rose over 3% in September, briefly touching its highest level since 2002.

Yields rose broadly in response to central bank actions, with the US 10 Year Treasury yield briefly topping 4%. In the UK, the 30 Year Gilt yield rose above 5% (the highest level since the global financial crisis), before the Bank of England announced a gilt market operation to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses. This action prompted a record rally in 30 Year Gilts, with the yield falling by over 100bps in one day. However, many British government bonds ended September with their biggest calendar month fall on record.

The S&P 500 fell by 9.3%, its worst monthly decline since the beginning of the pandemic, but GBP investors were marginally protected by the US dollar appreciation. In sterling terms, equity market declines were similar across all regions, ranging in the region of -5% to -8%. UK Direct Property performance remains positive so far this year, but declined by over 3% in September, whilst global REITs fell by over 9%.

It’s certainly been a tough few months for investors, with negative returns across many asset classes over the year to date. The gilt market operation from the Bank of England has shown how quickly prices can change, and the readiness of central banks to intervene. In this environment it can be tempting to react to short-term news, but we believe there’s value in staying the course. Take comfort from the fact that following the sharp sell-off, many asset classes and their associated yields look more attractive than they’ve been in over a decade. While markets could continue to get worse initially, those with a long-term, diversified, strategic asset allocation should sit tight.

Want to hear more?

Colin discussed the markets in September with Patrick Ingram in the first ever episode of our new Let's Talk podcast. Listen now ➜

FTSE Actuaries UK Conventional Gilts All Stocks TR in GB-8.04-12.85-25.10-23.29-26.08
ICE BofA Global Broad Market Hedge GBP TR in GB-1.271.06-3.31-4.51-8.97
IA UK Direct Property TR in GB-2.94-3.541.605.956.15
FTSE All Share TR in GB-5.88-3.45-7.87-4.002.40
FTSE USA TR in GB-5.453.46-8.99-0.3437.04
FTSE World Europe ex UK GTR in GB-4.94-2.27-16.98-12.786.84
FTSE Japan TR in GB-6.120.77-9.54-13.982.46
FTSE Asia Pacific ex Japan TR in GB-8.72-4.58-9.79-10.509.96
FTSE Emerging TR in GB-6.80-2.39-7.48-8.848.04

Source: FE Analytics, GBP total return (%) to last month end

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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