Please click here to read the Weekly Digest, which this week looks at the timing of an interest rate hike in the UK and the potential impact.
Welcome to the fourth quarter of 2017, which is started in a positive tone in financial markets. Q3 demonstrated another positive period for risk assets, albeit handicapped in some overseas exposure by the bounce in the pound’s exchange rates. UK equities generated total returns of around 2% (which if annualised would maintain the long run history of real returns in the 5-6% bracket). The market was led by midcap (medium-sized) stocks, which gained 3.5% as FTSE 100 constituents were constrained by rising sterling and rose only by 1.8%. The small cap index gained 3%. Overseas equities produced a return slightly below that of the UK, with the pound’s strength subtracting more than 3% from US and Japanese equity returns but having almost no impact on returns from Europe. Bond markets had a more volatile quarter, with ten-year yields generally ending higher than in June. Total returns were slightly negative for gilts, with a larger loss for dollar orientated bonds. Gold maintained its sterling valuation, but the highlight was the strength of oil prices, where Brent gained more than 20% in dollars during the quarter.
This quarter will start with politics firmly in the spotlight. At home there is the Conservative Party conference, a test for Mrs May’s ability to preserve unity compared to the uniform profile of Labour last week. Spain witnessed some distressing scenes as Catalans attempted to cast their votes in their referendum for independence, which has cast a cloud over the local equity market this morning. Across the Atlantic, observers are still grappling with the implications of the Republican tax proposals, whilst also now thinking about the potential candidates for the Fed chair which is scheduled for Q1 next year. President Trump has made little mention of Janet Yellen and alternative (generally more hawkish) candidates are starting to jockey for position.