• US Federal Reserve (the Fed) cuts rates again, effectively reversing policy back to the September 2018 position. They confirm that more cuts going forward will be data-dependent.
• Equity markets respond to the Fed in a positive manner, with the MSCI All Countries Index rising 1.9% in the month. Bond markets weaken, being somewhat overbought, with US 10-year bond yields rising from 1.5% to 1.7%.
• Gold price responds to monetary policy support by falling 3% in the month and the other safe haven, Japanese yen, also falls 1.7% against the US dollar.
• Oil prices spiked 15% in a single day after an attack on Saudi oil fields, but end unchanged from previous month, as global economics trumps regional politics.
   

Market update

The monthly volatility continues as the backdrop of the US-China trade war drags on, with no resolution in sight.  In the meantime, US data remains mixed, but the deceleration in economic activity is becoming clear. The US PMI Manufacturing number for example, fell below 48, the lowest since early 2016. The Fed responds to the slowing shift by cutting the Fed Funds rate another 25 b.p.’s, which effectively reverses policy to take the rate back to the same level as in September 2018.  Their communication now points to future rate cuts being data dependent, but we do expect that they would prefer to continue with appropriate action being front-loaded as a form of insurance to prevent the US economy from shifting into recession.

Given the negative month in August, as worries about the US increased, equity markets cheered the Fed on by reversing most of the losses of August. The MSCI All Countries Index rose 1.9% in the month.  Interestingly though, the move upwards was dominated by non-US positions, with the MSCI US Index only gaining 1.6%.  In the previous month the losses were led by the non-US positions.  Markets are therefore becoming increasingly aware of the differential in US to the rest-of-the-world economic prospects and hence the implications for market ratings.

On the fixed income front, it had become clear that the dramatic shift downwards in global bond yields, led by the drop of 10 year yields in the US to below 1.5%, meant that the market was overbought.  Subsequently then, yields retraced somewhat from 1.5% to 1.7%.  Given that we do not expect the US to slip into recession, we also believed that US bonds were overbought and maintained a short duration through this month. However, we also do not believe that a substantial move upwards in yields is likely as the paucity of yield in other developed markets remains. In Europe the majority of bond yields trade in negative territory and hence appetite for liquid, high quality bonds is likely to remain high, supporting the top end of yields in the US.

Of relevance here is that the European Central Bank has communicated a clear easing bias as their quantitative easing program kicks in again.  This has also impacted the euro-dollar market, and despite the US also easing, the euro remains on the back foot, as the “do whatever it takes” Eurozone approach contrasts with the more measured US approach.  

As far as safe havens go, the gold price gave up some of its gains, losing 3% in the month. The other safe haven, the Japanese yen also gave up some territory to the US dollar, losing 1.7% in the month.

Despite a lot of action on the surface, there has been very little substantive progress on the Brexit front, as the deadline of 31 October creeps closer, and hence, very little relevance that markets can use from a positioning perspective.

Portfolio strategy

Whilst markets rose in September, our slight underweight equity position remains as we are not convinced that volatility will fade.  At a time when data is mixed, we are likely to face the continued prospect of sharp swings in both directions, and hence having a slightly more defensive approach is appropriate.

In this context then we continue with a shifting preference for inflation linkers over nominal exposure in the bond component of our multi asset funds.  From a risk perspective, we also continue with a clear preference for emerging market exposure in the fixed income space – especially as we expect global central banks to continue to add to liquidity via monetary policy. 

We halved our short US dollar position as, from a timing perspective it is likely that support for the US dollar will remain, despite it being overvalued from a quantitative valuation perspective. We retained the long Japanese position as at volatile times like this having a defensive currency makes enormous sense.

Fund performance

As global equity markets rose fund performance was also positive, despite the negative moves in bond markets. The Sterling Asset Management Fund delivered +0.4%, whilst the Global Growth Fund, with its generally higher equity component rose 1.4%.