Interest rates have dominated investor sentiment this quarter, driving pronounced volatility in bond, equity and currency markets. The long-anticipated chapter of monetary loosening began in earnest in the US and UK, with central banks reducing base rates by 0.5% and 0.25% respectively. This significant move has been highly anticipated, following the European Central Bank’s early cut a number of months ago. Many prominent investors are increasingly confident of a potential “soft landing” for the US economy, where inflation returns to target levels without major disruption to the labour market or the broader economy. This optimistic outlook has been reassuring for both equity and bond investors globally.
In the UK, the economy has shown unexpected resilience, with growth forecast at 1.2% for 2024. This stronger than expected performance has sustained inflation expectations, with the current rate at around 2.2%, and analysts from Goldman Sachs and Barclays predict the UK will therefore maintain elevated interest rates for longer than its peers. This has contributed to a strengthening of the pound, which has gained over 5% against USD and 4% against the Euro so far this year.
Adding to this momentum is the political stability brought by Labour’s landslide election victory, which has included business-friendly overtures. However, uncertainty remains over whether the soothing language will translate into effective policy and whether anticipated changes to the tax regime could undermine the UK’s business competitiveness and its otherwise impressive and growing inbound foreign direct investment.
Staying close to home, Europe presents a less optimistic picture. Key European nations are struggling with pronounced political unrest, economic malaise, ballooning deficits, declining foreign investment and waning global industrial competitiveness. In response, the former Italian Prime Minister, Mario Draghi, has published a landmark 400-page report, recommending between €750-800bn in investments to revitalise European capital markets, defence, and public spending, an essential step, if adopted, to counter Europe’s increasingly stagnant economic outlook.
Elsewhere in the world, markets in Asia have experienced a more optimistic quarter. The Japanese yen, which had fallen to multi-decade lows by July, saw a sharp rally after the Bank of Japan raised interest rates. This move, in part, caused turmoil in the Japanese stock markets, which plummeted by 20% in yen terms in a single day as investors unwound positions built on the assumption of continued low interest rates.
The Japanese stock markets appeared to be finishing the quarter broadly flat on where they had begun, before falling on the final day of the quarter owing to the announcement of a general election – somewhat masking an otherwise very eventful three-month period. Nevertheless, the economic picture in Japan is rapidly normalising, bringing with it significant uplifts in investor confidence.
Meanwhile, China’s government has introduced significant stimulus measures. The Communist Party recently unveiled extensive support for bank liquidity, the property market, as well as lower interest rates. These interventions come after a period of pronounced economic difficulties, including deflation, and are seen by investors as encouraging steps towards stabilising China’s economic deterioration.