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Monthly Market Outlook September/October 2019

Monthly Market Outlook Article

Despite having cut interest rates in July, the Federal Reserve (Fed) delivered another 25 basis-point rate cut in September. However, they stopped short of making a clear commitment to further easing, which disappointed the market. The median projection from the Federal Open Market Committee (FOMC) members following the latest cut was that rates would remain at this level until the end of 2020. More surprisingly, the range of individual views was bifurcated, as seven members voted to raise rates next year, whilst eight members voted to lower rates. Given the wide breadth of views, further rate cuts appear more difficult. There appears to be a gap between what the Fed is planning to do as demonstrated by the "Dot Plot", and what the market is pricing-in.

Even though the US unemployment rate remains near a 50-year low, US job openings and wage growth have slowed amid uncertainty stemming from the US-China trade war. The US labour market has held up well thus far, but declining business sentiment may be starting to affect hiring decisions and wage growth. The slowing pace of jobs being created may have a knock-on effect on consumer confidence in the US, which, until now, has been the one bright spot in the global economy.

Providing some much needed respite, the US and China reached a truce in their trade war after agreeing a limited deal. The US agreed to suspend an increase in tariffs on $250bn of Chinese imports, from 25 per cent to 30 per cent, in exchange for Chinese concessions, primarily regarding agricultural purchases. The agreement was described by Donald Trump as a “substantial phase one deal”. While perhaps exaggerated, it should offer some relief to markets and the rest of the global economy unnerved by escalating tensions between the two countries.

In the UK, the UK Supreme Court ruled unanimously that Boris Johnson's decision to prorogue Parliament was "unlawful". On Brexit, the news is changing rapidly, with any written comments at risk of being out of date by the time they are read. Brexit movements are usually felt most acutely in the foreign exchange market, with the pound typically falling on the prospect of a "no deal", and rising when a deal looks promising. Sterling shot to its highest level in five months as hopes of a last-minute Brexit deal rose. However, this may prove to simply be a flash of optimism. The deal with the EU will require ratification by Parliament, where proceedings have already stumbled three times. A lack of clarity remains over whether any new proposed deal will pass Parliament. Writing on Friday 18th morning, we are reluctant to suggest that any outcome is more likely than another; however, we continue to see value in the UK equity market today.

Uncertainty is everywhere, and volatility is likely to remain high. Although, it is in times like these that there are also plenty of opportunities for investors. Equities continue to look attractive relative to bonds and will benefit should there be progress on trade talks. A US-China trade agreement or a Brexit deal would remove some of the uncertainty and upon a resolution, the readjustment may be abrupt.

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