Since Britain voted to leave the EU the pound has experienced high levels of volatility, but last month it plunged to a new 31 year low against the US dollar as a result of an unexpected ‘flash crash’. The incident, which occurred in the early hours of the morning on 7 October when only the Asian markets were open, has been attributed to human error, but it was exacerbated by algorithms adding to selling pressure during a period of low liquidity. During the crash the pound sank as low as $1.1841, and it has remained below $1.25 since.
The drop in the pound has been good news for global firms based in the UK, as their income from overseas translates to a greater amount in sterling. This has been reflected in the continued strength of the FTSE 100 index since the Brexit vote, as last month the index reached an all-time intra-day high of 7,129, beating the previous peak set in April 2015.
Inflation in the UK has climbed to a two year high. According to the Office for National Statistics, inflation measured by the Consumer Prices Index was 1% in the twelve months ending September 2016. This is an uplift of 0.4% from the previous month’s figure. The upward price pressures stem from numerous sectors, in particular the hotel and restaurant industry. Meanwhile food and non-alcoholic beverages continue to provide the largest downward pull on inflation.
The US presidential election takes place on 8th November. Both major candidates have come under fire in the last month, with Donald Trump forced to apologise for ‘vulgar’ comments towards women made eleven years ago and the FBI continuing their investigation into Hillary Clinton’s use of a private email server as secretary of state. Going into the final week of campaigning, Clinton has the edge according to polls and betting exchanges.
October was another mixed month for developed equity markets. In the UK, the FTSE 100 index climbed +1.03% while the FTSE 250 (ex IT) index and the FTSE Small Cap (ex IT) index slipped -2.19% and -1.75% respectively. In the US, the S&P 500 index declined -1.82% while in Europe the Eurostoxx 50 index rose +1.90%. Japanese equities, measured by the Topix index, surged +5.31%.
Emerging market returns were also mixed. The MSCI EM (Emerging Markets) index saw an increase of +0.62%. Chinese equities, represented by the MSCI China index, lost -1.95% but Latin American equities, measured by the MSCI EM Latin America GR index, soared +7.52%. The IISL Nifty index, which measures Indian equity returns, stayed relatively flat at +0.17%.
Global bond markets mostly had a negative month. UK government bonds, measured by the FTSE Gilts All Stocks index, fared particularly badly as they fell -3.90%. It was worse for long dated (over 15 years to maturity) gilts as they shed -6.50%. In the corporate market, European corporate bonds, measured by the Markit iBoxx Euro Corporates index, were down -0.77% and sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, declined -3.41%. High yield returns on the other hand were positive, as the Bank of America Merrill Lynch Euro High Yield index and the Bank of America Merrill Lynch Sterling High Yield index gathered +0.90% and +0.06% respectively. Emerging Market sovereign debt, measured by the JP Morgan EMBI Global index, dipped -1.46%.
Commodity returns were mostly negative. The S&P GSCI index, which consists of a basket of commodities including oil, metals and agricultural items, decreased -1.50%. The price of a Brent crude oil contract fell -4.22%. The precious metals also saw negative returns, as the S&P GSCI Gold and Silver indices dropped -3.31% and -7.35% respectively. However the agricultural markets had a positive month, as corn and wheat grew +5.35% and +3.54% respectively.
In the foreign exchange markets, the pound’s sharp decline resulted in most major currencies appreciating against it last month. The US dollar, the euro and the yen all posted gains of +6.40%, +3.79% and +2.53% respectively.
(All the above returns are reflected on a local currency basis i.e. they do not factor in any relevant currency movements. Unless accompanied by PR (Price Return), they do include income).
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