The Bank of England cut the UK’s base interest rate for the first time in over seven years last month. Having remained static at 0.5% since March 2009, it now stands at a new record low of 0.25%. In his inflation report, Governor of the Bank of England Mark Carney unveiled additional measures to help stimulate the economy, including a further £60 billion of gilt purchases and a new Term Funding Scheme which will allow UK banks to borrow up to £100 billion over the next year. On the day of the announcement, the FTSE 100 index rose +1.59% while the pound fell -1.64% against the US dollar.
UK factory output rebounded to a ten month high during August following a Brexit shock in the previous month. The Markit/CIPS UK Purchasing Managers Index, which gauges UK manufacturing output, surged by a record amount from 48.3 at the end of July to 53.3 at the end of August. A figure above 50 indicates that the manufacturing sector is expanding. The increased activity in August is attributed to a weaker pound boosting exports.
Meanwhile inflation in the UK has reached a twenty month high. The latest figures from the Office for National Statistics (ONS) show that in the year to July 2016, prices rose by 0.6%, the most since November 2014. The main contributors to the rise in prices were motor fuels, accommodation services and alcoholic beverages.
Unlike last August, in which markets were highly volatile due to the increasing uncertainty surrounding the Chinese economy, this year’s August was fairly positive. In the UK, the FTSE 100 index climbed +1.67% while the FTSE 250 (ex IT) index and the FTSE Small Cap (ex IT) index grew +2.99% and +3.85% respectively. In the US, the S&P 500 index stayed fairly flat at +0.14% while in Europe the Eurostoxx 50 index picked up +1.16%. Japanese equities, measured by the Topix index, returned +0.55%.
Emerging market returns were also positive. The MSCI EM (Emerging Markets) index saw an increase of +2.79%. Chinese equities, represented by the MSCI China index, soared +7.33% while Latin American equities, measured by the MSCI EM Latin America GR index, rose +1.13%. The IISL Nifty index, which measures Indian equity returns, increased +1.71%.
Global bond markets also had a strong month. UK government bonds, measured by the FTSE Gilts All Stocks index, returned +2.66% while long dated (over 15 years to maturity) gilts gathered +5.56%. In the corporate market, European corporate bonds, measured by the Markit iBoxx Euro Corporates index, grew +0.26% and sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, lifted +3.11%. High yield returns were also positive, as the Bank of America Merrill Lynch Euro High Yield index and the Bank of America Merrill Lynch Sterling High Yield index appreciated by +1.69% and +2.71% respectively. Emerging Market sovereign debt, measured by the JP Morgan EMBI Global index, improved by +1.80%.
Commodities meanwhile had a more mixed month. The S&P GSCI index, which consists of a basket of commodities including oil, metals and agricultural items, climbed +1.77%. Oil performed strongly, as the Brent Oil Price Brent Crude PR index jumped +10.79%, but the precious metals faltered, as the S&P GSCI Gold and Silver indices dropped -3.37% and -8.58% respectively. The agricultural markets also had a weak month, with corn and wheat losing -7.95% and -10.90% respectively.
In the foreign exchange markets, the pound had another weak month against most major currencies. The US dollar appreciated against the pound by 1.37%, while the euro and the yen gained +0.97% and +0.44% respectively.
James Timpson BSc (Hons), IMC
(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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