Financial Bulletin – October 2019


Central Banks were in the spotlight during September as they attempted to arrest the slowdown in global growth.

In his last meeting as President of the European Central Bank, Mario Draghi announced several further policies which the Bank hopes will stimulate the Eurozone.

A few days after the ECB’s move the US Federal Reserve followed suit by cutting interest rates for only the second time in a decade.

As a consequence of a slowing world economy and consistent stimulus measures from Central Banks, around $17 trillion of global bonds now offer a negative yield.  

Elsewhere, newsflow in the UK continued to be dominated by politics.

Boris Johnson attempted several times to trigger a General Election, but was rebuffed by opposition MPs who want a no-deal Brexit “taken off the table” before acceding to his wishes.

Despite economic news continuing to paint a subdued picture, most stock markets were able to make gains during September and have produced reasonable returns over 6 months.

Over the last 6 months the FTSE 100 gained around 1.2%, whilst the Euro Stoxx 50 and S&P 500 gained around 5.4% and 4%, respectively (all in price terms). 

The broad Emerging Markets index fared less well than its developed markets counterparts and returned -6.4% (in US$ price terms).

The Japanese Nikkei 225 gained approximately 1.15% (in price terms).

US Economic News

The US Federal Reserve cut the main interest rate during September, as the market had strongly suspected that they would.

The move means that US interest rates have been cut twice in a matter of months, despite the Fed forecasting as recently as June that no rate cuts would be necessary this year.

Despite the rapid turnaround, however, some still question whether the Central Bank is moving fast enough.

Investor anxiety only increased when a widely followed survey of the manufacturing sector suggested it was in the weakest position since 2009.

Although retail sales increased at a healthy rate of 4.1%, suggesting the American consumer remains relatively resilient, the ongoing ‘trade war’ is having a clear impact on industry.

However, there appears to be little sign of President Trump de-escalating the dispute with China.

Indeed towards the end of the month there were reports that the administration is looking into delisting Chinese companies from US stock exchanges.

UK Economic News

The month proved to be a fractious one for the UK politically as an already fluid situation became even more unpredictable.  

After the Supreme Court ruled that Parliament had been suspended unlawfully, Boris Johnson attempted to trigger a General Election.

However, opposition MPs were steadfast in blocking any national poll until a no-deal Brexit is “taken off the table.”

By law the government is required to request an extension to the Brexit process unless a deal is agreed by Parliament by the 19th October.  

Unsurprisingly, the significant political uncertainty continued to act as a drag on the economy.

Both the construction and manufacturing sectors fell deeper into contraction territory during September.

The construction sector, in particular, weakened at one of the sharpest rates in 10 years as firms reported delaying projects until after Brexit.

After contracting during the second quarter of the year, the UK will officially be in recession if the economy contracted again during the third quarter.

Although the consensus is that the UK will narrowly avoid recession, the performance of the UK remains lacklustre.

Despite average wages growing by 4% in the three months to July, the strongest growth since 2008, one member of the Bank of England suggested that interest rates may be cut even if the UK leaves the EU with a deal.  

Eurozone Economic News

The Eurozone economy remained weak during September as the European Central Bank introduced fresh new stimulus measures.

The manufacturing sector, which is particularly exposed to the China-US trade dispute, contracted at the fastest rate since 2012. 

The German manufacturing sector, which exports a significant amount to China, weakened at the fastest rate for 10 years.

Preliminary estimates of inflation across the region suggest the rate has now fallen under 1%; the lowest rate since 2016.

Pressure had been building on the ECB to take action aimed at preventing the deflationary environment, and in his last meeting Mario Draghi introduced several measures.

The Central Bank cut one of its interest rates further into negative territory, announced that they would restart monthly asset purchases, and said that the main interest rate would remain at zero indefinitely.

However, Mr Draghi admitted that the Central Bank is reaching the limit of how far it can go in supporting the economy.  

Wider Economic News

The trade tensions between the US and China continued to be the main driver of economic news in China, the effect of which is felt by most economies in Asia.

However, despite there being no sign of a resolution to the dispute, the Chinese manufacturing sector improved once again during September.

It was noticeable that the main source of this improvement was the domestic market, with some evidence that companies are turning to the domestic market rather than exporting.

Elsewhere, the Japanese economy followed the pattern of many economies around the world; the manufacturing sector weakened whilst the services sector proved reasonably resilient.

The Bank of Japan left monetary policy unchanged but made clear it is concerned about the slowing global economy.

Financial Markets and Corporate News

As investors have become more concerned with the strength of the global economy, and as Central Banks continue to pursue aggressive monetary policy, the yield on many government bonds has turned negative.

Around $17 trillion worth of bonds around the world are now offering negative yields, a situation which is truly unprecedented.    

In terms of stock markets investors appeared to be satisfied that Central Banks around the world can prevent a serious recession.

Over 6 months the FTSE 100 gained around 1.2%, whilst the Euro Stoxx 50 and S&P 500 gained around 5.4% and 4%, respectively (all in price terms).

The broad Emerging Markets index fared less well than its developed markets counterparts and returned -6.4% (in US$ price terms).

The Japanese Nikkei 225 gained approximately 1.15% (in price terms).

Bond markets, particularly government bonds, performed well over the 6 month period.

The Investment Association (IA) UK Gilts sector returned 8.1%, the IA Corporate Bond sector returned 5.4%, whilst the Sterling High Yield sector returned 3.6%.

Summary of Key News:

  • The US Fed cut interest rates due to a worsening outlook.
  • The ECB also introduced stimulus measures.
  • The UK political situation became even more difficult to predict – an election before the end of the year seems likely.
  • The Eurozone economy weakened further and inflation fell below 1%.
  • The Chinese economy is slowing but not dramatically.

Financial Markets:

  • A significant amount of bonds now offer negative yields.
  • Over the last 6 months the FTSE 100 gained around 1.2%, the Euro Stoxx 50 gained around 5.4%, whilst the S&P 500 gained around 4% (all price terms).
  • The Nikkei 225 gained approximately 1.15% (in price terms).     
  • The broad emerging market index lost -6.4% (in US$ price terms).
  • The IA UK Gilts Sector returned 8.1%, compared to 5.4% for the IA Corporate Bond Sector, and 3.6% for the IA Sterling High Yield Sector.         


As expected several Central Banks around the world have begun to loosen monetary policy in the face of a slowing global economy.

However, the limits of what can be done are being reached, and there is an increasing emphasis on governments using fiscal policy (tax and spending) to help Central Banks.   

For now, equity investors appear to be content that a significant global slowdown can be avoided and that companies can continue to grow earnings.

Government bond markets have continued their relentless move higher as interest rates have fallen. However, as more and more bonds offer negative yields, at some point investors will conclude that they do not offer the required reward.

In the UK what was already an unprecedented situation has now become even more difficult to second-guess.    

Although a General Election appears to have been postponed for the time being, it is likely that one will be held before the end of the year.

The weight of ‘Brexit’ uncertainty continues to undermine the UK economy. This is unfortunately only likely to continue over the coming month as Boris Johnson has thus far declined to confirm that, if a deal cannot be agreed, he will ask for an extension.

Source for IA sector and equity index returns: FE Analytics