Market Commentary – September 2020
By Neil Worsley, Investment Strategist
August was a good month for risk assets as global equities continued to make progress while fixed income markets saw a measure of profit taking. Even though the S & P appreciated more than 7% in local currency terms, the shine was taken off this as the dollar fell sharply, making the returns to international investors a little less exceptional.
One of the reasons for the weaker dollar was the Federal Reserve announcement that it was changing its inflation policy from its 2% objective to ‘average inflation targeting’ meaning it would let inflation run at higher levels for some time over its 2% target to allow for a recovery to take hold. This in turn means that US interest rates are likely to remain lower for longer, which hit the value of the dollar on international markets. While western policy makers have been primarily focused on controlling inflation, almost forever, this subtle change is an indicator that they see deflation as the big threat and the danger that persistently low inflation brings to economies.
The Democratic and Republican national conventions are now over and the Presidential elections are now only 2 months away. While most investors are primarily focused on the threat of coronavirus to the world’s economic health, the looming US Presidential election is also beginning to play a role, particularly in the currency markets and this is a further reason why the dollar has been weakening over the past few months. Although President Trump certainly has many critics, businesses view him as an ally, with his strong focus on the health of financial markets as one of his key metrics indicating his ‘success’. There is also some uncertainty (as there often is) over the impact of a new President and policy changes which will be brought in once in office. Post the conventions, the race for the White House appears to be narrowing. Although the polls presently favour the Biden camp, the election is again likely to be determined in the battleground states and not by the overall popular vote. This uncertainty is inevitably beginning to seep into currency and treasury markets in particular and is likely to continue until its resolution in November.
Finally, equity markets continue to exhibit a 2 tier system, with cyclicals and financials continuing to bear the brunt of the continued uncertainty while technology and healthcare remain robust. This divergence may yet persist for a while longer but at some stage there could well be an aggressive rotation as the ratings deviation gets ever wider and the performance gulf becomes excessive.
Get in touch
Hedley and Co offer a Discretionary portfolio service based on the strategies mentioned in our monthly commentary. Please contact our office on 01254 699333 or 01772 887880 to discuss the available options.
For regulatory disclosures, please visit https://www.hedleyandco.co.uk/publicationsandclientdocuments and click on Hedley Regulatory Disclosures.