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Market Update

September 2017

Central banks make significant moves, with more to come

Market sentiment in September changed tack to favour riskier assets. Equities generally strengthened, while more defensive assets such as benchmark government bonds, gold and the Japanese yen weakened.

Globally, markets took their tone from the US Federal Reserve (Fed), coupled with continued resilience in economic data. The Fed left interest rates on hold in its September meeting, but officials, including Chair Janet Yellen, signalled that there were risks to leaving it too late to increase rates further. The Fed also stated its intention to begin shrinking its balance sheet from October: the Fed holds around $4.5 trillion worth of bonds following its quantitative easing programme, so it plans to start selling these off or simply not reinvest when the bonds mature. Futures markets implied that the chance of a rate increase in December roughly doubled over September to about 70%1. The outlook for equities received a further fillip towards the end of the month from renewed speculation around the potential for a significant cut in US corporate tax rates.

A similar shift in sentiment occurred in the UK, driven by comment from Bank of England officials on the case for reducing monetary support for the economy. During September, there was a sharp shift in the market’s expectation for the timing of the next UK rate increase. The market now expects a rate increase at the November 2017 policy meeting rather than around two years from now.2 The European Central Bank (ECB) sounded more cautious on prospects for tightening, citing still-low inflation in the Eurozone. However, higher US dollar bond yields dragged European yields up in their wake – benchmark 10-year German Bund yields rose 0.09%.

Currencies reflected shifting expectations for monetary policy. The US dollar’s index against a basket of other major currencies rose 0.4% over the month, after declining for most of 2017.3 The US dollar strengthened against the euro, yen and Chinese yuan over the month, although it weakened against sterling, as expectations for policy tightening in the UK shifted even more abruptly than in the US.

Equities shrugged off central-bank hawkishness, suggesting investors expect a ‘Goldilocks’ move in monetary policy – that is, enough to curb any flickers of inflationary pressures without triggering a sharp slowdown. The MSCI World Index rose 2.1% over September, in US-dollar terms (USD), although it fell 2% in sterling terms, reflecting the strength of the pound. Emerging markets underperformed, with the MSCI EM Index declining 0.6% over the month (in USD). In the United States, the S&P 500 rose 1.9% to record a new all-time high. Japan’s Nikkei 225 and Europe’s EuroStoxx 500 rose 3.6% and 4.5%, respectively (in local-currency terms).4 Global equities shrugged off rising geopolitical risk given the escalation of tensions on the Korean peninsula. Even South Korea’s benchmark KOSPI Index rose 4.2% on the month in local-currency terms; the Korean won declined 1.8% against the US dollar, although this occurred at a time of general dollar strength.

UK equities were a partial exception to the trend. The benchmark FTSE 100 Index fell 0.8% on the month as the rise in the pound decreased the sterling value of companies’ foreign earnings, which is a significant factor for many of the companies that make up the index. The more domestically oriented FTSE 250 rose 0.4% on the month.

Commodities had a mixed month. Crude-oil prices rose 9% in September (West Texas Intermediate, in USD terms), although this may largely reflect expectations of supply disruption from Hurricane Irma’s impact on US refining capacity, and from Turkey’s threat to close a pipeline from the Kurdish region of Iraq after the Kurds voted for independence.5 Metal prices generally declined, with copper down 5.7% on the month. The decline in metal prices only partly reverses strong gains made since May. Copper prices are up nearly 16% year-to-date, buoyed in part by expectations of stronger demand from the development of electric cars.6

UK real estate outperformed UK equity, rising 0.9% against 0.4% for the domestically oriented FTSE 250 Index. The UK market remains supported by cheap funding conditions and sustained interest by foreign investors. Globally, real-estate related securities fell 3.7%, underperforming the 2% fall in the MSCI World Index, all in sterling terms.7

Markets showed little sign of concern ahead of Catalonia’s independence referendum on Sunday 1 October, although there was a more pronounced reaction after the vote with a rise in Spanish government bond yields and a drop in the Spanish equity index. The resolution of the situation remained unclear at time of writing, although the impact seems to be limited to Spanish markets so far.

Should I make any changes to my investments?

Everyone’s circumstances are different and we aren’t able to give you advice on what is appropriate for you. As always, if you are considering your own position, you should remember why you invested in the first place and consider the lifespan of your investments.

One way in which you can help reduce the impact of any market volatility is to spread your investments across different asset classes and regions. For more information about investing across different asset classes take a look at our Introduction to diversification in multi-asset funds guide.

Remember that before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting find a financial adviser, which is responsible for promoting financial advice in the UK.

All figures quoted are in sterling terms to 30 September 2017 unless otherwise stated.


  1. CME FedWatch
  2. Bank of England
  3. DXY index, Intercontinental Exchange
  4. Macrobond
  5. Bloomberg
  6. London Metals Exchange
  7. Financial Express