September is a traditionally weak month in share markets, but following a difficult start to the month they were lifted by positive news on interest rates.
The Federal Reserve reduced interest rates by 50 basis points – as opposed to a more expected 25 – and indicated more cuts were on the way. Markets took this bumper cut as good news that the Fed is pre-empting any weakness in the economy and labour market rather than it being ‘behind the curve’.
The clearer outlook for easier monetary conditions that should offer lower borrowing costs and greater consumer confidence led to a rally in the US equity market into the month end.
For bonds it was a mixed result and there was significant day to day volatility as investors weighed up competing forces. Although lower interest rates are generally a positive phenomenon, investors eyed the risk of inflation reaccelerating if the Fed are too aggressive on reducing interest rates. That could ultimately mean rates settle at a higher level further out. Areas that are both interest rate sensitive and economically attuned such as property and infrastructure fared better.
Why has China’s stock market rallied?
Meanwhile, fears over the Chinese economy abated as Beijing announced a considerable stimulus package aimed at bolstering the ailing property market and boosting consumer confidence. People's Bank of China Governor Pan Gongsheng announced plans to lower borrowing costs and inject more funds into the economy, as well as to ease households' mortgage repayment burden.
This turned around a miserable year to date for funds specialising in the area, and many broader Asian and Emerging Markets funds benefitted too. It’s too early to say whether these latest efforts to reignite the Chinese economy to meet the government’s 5% growth target will meet with success. This time around cash could be more directly going to struggling local governments and households, but given the extent of the now-deflating property bubble it may take a long time to fully correct the systemic problems.
The uplift in sentiment spread into the commodities market given its sensitivity to Chinese economic activity. However, with monetary and fiscal efforts directed primarily at the consumer rather than new building activity it’s unclear whether there will be significant and lasting effects on the consumption of raw materials. Equities in the luxury goods sector and some European industrial names also rallied on the news as they are potential beneficiaries of increased exports.
Weaker Chinese demand this year has helped lead to lower oil prices, and crude continued to be subdued despite the news from China and ongoing geopolitical fractures. This factor led to the muted performance of the UK’s FTSE 100 with its large weighting to energy heavyweights. However, a lower oil price is helping keep global inflation in check, which is positive for assets more broadly. Meanwhile, UK smaller companies fell back, perhaps owing to the cloudy outlook for the UK economy ahead of the upcoming budget.
Gold price hits new highs
Elsewhere in the commodity complex, gold continued its standout performance, helping propel shares in gold mining companies. Something significant is happening in the gold market and there is a mix of positive ingredients with the US dollar weak, a troubled geopolitical picture and falling interest rates around the world. But it’s difficult to square this with a near 30% rally in an asset that has no cash flow or, bluntly, any intrinsic worth. However, it appears gold’s appeal as a timeless store of value has attracted a new wave of buyers. Central banks have been keen purchasers, especially China, which has helped inflate the price.
In terms of the weaker areas, a particular standout was the Healthcare sector where some pre-election jitters have set in. This has also sometimes been the case in previous US presidential election years. Investors’ perennial worry is that the US government could become increasingly influential in the space and potentially exert greater pricing controls.
As the November election has drawn closer, Democrat nominee Kamala Harris’ improved showing in the polls has increased the tension. It’s thought she would favour an expansion of the Affordable Care Act, which might mean additional pricing pressures for pharmaceutical companies.
Explore the top performing funds and sectors in September 2024
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Market commentary - September 2024
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