Ark Review of the Month
Following a strong rally in equity markets in the first half of the year, equity markets as a whole declined in the third quarter, with the S&P 500 index in the United States down 3.3% and the MSCI Europe ex-UK index down 3.4%. The best performing major equity market was Japan, with the TOPIX up 2.5% for the quarter, followed closely by the UK, with the FTSE All-Share Index up 1.9%, thanks to its relatively high weighting of the energy sector, which was underpinned by a sharp rise in oil prices.
A sell-off in global bond markets pressured risky assets, with global investment grade corporate bond prices falling 2.7% in the third quarter. British government bond prices fell 0.7%, German government bond prices fell 2.1%, and U.S. government bond prices fell 3.1%.
As of 29 September 2023:
UK 10 Year Gilt Yield 4.45%
US 10 Year Treasury Yield 4.58%
Germany 10 Year Bund Yield 2.85%
Since December 2021, the Bank of England's Monetary Policy Committee (MPC) has raised the Base Rate at 14 consecutive meetings. The decision to leave the Base Rate unchanged at 5.25% was taken at the September meeting by a 5-4 vote, but it remains at a 15-year high. The close vote is due to the current uncertainty about the economic and inflation outlook.
Inflation, as measured by the Consumer Price Index (CPI), had fallen further to 6.7% in August. However, measures of underlying inflation in the economy rose in the first half of 2023. For example, inflation in services recently reached 7.4%, a 31-year high. Services inflation is less influenced by global factors, such as energy prices, and depends more on domestic economic factors, such as wage growth and consumer demand.
Over the past two years, the Federal Reserve has produced the most aggressive rate hike cycle since the 1980s. While the market widely believes that current interest rates are close to peaking and some central banks have paused their rate hikes, Chicago Fed President Goolsbee mentioned in an interview last week that the risks posed by high inflation outweigh the risks posed by high interest rates. The current debate surrounding the Fed's policy is no longer about how many more basis points of interest rates to raise next, instead it is shifting to how long rates need to stay at peak levels.
As of the time of writing, long-term Treasury yields unexpectedly spiked to a 16-year high yesterday, causing market commentators to once again question the possibility of a "soft landing", i.e. measured economic slowdown. Interest rates will likely remain high for longer than expected.
The synchronised decline between stocks and bonds in the third quarter was also a timely reminder of the importance of allocating to alternative assets to diversify risk, whilst keeping a level of liquidity to prepare for the worst.
As always, our Investor Relations team would be more than happy to help you with any queries.
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