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WeekWatch -‘Global equity markets generally rose last week, as investors processed the US Federal Reserve’s plans to begin tapering its economic support’ Nov 2021

WeekWatch -‘Global equity markets generally rose last week, as investors processed the US Federal Reserve’s plans to begin tapering its economic support’ Nov 2021

Global equity markets generally rose last week, as investors processed the US Federal Reserve’s plans to begin tapering its economic support, while the Bank of England (BoE) unexpectedly chose not to raise rates.

It was widely predicted that the BoE would raise interest rates at its regular Monetary Policy Committee (MPC) meeting on Thursday last week in the face of ongoing inflation. These predictions only became more confident after BoE Governor Andrew Bailey said it would have to do something if inflation persisted.

However, in the end the central bank confounded expectations, voting 7–2 to keep interest rates at their record 0.1% low for now.

In general, equity markets reacted positively to the unexpected news , with the FTSE 100 climbing rising notably in the 24 hours following the announcement, before falling back slightly. It still finished the week up, as it moved further into post-pandemic highs. That said, the news did see Sterling fall notably on Thursday.

The news was not so straightforward for bond traders. Although lower interest rates are generally better for bonds, it may have caused a few traders who had bet on an increase in rates a few headaches.

Speaking on the Making Sense of the Market podcast , Lauren Smith, content strategist at St. James’s Place, explained: “This shows there is a gap in expectations between officials from central banks and traders, in terms of what they think interest rates are going to do, and this gap is increasing the chance of market volatility.

“The real takeaway for clients around this topic is, of course, the old truism of ‘time in’ not timing. But also, they really don’t want to be in that gap [in expectations] between officials and traders, because it is quite a volatile space.” A well-diversified portfolio that has exposure to different asset classes and different regions can help add some protection for investors when unexpected events such as this occur, as opposed to just gambling on when a rate change may happen.

Although it did not raise rates on this occasion, the BoE did note a rate rise may occur in the not-too-distant future: “The Committee judges that, provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November [Monetary Policy] Report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”

The day before this, the Federal Open Market Committee (FOMC) in the US also voted not to raise interest rates, although this was expected. It did, however, announce it would begin to wind down some of its economic support measures it put in place during the pandemic.

This included reducing its monthly net asset purchases by $10 billion per month, and agency mortgage-backed securities by $5 billion per month. At this rate, the bank will have finished its bond-buying exercise by the middle of next year.

Like the UK, the US is experiencing high inflation. In recent months it has been hovering at 5.3% to 5.4%. The Fed maintains that this is caused by largely transitory events, such as supply and demand imbalances related to the global economy reopening.

The move to begin tapering was widely anticipated, and had been expected for some time, which might help explain why markets reacted so calmly to it.

In fact, following the BoE and the FOMC announcements, US markets were notably up. The S&P 500 finished the week 2% up compared to its position on Monday, as the US index moved further into record territory. The Nasdaq rose by over 3% during the week, again moving further into record territory.

Looking ahead, the FOMC did say it was prepared to adjust its stance if risks emerged that could hinder the recovery. With COVID-19 still not gone away, as well as supply chain issues still not dealt with, this flexibility may be called on.

David Page from AXA Investment Managers noted: “The progress of wage growth in the US is likely to prove critical – something that Fed Chair Powell acknowledged was ‘key’. As such, we consider that risks of an earlier hike would increase if wage growth does not soften materially into the start of next year.”

Turning to Europe, the STOXX Europe 600 continued its upward trajectory. The pan-European index has performed well since a dip in September . In fact, it finished the week up over 7% compared to its low on 6 October on the back of a better-than-expected earnings season.

AXA Investment Managers is a fund manager for St. James’s Place.

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