Monthly Market Report - October 2016

21st September 2016

With commentary from David Stevenson


Who'd have guessed that just a few short weeks after the Brexit vote, equity markets would hit near term highs. Both the FTSE 100 and the S&P 500 have pushed ahead, powering past 20 and 200 day moving averages and breaking through all short-term technical trend barriers. If the current positive momentum continues to work its magic on shares we could see the FTSE 100 push past 7000 and the S&P 500 past 2250. This remarkable turnaround in confidence is mirrored in other key measures - volatility as measured by the VIX Index in the US (it tracks S&P 500 turbulence) has crashed to near all-time lows, while over in the bank CDS market, rates on what are in effect insurance contracts against bank default, have crashed to incredibly low levels. Investor's clearly believe that the chance of a major debt crisis within the banking system is increasingly unlikely. Yet these market developments seem hard to square with government bond yields crashing to all-time lows - the yield on 10-year gilts is now an incredible 0.56%. Such low yields would typically suggest that a recession is imminent although in our QE manipulated world, these low rates may simply be a factor of massive central bank bond purchase programmes.

In sum then, the optimists seem to have won out. This cheeriness and optimism has even spread to Japan, with many investors now suggesting that it represents the next frontier for equity income investors. Dividend hunters converging on Japan - how the wheel constantly turns within international finance! And yet investors might want to pause to consider the link between low gilt yields, surging equities and populism represented by Donald Trump. Our societies are aging fast which is in turn producing a savings glut. This helps to lower yields and interest rates, which in turn makes dividend producing assets more attractive. But these forces also produce low economic growth and even lower wage growth rates. Which in turn fuels the populist political agenda, built on smashing up the cosy economic and political consensus. You have been warned!

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