Market Review September 2011

After yet another month of falling markets if I was to tell you that there was one sector that actually made profits I am sure you would think that the pressure had finally got to me and I had gone mad. Well, call for the men in the white coats as the average of the top ten funds in the Absolute Return sector actually showed a profit, albeit only a small one. The Absolute Return sector wins the Sector of the Month award for the first time.

Markets are extremely nervous and react with volatility to any news whatsoever. Looking back to last week alone we saw investors react positively to news that European policy makers are beginning to address some of the issues surrounding the Euro zone sovereign debt crisis, particularly a potential default by Greece, which has plagued the region.

The German parliament approved the plan to expand the European Financial Stability Facility, details of which were outlined in July, and this news was welcomed. Investors were also calmed by better-than-expected economic data from the US. Consequently, appetite for risk increased, which led to equities recovering somewhat across most regions and demand for ‘safe-haven’ assets, such as gold and benchmark government bonds, falling.

Greece then announced a projected deficit of about 8.5% of GDP for 2011. The figure is down from 10.5% in 2010 but short of the 7.6% set by the EU and the IMF so Friday was a bad day for markets with the FTSE 100 starting off 2.5% down then “recovered” to show a reduced deficit of around 1.3%.

Initial data released late last week indicated that inflation across the Euro zone increased by 0.5% to 3% year-on-year in September.

Significant fears over global growth and the ability of leaders in Europe to overcome the debt crisis still persist. One economic bellwether - the price of copper, which fell 4.9% last week, points towards a recession and equities as a whole produced their worst returns since 2008 over the third quarter.

October is going to be an interesting month. The first week has the Conservative Party Conference and markets are likely to react to whatever David Cameron and George Osborne say. On Thursday 6 October 2011 when the Bank of England’s Monetary Policy Committee (MPC) meet we are unlikely to see a change in the 0.5% pa bank base rate but we may see the Bank of England resume its bond-purchase programme (quantitative easing), as was hinted in the MPC’s September minutes.

On the same day European Central Bank President Trichet chairs his last policy meeting before handing over to Mario Draghi. Markets are calling for a rate cut in Europe to boost growth across the region. However, economists, with an eye on the region’s inflation, are more cautious and in general are forecasting rates to stay on hold at 1.5%.

The biggest release across the Atlantic this week will be the September non-farm payrolls report on Friday. The consensus forecast is that 53,000 new jobs were created in the month.