Halloween was not the only event that spooked investors in October. In fixed income markets, yields on many Government bonds hit multi-month highs, as inflation expectations increased and markets started to price in a shift in monetary policy. UK gilts and sterling were the notable underperformers in the month, following comments that suggested the UK Government was open to a ‘hard Brexit.’
Our view – asset allocation summary
- At its October meeting the Asset Allocation Committee decided to make no changes to the centralised models
- The cautious positioning of the models is believed to be appropriate given the challenging outlook; current levels of investor complacency increasing the risk of a significant correction across asset classes
- Despite our lack of conviction in the health of the US economy, the Fed will likely have to increase rates in December to retain any credibility – this could give rise to a stronger dollar, higher bond yields and could kill off the equity rally. However, cable does look stretched at these levels
- Central banks are now clearly approaching their limit in terms of their ability to stimulate markets, and the change in Bank of Japan policy suggests this is becoming more widely recognised. Central banks and markets will likely look through short-term and transitory inflation, with fixed income positioned for a ‘secular stagnation’ environment
- However, there is a risk that bank lending in the UK and US and fiscal stimulus could further back-up bond yields. Increased fiscal spending could benefit Main Street, but not Wall Street, though such stimulus could still be some way off.
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