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The big themes of the year have been:

  • A gradual fall in inflation towards Central Banks’ 2% target but in most cases, inflation remaining stubbornly 1% above or so above target
  • As a result strong expectations of cuts in interest rates at the start of the year but, in most cases, a failure of those cuts actually appearing.

Nonetheless there is a belief that the inflation problem is beaten and gradual interest rate cuts will materialise.

So how have markets reacted?

Equities – which love lower interest rates – are pretty much at all-time highs.

Bonds ­– trading roughly in the middle of the last 12 months trading range with 10-year US and UK government bonds trading around 4.25% Yield-to-Maturity.                

In some ways, it is quite a quiet time in financial markets as this story unfolds.

What about other asset classes?

US Dollar – the biggest driver of the strength of any currency is the level of short term interest rates i.e. if US interest rates went to 10% investors would sell their own currency and buy USD to take advantage of such interest rates. USD would strengthen.   

And this matters. If you are a UK investor and you buy a US share that goes up 10% and the USD strengthens 10% versus GBP … you just made 20%. If the USD falls 10% you make nothing despite the share gain.

As US interest rates have stayed high the US dollar has strengthened…so good if you are foreign investor owning shares in the US. A lot of people follow the DXY index, a measure of the USD versus 6 of the United States trading partner currencies. Currently the DXY is 106.00 … the 12-month trading range is 99.58 – 107.35 so you can see how strong the Dollar is right now.

A strong dollar of course makes it harder for US exporters to sell their goods abroad as it makes their goods expensive in local currency terms.

Gold: Gold is trading close to its all-time high of USD 2,350 per ounce. It likely would be even higher if US interest rates went down because gold is a non-interest bearing asset so does better in a low interest rate environment.

Oil: Oil has been quite static in price at USD 80 per barrel. It will likely increase in value if global supply lines are threatened in the Middle East, but this region is not as important as it was with others, such as the US itself, also an exporter of oil. If global economic growth accelerated this would also force up the demand for oil and vice versa if global growth slows.

So a fairly quiet time in financial markets but it rarely stays that way!