US monetary policy remains in focus

Global Briefing

Global Briefing

The prospect of higher US interest rates continued to hold investors’ attention during September.  Although the Fed left rates unchanged, the likelihood of further tightening before the end of 2016 remains strong.

  • Opec announced a preliminary agreement to reduce oil production
  • The banking sector came under pressure during the month amid concerns over Deutsche Bank’s financial health
  • UK interest rates remained unchanged at 0.25%

US monetary policy remained firmly in the spotlight during September. Stock markets were volatile in the run-up to the Federal Open Market Committee’s (FOMC’s) meeting amid speculation that policymakers might decide to increase US interest rates. In the end, although most FOMC members appear to anticipate an increase in interest rates before the end of the year, they left the Fed’s key rate unchanged at 0.25%-0.5%. The Fed conceded that “the case for an increase in the federal fund rates (had) strengthened” but decided to “wait for further evidence of continued progress towards its objectives”. The Dow Jones Industrial Average Index fell by 0.5% during September as a whole.

In Europe, German bank Deutsche Bank absorbed much of the limelight during the month. The company’s share price lost over 20% of its value in September amid fears over the bank’s financial health. Although Germany’s benchmark Dax Index fell by only 0.8% over September as a whole, this relatively muted drop did not reflect some pronounced daily swings exacerbated by concerns relating to the banking sector. Elsewhere, the CAC 40 Index edged 0.2% higher over the month.

Oil also managed to garner a fair amount of attention during September, following the news that oil cartel Opec (Organisation of the Petroleum Exporting Countries) had reached a preliminary agreement to reduce output. The price of oil surged, providing a boost for share prices in the oil and mining sectors. In the UK, the FTSE 100 Index rose by 1.7% over September as a whole. Although sentiment towards the banking sector was clouded by Deutsche Bank’s predicament, the overall performance of the blue chip index was boosted by an oil-driven rally amongst energy and mining stocks. The Bank of England (BoE) maintained its key interest rate at 0.25% during the month.

During September, Japan’s Foreign Ministry published a report warning that the UK’s exit from Europe could motivate Japanese companies to shift their UK-based European head offices out of the UK and into Continental Europe, if EU laws cease to apply in the UK after Brexit. Meanwhile, the Bank of Japan (BoJ) adjusted its stimulus package during the month: although its key interest rate remained unchanged at -0.1%, it announced plans to keep yields on ten-year Japanese Government Bonds (JGBs) at around zero percent. Over the month, the Nikkei 225 Index fell by 2.6%.