Fiscal Insiders: Monthly Update September 2024

Welcome to Fiscal Insiders: Monthly Update. Here we take a look back over what affected the market in August and let you know what’s in store for September. Here’s our portfolio manager Chris with everything you need to know.

A look back at August

August got off to a turbulent start as recession fears in the US led to an equities dump on Japanese markets. Tech stocks dented the Nadsaq & S&P 500 with shocking unemployment figures fueling uncertainty and increasing volatility.

The Bank of England announced its first rate cut since the Pandemic, with a 25 basis points cut to 5%. The reduction from 16 year high of 5.25% came after two consecutive months of inflation hitting its 2% target. Inflation did show a small uptick of 2.2% for August, slightly under expectation, although there remains concern amongst policymakers on services inflation which remains above 5%.

The much-awaited Jackson Hole Symposium appeared to rattle markets as Sterling posted two year highs vs USD. FED Chair Jerome Powell took the opportunity to tell the market “the time has come” for rate cuts, however failed to hammer home to projections of easing cycle the market had hoped for with a clear signal on reductions.

The FED kept their rates on hold as expected, however a shocking unemployment release at 4.3% which was the highest level since October 2021, alongside a poor Non Farms Payroll, has lead traders increase bets on the size of future rate cuts, with JP Morgan now pricing in 50 basis point reductions in both Sept and Nov decisions, they also see a 35% chance of a recession by year end in the worlds largest economy.

Sterling took full advantage, as Governor Bailey also joined the Symposium, cementing his thoughts that it was too early to declare victory on inflation, suggest there may not be the same appetite as their US counterparts for rate cuts.

After its first rake hikes in a generation, the Bank of Japan indicated that whilst markets remain unstable, the central bank will not hike rates, this is in contrast to Governor Ueda recent bullish sentiment, it remains to be seen if there will be further intervention from the central bank. China has received a recent inflation boost but tensions still remain high with the West as tariffs on Chinese goods look set to increase.

On the politics front, markets are anticipating a much tighter than expected presidential race between Kamala Harris and Donald Trump, which could well see increased volatility as uncertainty drives choppy waters in the market. Kamala Harris’ impressive start to her campaign continues to build after her first televised interview, despite notable changes on key policies such as climate change and immigration. Harris has pulled out the big guns with the Obamas assisting her campaign, as she confirmed Minnesota Governor Tim Walz as her running mate.

In the Middle East there is increasing pressure on Israeli Prime Minister Benjamin Netanyahu to pursue a ceasefire and secure the return of 101 remaining hostages. In Ukraine, Kyiv was bombarded by Russian missiles in retaliation for mass drone attacks across the border as President Putin looks to go on the offensive after losing ground in his Kursk region.

What’s in store for September

Anticipation will now build towards October’s budget Chancellor Rachel Reeves who is under fire on any proposed tax hikes with the economy growing at such pace, as she continued to defend a treasury audit showing a gap of £20bn in the public’s finances as justification for tax increases.

PM Keir Stamer finally appeared to come clean on his plans for tax rises last week. The Prime minister looks set to let his chancellor loose on Britain’s wealthiest in the upcoming October budget with a Robin hood style approach, sending the pessimistic message “those with the broadest shoulders should bear the heavier burden”. Whilst income tax looks set to be left alone, Reeves could well target capital gains and inheritance tax as well as targeting those who seek non dom tax status.

With major market focus leaning on the size of potential cuts to come, it’s worth noting that with the BOE set to hold at next month’s meeting on Sept 19th, investors instead may react to the Quantitative Tightening plans as Bailey looks to reduce stock £100bn over the next year to £550bn. This matters as QT puts upward pressure on guilt yields. Bailey’s appetite for this is increasing with plans to see the level of reserves fall below the amount bank desire, meeting their needs by borrowing from the BOE against pledged collateral, this in turn reduces interest rate risk as banks borrow directly from the Old Lady.

Optimism on the UK economy is now rife amongst traders after August’s drop in inflation, who are pricing now pricing in 2 further rate cuts this year from the Bank of England, as some banks look set to offer 3.5% mortgages The property market in the UK has proved its resilience despite interest rates hitting 16-year highs as confidence increases from lenders. UK GDP figures show the economy grew 0.6% in line with economist’s expectations, continuing its recovery after a shallow recession last year. Confidence is also increasing in the retail sector with a 0.5% boost for July, as the Euros tournament & store discounts lift summer spending.

Despite a quiet start to September, we anticipate another volatile month as traders return from summer holidays and market volume increases. We build towards Friday’s all important non-farm payroll data from the US & EU GDP rate

How can Fiscal FX help?

Market Orders

Our platform offers a market orders facility where we can target desired levels outside of UK core trading hours. This tool is fundamental when taking advantage of market volatility in a tough economic climate, our clients have seen significant profit margins off the back of this product when compared with their competition.

Forward Contracts

For those looking to help mitigate the risk of expected market volatility, then a forward contract may be the perfect tool, allowing you to lock in profit margins and fix your rates of exchange ahead of big political events. Our risk management solutions are one of the main reasons clients utilise our facilities, the ability to fix rates ahead of upcoming projects. Locking in profit margins and lowering the risk of FX losses. It is important to note, that as with any financial product, there is always a risk. Talk to our portfolio managers if you have any questions on using Forward Contracts for your business.

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