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Market Update from Rathbone Unit Trust Management

Posted Friday, 20 November 2015, 2.11pm

“The US Federal Reserve (Fed) has dropped a few subtle hints that it still wants to raise interest rates this year. In its monthly announcement, the US central bank omitted any mention of global weakness staying its hand, among other semantic nuances. During October, the chances of a US rate hike, as measured by the treasury futures market (which values investors view of yields in the future), broke 50-50. That is a pivotal point, as the bank rarely acts against the market. The few times it has, in the 1990s especially, the fallout from the fixed income markets was massive.

We expect more turbulence in the coming months as interest rates rise. However, this is likely to be simply a shake out of aberrations, and driven by the short-term fears of a market that has almost forgotten what higher rates feel like.

The excessively dovish tone struck last month by the Bank of England was unexpected, even for us. We thought UK interest rate rises were a while off, but fourth quarter 2016 to 2017 is very late to the party indeed. The Fed’s subtle hints about wanting to hike rates in December were amplified by the hugely positive nonfarm payrolls release in early November. The number of new US jobs added was 271,000 – beating expectations by 91,000. It now appears almost certain that the Fed will get off the mark next month.

It seems an age since some commentators were discussing the (very good) chances of the BoE increasing its rate before its American counterpart. Yet that was less than a month ago. Now, the argument has been flipped on its head. Few have blinked. Greater information, swifter technology and 24-hour news cycles have amplified the noise around investments to ear-splitting volumes. As investors, we try to block that out as much as possible and always keep our eyes on the horizon and fundamentals.”

David Coombs, Head of Multi-Manager Investments, Rathbone Unit Trust Management

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