Equity and bond markets saw further declines in September as central banks continued to raise interest rates in an attempt to tame inflation. US equities fell to November 2020 levels and experienced their worst September since 2002. In fixed income markets, US and UK bond yields rose to their highest level in over ten years and the pound plummeted to record lows, forcing the Bank of England to intervene by temporarily buying long term bonds in order to stabilise yields. The events of September illustrated a heightened sense of volatility in markets and highlighted that policymakers face a very difficult trade-off between bringing inflation under control and preserving economic growth.

The US Federal Reserve Bank increased interest rates by 0.75% in September. While the US economy has already recorded two consecutive quarters of negative economic growth, the labour market remains resilient. US inflation was flat in July and rose only 0.1% in August as higher costs in various sectors offset the decline in gasoline prices and markets reacted negatively to this data. Overall, inflation is expected to moderate in the coming months but to remain above the Fed’s target. Tighter monetary policy has certainly already impacted the US housing market as evident in rising mortgage rates and a decline in housing activity, however, a financial crisis is unlikely given stronger housing market fundamentals and the capitalisation levels of banks.

In the UK, the death of Queen Elizabeth II, the UK’s longest serving monarch, dominated headlines earlier in September. The UK has lost economic momentum and consumer confidence fell, although the labour market remained strong and unemployment reached its lowest level since 1974. The Bank of England’s Monetary Policy Committee increased interest rates by a lower than expected 0.5% to 2.25% in September. From a fiscal policy perspective, the UK government’s recent ‘mini budget’ highlighted their aim to boost growth with unfunded tax cuts and spending increases, which would widen the gap between government revenue and spending. Markets did not react well to this announcement, causing a slump in the value of the pound, a spike in yields and a fall in bond prices which forced the Bank of England to intervene, damaging confidence in the handling of economic policy by the Government. The peak in interest rates is expected to be higher as a result.

Europe continues to deal with the energy crisis, rising inflation and slowing growth. Economic growth in the Eurozone continued to deteriorate with data showing a decline in industrial production and consumer confidence. The European Central Bank (ECB) raised interest rates by 0.75% in September and the market expects the ECB to continue raising interest rates to reach 2% by year end. European equities fell in September amid disappointing corporate earnings and fears of recession.

The ongoing conflict in Ukraine entered a new phase in September as the Ukraine military successfully reclaimed territories that had come under Russian occupation. Earlier in September, Russia stopped its supply of gas to Europe through the key Nord Stream 1 pipeline, however, imports of liquefied natural gas helped the European Union to meet its target of underground gas storage required ahead of the coming winter, and gas prices declined. The proposals announced by the European Commission were positive and include plans for electricity savings, a cap on energy prices and tax on revenues of fossil fuel producers.

Chinese equities continued to come under pressure as the local currency weakened against the US dollar and signs of a fragile economy increased investors’ concern about the outlook. China’s zero COVID policy, weather-related disruptions and housing market instability over the third quarter have all weighed on the economy. Data showed reduced profits in the industrial sector and a contraction of activity in the services sector including domestic tourism and retail spending. Weak domestic demand suggests that China is not facing the same inflation pressures as the rest of the developed world and the subdued inflation environment allowed the People’s Bank of China to ease monetary policy.

Central banks in most major economies are currently facing the biggest inflation shock since the 1970’s and they are trying to do whatever necessary to bring it under control. As we go into the final quarter of 2022, the global economy is expected to continue slowing, with the leading developed markets likely to enter recession, led by the Europe and UK given the energy crisis, as well as the US.

After a very difficult year so far for financial markets, valuations appear more attractive for equities and notably bonds. Taking into account the challenging growth outlook, markets are already pricing in a moderate recession and a significant degree of further monetary tightening. The approach taken by central banks is likely to influence market movements and their priority to bring inflation down quickly as opposed to supporting growth may increase the magnitude of recession.


Market Performance


2022 Year to Date
FTSE All-Share -7.87%
FTSE World ex-UK -9.52%
FTSE Actuaries UK Conventional Gilts All Stocks -25.10%
FTSE Actuaries UK Index-Linked All Stocks -29.34%


Total returns in GBP to 30/09/2022



Key Rates
Bank of England Base Rate 2.25%
Inflation (Retail Price Index/Consumer Price Index)* 12.30%/9.90%


* August 2022

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.