The anticipation of persistent high interest rates dampened the mood in stock and bond markets as the third quarter drew to a close. Yet, UK investors experienced less impact from this downturn, as the pound weakened significantly against the dollar, and local stocks and bonds outshined international ones. In sterling terms, the MSCI All Country World Index finished slightly up, while UK government bonds, known as gilts, dipped by 0.8%.
This bearish sentiment intensified after the Federal Reserve's September meeting, where officials signaled higher future interest rates due to unexpected economic robustness. This was a departure from market expectations, which had been leaning towards a softer stance on rates, leading to a reevaluation among investors. Consequently, the US 10-year Treasury yield soared past 4.5%, a level not seen since 2007.
Conversely, the Bank of England and the European Central Bank suggested they might be nearing the end of their rate-hiking cycles. Both the UK and the Eurozone have been lagging behind the US economically, and recent communications imply that policymakers believe they might have raised rates sufficiently, even as inflation remains high. The BoE paused its rate hikes with a close 5-4 vote, maintaining the base rate at 5.25%, a decision backed by key committee members.
A lower-than-expected Consumer Price Index figure in the UK, falling to 6.7% from a previous high of 11.1%, likely influenced the BoE's decision and bolstered UK stocks, which gained 2.5% for the quarter. The pound's drop to $1.22 also played a role in this performance. UK government bonds performed better than those in Europe and the US, buoyed by positive inflation news and the BoE's pivot.
In the US, Wall Street retreated as yields hit new highs, with the market ending around 3.5% down in local currency terms. Despite this, US market returns for the year to date remain above global, UK, and European indices.
The relative performance between growth and value stocks has become noteworthy, with growth leading in the US and value in Europe. US tech stocks, spurred by AI excitement, have benefitted from the robust economy, which has helped negate the typical adverse effects of higher rates on growth stocks. In Europe, the dimmer economic outlook has favored value stocks, as growth stocks tend to be more sensitive to economic downturns.