The Weekly Update

Last week started with asset markets on tenterhooks; awaiting monetary policy announcements from the BoJ and Fed. As we had expected the BoJ moved to steepen the JGB curve, by launching 'QQE with Yield Curve Control', or Quantitative and Qualitative Monetary Easing with 10-year yield cap at 0%, and the Fed maintained the status quo; leaving a hike in December on the table.

The BoJ’s shift in policy creates a lot more flexibility without actually doing much to immediately push inflation higher. The central bank seems to have quietly dropped the unrealistic 2 year timeframe for reaching its 2% inflation target, forward guiding that an inflation overshoot will be tolerated, broad yield curve targeting rather than allocated QE amounts and maturities and the further possibility of increasingly negative key rates. The BoJ do still have some tricks up their sleeve though the latest comments suggest that they, like the rest of the world, still regard ‘helicopter money’ as unviable. However, there is still the possibility they are already preparing to pull out a fourth arrow, at the very least promoting wage increases to be based on future inflation expectations rather than the preceding year’s measure. After all with full-time wages remaining flat for over two decades many feel it is long overdue. We don’t see Japan’s economy sinking yet but there are clearly still a lot of holes to patch up.

Elsewhere, the Fed 'struggled mightily with trying to understand one another’s point of view' said Fed Chair Yellen, adding however that 'most participants do expect that one increase...will be appropriate this year' and that the issue is about timing rather than hiking. Having risen to 61.2% on Thursday, market odds for a hike in December ended the week around the same level, at 55.4%. The Fed’s median forward guidance was revised to two rate rises, from three for 2017.

US employment appears robust and August’s inflation numbers surprised on the upside, although retail sales did retreat. So some might say that the case for a 25bp hike has strengthened, but it appears that as much as the Fed may wish to tighten it is concerned with the eventual global market turmoil; as markets continue to cling onto central bank mutterings and have thrown fundamentals out the window. We have seen demonstrations of this all month as Fed speakers have opined differing views and asset markets have swung. We also have the market's overreaction since the Fed announcement yesterday; the S&P bounced over 1% into the close, the dollar and US Treasury yields fell and gold witnessed its strongest rally in a fortnight. The FOMC committee continues to indicate a 'gradual' path to tightening and this is exactly what they are doing, surely 25bps of tightening a year IS gradual.

Risk-on sentiment immediately picked up after the FOMC unchanged policy announcement and most assets classes enjoyed a bounce over the week. The yield on the 10-year UST fell 7bps over the week and the VIX (volatility Index) plunged 20%. Holdings across our portfolios benefited from the risk-on sentiment, especially at the long-end of the spectrum. Qatar sovereign 6.4% 2040s bounced 3.5 points just short of all-time highs. The issue continues to offer very attractive risk-adjusted return including  yield of ~17% with a comfortable 4 notch credit cushion, according to our proprietary Relative Value Model the bond could still rally another 20 points to reach fair value.

This week, market focus will turn to the US presidential debate; where Clinton and Trump are due go head-to-head in what might be the most tuned into TV broadcast in history; ~100m viewers. This is where we’ll get a real indication of where public opinion lies. The OPEC meeting, which begins today in Algiers, will also be watched closely. There have been rumors that Saudi Arabia has offered to freeze production at January levels, with Iraq stating the meeting could end with steps to tackle the supply glut; should be interesting to see what Iran’s stance is… we will not be holding our breath.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.