The reduction in US interest rates seen at the very end of July was, until a few weeks ago, almost wholly unexpected. After a period of slow but steady monetary policy tightening, the Federal Reserve has gone into reverse gear for the first time since the aftermath of the financial crash of ten years ago.
The reduction is all the more surprising given that the US economy continues to enjoy growth, unemployment is low and equity markets are high. These factors might normally suggest that interest rates ought to carry on rising gently. However, the missing ingredient is higher US inflation while there is evidence that global growth, although in overall terms not unsatisfactory, is slowing and ‘trade wars’ continue.
Interest rates may now fall further in Europe and in some emerging economies (where in some cases they are substantially higher than elsewhere), combining to make the backdrop for equity markets continue to appear favourable.
A further factor boosting equities is that for the most part, company results for the second half of the year so far have been positively received.
All of this has been helpful from the point of view of UK investors holding funds with an overseas focus in that they have also benefited from the decline in the value of sterling which magnifies foreign earnings growth when it is translated into the domestic currency. The medium-term inflationary implications of this are very likely to be sufficient to ensure that the Bank of England does not follow the Federal Reserve’s most recent example at least in the short-term, particularly given both short and long-term Brexit related uncertainties.