September in Review

Indices across the globe experienced volatility throughout the month of September, with the U.S. equity market (S&P 500 Index) rising 1.58%, and the Canadian equity market (S&P/TSX Composite Index) falling 3.99%. Despite the mixed performance, both U.S. and Canadian equity markets maintain solid year-to-date results of 13.96% and 12.20% respectively.

Bank of Canada (BoC) policy will march to the beat of its own drum

The BoC announced last month that its monetary policy will remain independent from the U.S. Federal Reserve (the Fed) and may even diverge depending on the state of the Canadian economy. Many economists expect the BoC to keep interest rates unchanged well into next year. In contrast, the Fed is expected to end its quantitative easing program in October, and most experts believe it will likely start raising interest rates mid-way through 2015.

The Fed maintains its dovish stance, or do they?

The Fed maintained its commitment to keep short-term interest rates near zero for a “considerable time” due to “moderate” growth in the economy. Despite rising inflation and improving employment in the U.S., the country is still below the Fed’s long-term target and the Fed would like to see further improvement before raising interest rates. The risk: unexpected economic strength may speed up the timetable for a rise in interest rates, prompting a sudden surge in volatility that could put the brakes on growth.

U.S. dollar strength and what it means for markets

September saw the U.S. dollar hit the longest stretch of monthly gains since 1967. The primary driver of the currency surge was the Fed’s signals of ending its monetary stimulus measures next year. From a Canadian perspective, the loonie depreciated roughly 2.5%, (a good omen for exports), as the country’s trade surplus expanded and manufacturing grew to pre-2008 levels.

Meanwhile in Europe

Scotland voted to stay in the United Kingdom (U.K.) – in a referendum on independence – avoiding the breakup of the 307-year-old union. Over 55% of Scottish voters supported the “no” campaign while close to 45% sought independence, as a record turnout of more than 90% in 32 districts sealed the fate of Scotland. Markets reacted quickly to the news as U.K. shares helped lead European equities to a six-and-a-half year high and the pound rose to the strongest level in two years.

China shows signs of slow-down; causes markets to react

China’s economy showed evidence of a slowdown with industrial production and foreign direct investment hitting multi-year lows in August. This has forced China’s central bank into action, announcing that it will inject US $81 billion into their banking system in order to lift business confidence and investment following the string of weak economic data. Markets haven’t reacted kindly to this news, as virtually every equity index saw declines in anticipation of the news out of China getting worse.