September was a frustrating month for investors in global financial markets. The first half of the month saw both bonds and equities retreat on concerns the Federal Reserve would lift interest rates at its meeting on the 20th – 21st. As things turned out, the Reserve left the cash rate unchanged and revised down its forward profile of interest rates. The markets were reassured by this, leading bonds and equities to recover ground lost earlier in the month. This see -saw effect is now a recurring theme as markets dance to the tune of the interest rate outlook.
Here in Australia the Reserve Bank has maintained the cash rate at 1.5%, noting the economy is growing at a moderate pace but inflation is low and likely to remain so for some time. Once again, the Reserve Bank noted that an appreciating A$ could complicate the adjustments the economy needs to make.
The Bank of Japan announced a new dimension to its QE program aimed at generating a positive yield curve. Despite the commentary it appears markets remain sceptical about this move.
Meanwhile in Europe the European Central Bank [ECB] left its monetary policy stance unchanged at its meeting in early September. Financial markets interpreted the accompanying statement as a signal the ECB would start to wind back its QE programme. This contributed to nervousness and volatility, as did speculation about the solvency of Deutsche Bank later in the month.