Synopsis: The third quarter of 2014 is over for the investment markets. It looks like a fairly flat year so far, although the end September readings for equities have been pulled down by a rather volatile second half to September.

Date posted: Friday, October 03, 2014

Go back to the era of floods, and 2014 began with the initial ‘tapering’ of the Fed’s $85bn a month quantitative easing (QE) programme, which reaches its $15bn finale this month. The run-off of QE was predicted to push up bond yields, but somehow it has not worked out that way – at least for longer dated securities, as the data below shows:

* November 2013 and August 2014 data

+ Not seasonally adjusted

A few points to note from this table are:

• The UK stock market has gone virtually nowhere in nine months, despite the resilience of the economic numbers, such as October 1st’s confirmation of Q2 GDP growth of 0.9%. The FTSE 100 briefly dipped below 6,600 in August and in the third quarter once again failed to get past 6,900. Over the quarter the index was down 1.8%.

• The US market has outperformed the UK, despite the tapering of QE. In addition, the dollar has strengthened against sterling and, for that matter, virtually all other currencies.

• The Eurozone markets have held up better than might be expected given the zone’s economic problems. However, the euro has weakened over the nine months – down 6.3% against sterling and 8.3% against the dollar.

• As we said at the six month stage, the dog that didn’t bark was bond yields. Ten year government bond yields are now lower than when the year began in the US, Germany and the UK. The widely predicted 2014 yield increase has not materialised and in the third quarter 10 year yields dropped further. The Eurozone seems to be heading back to ignoring country risk: the gap between Spanish and German 10 year bonds has narrowed from 2.20% in January to 1.21% now.

• Short-term bond yields tell a different story. Two year bonds are taken as a good indicator of the market’s expectations of short-term movements. Thus the US and UK have seen yields rise in expectation of central bank rate increases. On the other hand, the Eurozone’s drop reflects Mario Draghi’s interest rate cuts (to negative territory in some areas) and the possibility – Germany permitting – of Euro QE beginning soon. Note that two year German government bonds also now have a negative yield – Ms Merkel is being paid to borrow.

• UK property, both commercial and residential, did well over the period. On the commercial side, each of the last 16 months has seen a rise in values according to Investment Property Databank (IPD) (a total increase of 12.8%).

• After a rally in the first half of the year, gold lost almost $100 an ounce in the third quarter. Other commodities were generally weak, with Brent Crude at lows not seen for more than two years. Iron ore, often seen as a guide to China’s economic growth, is down over 40% since the start of 2014.


The next three months begin with the end of QE in the USA and, just possibly, the start of QE in the Eurozone. In the UK a base rate rise moves ever nearer, as does the general election. May you live in interesting times…

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