Will the Budget and BoE disrupt markets in characteristically fruitful fourth quarter?

Albert Camus said: ‘Autumn is a second spring when every leaf is a flower’. His lyrical description of autumn is an apt metaphor for the currently benign financial markets. However, beneath the foliage, green-fingered investors have plenty to consider.

Setting aside the conditions created by ongoing Brexit negotiations such as the lower Pound and the direction of domestic politics, the interest rate outlook is perhaps most significant. So far, inflation has stayed below 3 per cent, but policy challenges are still building for the Governor of the Bank of England and the Chancellor. The Bank looks poised to raise interest rates for the first time in a decade at one of their upcoming meetings, either in early November or mid-December, which may represent at least a reversal of interest rate cut prompted by the post-Brexit referendum vote.

This may seem surprising. Certainly, the economic case for an interest rate increase is not wholly proven given the aforementioned challenges. Monetary policy remains exceptionally loose with a negligible 0.25 per cent base interest rate, and the quantitative easing stimulus programme – which was further augmented at the time of the last interest rate reduction in August 2016 to address fears of UK recession – continues.

However, one interest rate increase does not make a trend and anyone expecting a return to interest rate and broader monetary policy norms of a decade ago, before the global financial crisis, is likely to be disappointed. The very slow pace of policy tightening by the Federal Reserve in America over the last couple of years provides an insight on how things might progress. In the US, the Fed has decided that ongoing challenges like high debt levels, muted wage growth and low productivity gains trump headline low unemployment levels. Typically, higher interest rates are not good news for financial markets, heralding slower growth and higher costs that, in turn, put pressure on profit levels. In this sense, the prospect of a modest increase is at least a minor positive.

But there is much more to keep an eye on during the autumn period. Uppermost among these are corporate earnings and the UK Government’s upcoming budget. The large number of results reported over the autumn period, and the large cap UK market bias towards sectors like oil, healthcare, banking and telecommunications, will tell their own story but commentaries will also be closely followed. With active stock pickers performing better in recent moves, this specific information flow is likely to prove more influential for investor returns than in previous years.

The same applies to the UK Budget which is set to be announced on 22 November. The Government can be expected to focus efforts on using its fiscal policy to help provide new incentives for business investment and job creation while at the same time maintaining a grip on the public finances.

Recent stock market performance history has shown that the fourth quarter has been fruitful for investors but decisions by the Bank of England, corporate earnings, Government Budget initiatives, UK political stability and Brexit discussions are all factors to watch closely, not to mention the usual mix of global stock market influences from other regions and countries such as monetary policy by the ECB. It’s even more vital in this age to keep a watching eye on everything. It remains a financial market to be actively cultivated, rather than to wait for the leaves to blossom.

Chris Bailey is European Strategist at Raymond James