Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

SEPTEMBER is living up to its reputation as the weakest month of the year in the markets as investors get to grips with a new narrative of higher for longer interest rates. The cost of borrowing may be close to peaking but hopes for a rapid retreat to cheaper money look wide of the mark.

Three strikes and you’re out

Stock markets fell for a third week running last week after the Fed’s latest rate-setting meeting left no-one in any doubt that we are in a new interest rate regime. The near-zero rates that boosted markets for much of the 15 years since the financial crisis are well and truly over. Although interest rates were left unchanged, it was what market watchers call a ‘hawkish hold’ - one that sends a warning for the future to investors.

The evidence for that came in the form of the so-called dot plots, which indicate individual rate setters’ forecasts. They are now pointing to one more quarter point rate-hike this year but, more importantly, to a much slower than anticipated easing back in 2024 and 2025. By 2026, US interest rates are still expected to be nearly 3%.

That is feeding through into other markets in predictable ways. Bond yields are now standing at their highest level since 2007 as a stronger than forecast economy, higher inflation and higher rates are priced into the fixed income markets. And the US dollar is rising against other currencies where weaker economies and so less aggressive monetary policy is now being factored in. The pound is back down to $1.22 and expected to fall further.

First in first out

The UK started raising interest rates in 2021, slightly ahead of the Fed, and now it looks like it's reaching peak rates slightly before the US. Last week’s pause by the Bank of England was a bit of a surprise given the UK’s bigger inflation problem. But a narrow majority of rate-setters in Threadneedle Street decided that we need more time to assess whether the rates already imposed are still working through the system.

In particular, the UK economy looks to be slowing fast on the back of sharply higher mortgage rates. The health of the housing market is critical for consumer confidence in Britain and dearer home loans and high inflation are taking their toll on the UK economy.

Is the ECB also done and dusted?

The main economic announcement to watch this week is eurozone inflation, with expectations for a pretty sizeable fall in consumer price growth in Europe from 5.2% in August to 4.6% this month. That might persuade the ECB that its 10 rate hikes from negative territory to nearly 4% have done the job. Elsewhere, on the corporate front, it’s a quiet week. A few retailers on this side of the Atlantic, including ASOS and H&M, are the highlight with results also from cruise company Carnival, Nike and Accenture.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates.  Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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