"If you spend your life waiting for the storm, you don't enjoy the sunshine" Morris West

 The Bank of England is preparing to raise interest rates in November, for the first time in a decade. On Tuesday, the year on year inflation rate was confirmed at 3% for the month of September, however, the core rate rose slightly below expectations to 2.7%. Three members of the Monetary Policy Committee appeared in front of the Treasury Select Committee on Tuesday. Two of those appearing are new members of the Committee and both expressed the view that they would be in favour of an interest rate rise in November. The third member to appear, Mark Carney, stayed away from the topic of interest rates and focused more on Brexit. He did, however, express the view last week that the markets should prepare themselves for a rate rise in the coming months. Later on, Wednesday we get year on year wage growth for September. It will be interesting to see if wage growth is starting to pick up along with the broader inflation rate, or if real wages remain under pressure.

The pound was little changed against both the dollar and the euro, as these inflation figures were in line with expectations. There was a little reaction in the gilt market as well, however, yields on the ten-year gilt have now fallen to a one month low, despite this latest inflation data and the threat of a rate rise in November.

Being bearish of the UK and sterling seems to be becoming consensual. It is worth reminding oneself the point of inflexion for an asset price is often the point when for the case for the opposite view is overwhelming, the point of euphoria or capitulation. The possibility of Jeremy Corbyn taking power, the uncertainty over Brexit and the impact it may have on the UK economy are the main reasons speculators are bearish of the pound. Fund managers, most underweight position, relative to history is the UK according to the latest Merrill Lynch Fund Manager Survey. As a matter of note, the second, as the oil price continues to climb, this time on Middle East tensions, is oil.

Sterling has had a reasonable bounce in the past few months and this appears to have reinforced the bearish view, based on the above arguments. Another good adage to remember markets moves in the direction that gives the most pain. For this reason, it is possible that be that sterling’s rise may continue to defy the experts.

Similarly, for the first time, it feels almost since 2007, no-one can find many fundamental reasons to be bearish of equities, as investors see economic growth and hence earnings growth, with limited inflationary and monetary headwinds. The jury appears to be out on whether we have reached the point of euphoria with that asset class.

Posted on October 17, 2017 .