Mover and Shakers – what were the big trends in September 2023?

FTSE 100

The FTSE 100 enjoyed a particularly strong September, with the index stabilizing after a positive start to the month. Coming at a time of economic concern, many traders would expect to see UK stocks decline to reflect the heightened chance of a recession. However, the weakening UK economy instead hampered the pound, with the Bank of England’s decision to end their tightening cycle driving sterling sharply lower. The international nature of the FTSE 100 means that many companies earn in foreign currencies and report in pounds. With that in mind, the FTSE 100 can provide relative safety at times of economic distress as the decline for GBPUSD lifts earnings for those earning abroad. As such, the FTSE 100 looks to remain an outperformer as long as the pound weakens. Conversely, a risk-on switch for markets will often benefit GBPUSD, hampering the FTSE 100 and causing it to underperform its foreign counterparts.

Russell 2000

The Russell 2000 has been hardest hit over the course of September, with small-cap stocks losing traction ahead of a potential burgeoning economic crisis. The FOMC meeting brought a fresh dot plot that made for worrying reading in the small-cap world, with interest rates now expected to remain elevated well into 2025. Given the fact that many small-cap firms rely on continued funding to push through to profitability, the cost of borrowing is unlikely to fall anytime soon. Meanwhile, signs of economic weakness bring a difficult environment for businesses to work within, as depleted consumer savings lower spending expectations. From a historical perspective, small-cap stocks have rarely been so cheap. Quite when that translates into a big Russell 2000 recovery remains to be seen given the ongoing economic and monetary policy concerns. For now, the bears remain well and truly in charge.

US Dollar

The dollar enjoyed a bumper month, with concerns over a potential market correction driving haven demand for the greenback. The relative strength of the US economy has allowed for a continued hawkish outlook from the Fed, with markets still considering a potential final hike to come. The rising price of crude oil has caused serious consternation for market participants, raising inflation expectations and lengthening the timeframe for tight monetary policy. This means that we are increasingly likely to see crude oil trade in a positive correlation with the dollar, as further upside in energy prices lift haven assets. With calls for $100 crude, any signs of a second energy-fuelled rise for inflation would likely feed into equity weakness and dollar strength.

British Pound

The pound found itself on the bottom of the pile last month, with the economic outlook souring and the Bank of England stepping back from their hawkish monetary policy stance. A sharp decline in the services PMI survey highlights a potential contraction for the UK economy, while house prices are moving sharply lower in a sign that the Bank of England’s tightening has finally starting to take its toll on affordability. While we have seen inflation weaken, elevated earnings do signal the difficulty faced by the BoE in bringing down prices. Nonetheless, with signs of economic distress emerging in the face of recent CPI declines, the BoE decided to end their tightening phase in a bid to see how things play out. That decision to end their tightening despite relatively elevated inflation rates served to unwind much of the GBP long trade, with further downside likely if inflation falls further in October.

WTI

US crude spent much of the month gaining traction, as OPEC+ efforts to drive up energy prices through production curbs finally paid dividends. Joe Biden’s decision to draw down the US strategic reserves (SPR) may have looked sensible at the time, but we are now in a position where WTI approaches $94 and the US is faced with the prospect of an empty SPR that will ultimately need refilling. With energy traders looking ahead to a China recovery and US SPR refill programme, future demand looks to add to the bullish energy story. Underinvestment in fossil fuel industries under the guise of a green transition could bring significant weaknesses in supply story, meaning that we cold yet see plenty more upside to come.

Silver

The strength of the US dollar typically comes at the expense of precious metals, and that negative correlation has played out once again in September. While haven demand has often been confused as a positive environment for the likes of gold and silver, the trajectory of the dollar is the key. With USD rising, we have seen silver hit hard. The gold/silver ratio teaches us that silver typically outperforms in precious metal bull markets, but is more heavily sold off when times are tough. As such, further silver weakness could come in the event that risk-off sentiment continues to drive the dollar higher. However, any move to buy-the-dip in equities should similarly benefit previous metals when it comes around.