Last week was broadly speaking a risk-on environment, as Equity market valuations pushed ever-higher in their dramatic rebound from the lows experienced in April. The MSCI All Country World Index (ACWI) of global equities was up +2.3% for the week in local currency terms, which translated to a +0.8% return in Sterling terms as the Pound strengthened against all major currencies, particularly the US Dollar. The same risk-on appetite was observed in Fixed Income markets, as High Yield bonds rallied +0.6% while global treasury bonds retreated -0.6%. Emerging Market Local Currency Debt rallied +1.0%.

The main event on which the markets were focused last week was the virtual meeting of the Federal Reserve, which is typically held in Jackson Hole in scenic Wyoming. At the meeting, Chairman Powell announced a reasonably significant change to how the US central bank would implement monetary policy. This involved taking a more lenient approach to inflation, whereby the Fed would target an “average” inflation rate of 2%; rather than a target of 2%. This of course means that if the Fed undershoots 2% in one period, it can catch up via letting the economy run hot in a subsequent period.

Government Bonds initially sold off on the news, as inflation is the nemesis of a fixed rate of return – however, bonds soon rallied back. This could be symptomatic of a market that has lost faith in the ability of global central banks to research their objectives. If inflation is the desired outcome and monetary policy is proving ineffective, central banks may be implored to ‘stop digging’, and take a back seat to fiscal stimulus driven by government spending.

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