There are currently a wide range of factors impacting the potential future direction of market:

  • the prospect of negative interest rates

  • US / China trade tensions having eased in the Covid era

  • the EU appears to be moving forward positively in terms of agreeing a fiscal Covid response package

  • the noise in the UK economy is increasingly about Brexit again

  • China is again doing well economically

  • particularly in an election period the US authorities are unlikely to want to allow equities to slip (noting that the US market is more important to US voters due to their pension arrangements than is the case, for example, in continental Europe)

  • there is currently little leverage in markets and institutional fund managers continued to hold significant cash reserves

  • that the UK index is more diversified than previously due to relative moves of its constituents

Looking forward, one area to monitor is how quickly governments try to repay the debts which have been created in supporting the lockdowns and when they will raise taxes to reduce these borrowings. At present it seems unlikely that governments will rush to reduce these borrowings as it would be a move towards fiscal austerity, which is not a vote winning situation. Moreover, low interest rates mean that the cost of the extra borrowing is manageable. The issue will be when interest rates eventually begin to rise.

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The markets are likely to experience volatility in the run up to the US election and afterwards if Joe Biden wins, as the markets will then have to price in his tax rises and policies. But outside the US, accommodative Central Banks and an ongoing economic recovery are likely to be supportive for equity markets. There will eventually come a time when Central Banks signal higher interest rates, but this will be when unemployment has reached lower levels and we are some way from this environment. Markets may look ahead to this and there is a risk that bond yields will rise from the current low levels (which would negatively impact bond and equity valuations).