In addition to rounding up the week’s important issues in the financial markets, we’ve also added brief thoughts on what effects on wealth and investment management you should watch for, which we’ll continue to highlight each week.

Market Action:

As the U.S. election grows nigh, markets have registered concern as investors flee risky assets. Equities have sold off, the premium for insuring against losses has risen, and safe-haven assets like gold and the Yen have rallied. The selloff comes in the context of improving underlying economic fundamentals: continued labor force growth and continued increases in labor costs. The Federal Reserve elected not to raise rates just before the election (statement redline), but it seems likely to do so in December given current inflation measures. Productivity growth remains one of the big open questions at the moment; while productivity did rise last quarter, the rate of increase continues to reflect a long-run slowing of improvement. The slowdown might just reflect a transition towards a services-based economy though, where technology often cannot reduce the required labor of a task. The canonical example of a task that technology likely cannot simplify comes from William Baumol: “It’s fairly difficult to reduce the number of actors necessary for a performance of ‘Henry IV.’”

Outside the U.S., the narrative of market volatility caused by political instability reigned as well. The pound fluctuated on uncertainty over how long Governor Carney would stay at the Bank of England (the answer is until Brexit), a court ruling that Parliament must approve Brexit, and questions as to how much moderates could leverage the verdict to get a “softer” Brexit. The politics again took place against a backdrop of economic stability: the BoE does not anticipate needing to cut interest rates again and expects inflation to overshoot its targets.

In the European Union, while officials warned that the European Central Bank has “almost exhausted its monetary policy leeway”, European growth clocked in as expected. The fact that Eurozone firms are saving rather than spending capital earned or raised in the ultra-low interest rate environment does bring the sustainability of that growth into question. The continued and likely durable surplus of crude oil also could challenge exporter economies.

What to Watch:

Giving the Devil His Due,

The Polly Portfolio Team