Just after midnight on Friday 7 October, the pound plummeted against the dollar, dropping more than 8 per cent from $1.26 to $1.15 in just eight minutes. Although within the hour the currency recovered some, but not all, of its losses, sterling's weakness does point to a coming rise in inflation.
But the major story last month was the sudden reversal in government bonds. UK, eurozone, Japanese and US bonds all sold off amid market fears that the easy money policies pursued by the developed world's central banks were finally coming to an end.
Japanese bonds fell and their yields rose over concerns that the Bank of Japan might call time on its long-dated bond-buying programme at its September meeting. In Europe, the European Central Bank's (ECB) failure to add any new stimulus at its 8 September meeting set markets on edge and yields rose.
Politicians and economists look to be shifting towards fiscal, instead of monetary policy, reducing the appetite for central bank bond-buying. Prime Minister Theresa May spoke out against the emergency measures taken by the Bank of England (BoE) since the financial crisis in her speech last week, saying the measures had caused some "bad side effects".
The yield on 10-year UK gilts climbed above 1 per cent for the first time in two months following her comments. Since its one-year peak in August, the Barclays Sterling 15+ Years bond index is now down 8 per cent. US bonds sold off in September, too, amid fears of a possible US rate hike in December.
Corporate bonds, however, are a different story. The BoE said last month that it would start buying corporate bonds. New sterling corporate bond supply totalled £13.7bn in the six weeks following the BoE meeting - up from £9.3bn during the whole of the first half of 2016.
UK equities, meanwhile, remain high: the FTSE 100 was propelled back above 7,000 again last week as a result of the sliding pound, and so far is the best-performing major index in 2016. It has posted some of the strongest returns among major global markets in recent months and investors everywhere seem in a risk-on mood.
Guy Monson, chief investment officer at Sarasin & Partners, says: "Global sector leadership has started to shift, moving away from defensive and comparably expensive utilities, telecoms and consumer staples stocks towards materials, technology and even selected US financial names as risk appetites trend modestly higher."
How to position your portfolio
September's worst-performing open-ended fund sectors were Targeted Absolute Return, Sterling High Yield, Sterling Strategic Bond, Sterling Corporate Bond and UK Gilts.
Chris Iggo, chief investment officer for fixed income at AXA Investment Managers, says now could be the time to take out inflation protection, and he is also keen on emerging market debt because it offers diversification. But he adds: "On the whole the bond rally is done for now and the last thing investors need is market beta exposure in fixed income."
Mr Monson says: "We will continue to take profits in bonds, while for the first time in several years adding gradually to our alternative holdings. These include uncorrelated assets (gold), selected and competitively priced hedge funds and our current infrastructure positions."
Meanwhile, Darius McDermott, managing director at FundCalibre, says markets are shifting so it could be time for a switch in investment style. UK small- and mid-caps have outperformed value for the past 10 years, but the US elections, any 'hard Brexit' and an Italian referendum could spell investor flights to safety. He says in that context Evenlode Income (GB00B40Y5R17) and Fidelity Enhanced Income (GB00B87HPZ94) could perform well.
Value-style investing has not been in vogue in recent years, with low rates and yields pushing investors into bond-like stocks with steady income streams. Catalysts for a shift have not fully emerged, but could be triggered by a US rate rise or the fallout from Brexit. "A clear catalyst for this rotation to begin in earnest is yet to emerge, but if you think value is on the cusp of coming back into fashion, now may be a good time to invest in a company that's 'cheap', as long as you're prepared to be patient," says Mr McDermott.
Value funds which are rated 'Elite' by FundCalibre include Investec UK Special Situations (GB00B61JXN13), L&G UK Alpha (GB00B28PT700) and Man GLG Undervalued Assets (GB00BFH3NB82).
The top-performing open-ended fund sectors during September were Japanese Smaller Companies which returned 9.74 per cent, and Japan which returned 4.45 per cent. These have been performing strongly for several months on the back of yen weakness.
The top 10 performing investment trusts over September included Japanese equity-focused Baillie Gifford Shin Nippon (BGS), International Biotechnology Trust (IBT) and Lindsell Train Investment Trust (LTI).
The market in a minute
Style: Growth UP, value DOWN
Assets: Equities UP, bonds DOWN
Sectors: Utilities, Telecomms, consumer goods DOWN mining, banks, technology UP
Equities: Emerging markets and developed both UP
Bonds: Long-dated gilts DOWN, UK corporate bonds UP
