Global Markets: In the financial arena, global markets are experiencing a wave of optimism, with MSCI’s world share index embarking on its seventh consecutive winning week, making it the lengthiest winning streak in six years. As investors bask in the glow of positive trends, various factors contribute to this buoyant atmosphere.
The recent Federal Reserve meeting has played a pivotal role in shaping the current market sentiment. While the Fed opted to leave interest rates unchanged, as widely expected, the notable development was policymakers penciling in a potential 75 basis points of rate cuts for 2024. Fed Chair Jerome Powell, in a significant shift, indicated that the era of historic monetary policy tightening might be over, citing faster-than-expected declines in inflation.
This dovish stance has spurred market enthusiasm, resulting in the pricing in of approximately 150 basis points of Fed cuts in the coming year. Similar expectations extend to the European Central Bank (ECB) and the Bank of England, with around 150 basis points and 110 basis points of cuts respectively.
Sebastian Vismara, Senior Financial Economist at BNY Mellon Investment Management, remarks on the unprecedented market response to the Fed’s dovish signals. “The Fed, obviously, was more dovish than expected, and the market has been rallying strongly on the back of that and Powell’s comments which endorsed rate cuts for the first time,” Vismara notes.
Global markets appear to be particularly attuned to the actions and sentiments of the Federal Reserve, placing a greater emphasis on its decisions compared to other central banks like the Bank of England or the ECB. The dovish turn by the Fed has become a key driver for equity markets, overshadowing concerns about global growth expectations.
Also Read: Global Markets Take a Dip as Investors: Anticipate Key US Inflation Data
Apart from the broader economic outlook, U.S. real rates hold significant sway over equity markets. The recent dovish stance by the Fed, indicating a willingness to cut rates, has resonated strongly in this context. The largest driver for equity markets, alongside global growth expectations, has become U.S. real rates.
MSCI’s world share index is currently up 0.16%, reaching its highest point since April 2022. This positive trajectory positions the index for a weekly gain of 2.7%, marking its best week since the beginning of November. Impressively, this run marks the seventh consecutive week of gains.
In the European arena, the STOXX 600 benchmark has risen by 0.37%, achieving a 23-month high. Simultaneously, S&P 50 futures show a 0.2% increase, maintaining the benchmark’s upward trajectory since Wednesday, where it reached its highest level since January 2022.
Despite the generally positive market sentiments, challenges persist within the Eurozone. On Thursday, ECB President Christine Lagarde emphasized that policymakers did not discuss rate cuts. However, Friday’s PMI activity data revealed difficulties in the Eurozone economy, with the preliminary Composite PMI falling to 47.0, worse than expected and marking its seventh consecutive month below the 50 level that separates growth from contraction.
These challenges have contributed to a rally in Eurozone bonds, challenging the ECB’s commitment to a higher-for-longer approach. Germany’s 10-year bond yield, for instance, saw a decline of 8 basis points, hovering near a nine-month low.
China, a significant player in the global economic landscape, has also contributed to market dynamics. Data from China showed an acceleration in the factory and retail sectors in November. However, some indicators fell short of expectations, signaling that the recovery in China may not be as robust as anticipated.
In the currency market, the euro experienced a dip of 0.28% to $1.0961. The weak PMI data played a role in this decline, although the euro retained the majority of its 1.1% gain from Thursday, primarily attributed to the ECB’s seemingly more hawkish stance compared to the Fed.
Oil prices have witnessed an upward trajectory, poised for their first weekly rise in two months. Positive forecasts from the International Energy Agency (IEA) regarding oil demand for the next year and a weaker dollar have contributed to this surge. U.S. crude rose by 0.18% to $71.7 per barrel, while Brent also saw a 0.25% increase to $76.80 per barrel.
In the precious metals arena, spot gold exhibited resilience with a 0.3% increase, reaching $2,041.8 per ounce. As global markets continue to navigate these dynamic conditions, investors closely monitor key indicators and central bank actions for cues on future trajectories. The intricate dance between economic data, central bank policies, and geopolitical developments shapes the landscape, providing both opportunities and challenges for market participants.
Our Reader’s Queries
How did Jerome Powell make his money?
Between 1984 and 1990, Powell was employed at Dillon, Read & Co., an investment bank. During his tenure, he focused on financing, merchant banking, and mergers and acquisitions, ultimately achieving the rank of vice president.
Will the Fed raise rates again in December 2023?
According to reports, none of the Federal Reserve officials anticipate an increase in rates by the end of next year. The Fed has been on a rapid rate hike campaign, raising the policy rate by 5.25 percentage points since March 2022. However, since July, the rate has remained steady as inflation approaches its 2% target rate, down from a high of over 9% in 2022.
Will the Fed cut rates in 2024?
The U.S. Federal Reserve has projected that interest rates will be cut three times in 2024, marking the first reduction since rates were lowered to their lowest point during the Covid-19 pandemic. This move is expected to benefit bonds and REITs.
What are the expectations for the Fed meeting in December?
In December, the Federal Reserve decided to maintain the target range of 5.25% to 5.5%, keeping rates steady. However, traders are now focused on policymakers’ forecast for rate cuts, which includes three in 2024. The Fed’s dot plot of central bankers’ rate expectations predicts four more cuts in 2025 and three cuts in 2026.