The Fed has finally pivoted. By cutting rates by 0.5%, it has created a new wave of optimism in US and Emerging markets. The size of the cut brought a few doubts in relation to the performance of the US economy, with some fearing the chances of a hard landing on the rise. But one the whole, stocks have done well, with US stocks up more than 2% and emerging markets (EM) performing mainly positive.
In general, EMs tend to benefit from lower US rates. They render the credit they need in order to invest for the future cheaper. But sharp differences have surfaced between them, depending on their own circumstances.
Elsewhere, China has announced lower interest rates, lower reserve ratios for its banks which will improve liquidity in the system, new measures to support homeowners, as well as new funds available to support the country’s stock markets, as well as other measures to come. With the authorities finally perceiving a risk to their 5% growth target for 2024, we expect greater intervention as the year draws to a close, with even more stimulus to be announced over the coming weeks.
The large Fed cut has pushed most bond markets up. US Corporate and HY have done well gain. The logic is rather simple: with the US economy still growing moderately and easing credit conditions, companies are expected to be able to fulfill their debt payments. This is good news for the corporate world as a whole, but in particular for HY debt which, by definition is issued by companies facing trickier financial situations.
While Emerging markets have enjoyed a good month, the Eurozone’s performance has been disappointing, with EUR stocks slightly down. The outlook is deteriorating rapidly. Economic activity indicators such as PMIs are going through a torrid time, declining sharply in the service sector, while the industrial sector remains in the doldrums. Ifo business climate in Germany is worsening even further.
Investors are hoping new ECB interest rate cuts will save the day. But that seems fanciful. No amount of monetary policy can save an economy that lacks a serious plan for the future and is undergoing massive decline in key sectors (such as industry) while failing to be competitive in others, such as technology. Furthermore, the Eurozone lacks the skills to be a seriously contender in science and technology, and the anti-migrant rhetoric won’t help in the global race for talent. As the Draghi report makes clear, serious investment is needed.
At the end of the day, privilege a good diversification by assets and regions and invest with a proper time horizon.