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INVESTMENT NEWSLETTER

October 2024

SEPTEMBER IN REVIEW: RATE CUTS SPARK MARKET RALLY

FED'S SURPRISE MOVE IGNITES INVESTOR OPTIMISM

The Federal Reserve kicked off its easing cycle with a bang, cutting the federal funds rate by 50 basis points to 4.75-5.00%. This unexpected move, driven by concerns over rising unemployment and confidence in inflation control, sent shockwaves through global markets. Investors cheered the decision, pushing U.S. equities to new highs as hopes for a soft-landing scenario gained traction. The S&P 500 climbed 5.5% for the quarter, while the tech-heavy Nasdaq lagged slightly, gaining 2.6%.

GLOBAL CENTRAL BANKS FOLLOW SUIT

The Fed's aggressive stance prompted other major central banks to follow suit. The European Central Bank lowered its deposit rate by 25 basis points to 3.50%, while the Bank of England held steady at 5.00% after an August cut. Even the traditionally cautious Bank of Japan signaled potential future rate hikes as inflation firmed. This coordinated global easing helped propel the MSCI World Index up 6% for the quarter, with emerging markets outperforming developed markets by a significant margin.

CHINA'S STIMULUS BLITZ REIGNITES ASIAN MARKETS

In a bold move to counter economic headwinds, China unveiled a comprehensive stimulus package. The People's Bank of China surprised markets by cutting key interest rates, including a 20 basis point reduction in the 7-day reverse repo rate to 1.50%. These measures, coupled with property market support and equity market interventions, sparked a dramatic rally in Chinese stocks. The Hang Seng Index surged an impressive 19.3% for the quarter, marking its best week in 16 years and injecting newfound optimism into Asian markets.

BALANCING ACT IN A SHIFTING LANDSCAPE

FLIPPING THE UNEMPLOYMENT SCRIPT

Despite concerns over rising unemployment that partly drove the Fed's decision, labor markets across major economies continue to show resilience. In the United States, the unemployment rate has ticked up to 4.2% from five-decade lows but remains historically low. Wage growth has moderated, easing inflationary pressures while still supporting consumer spending. In Europe, labor markets remain tight, with skills shortages persisting in key sectors. The impact of monetary easing on job creation and wage dynamics will be closely watched in the coming months.

INFLATION A GLOBAL PRICE-TAMING GAME

Inflationary pressures continue to ease in most developed economies, vindicating central banks' pivot to looser monetary policy. In the U.S., core inflation has fallen sharply from its four-decade highs, approaching the Fed's 2% target. However, the picture is more mixed in other regions. Europe continues to grapple with above-target inflation, while Japan is seeing a welcome firming of prices after decades of deflationary pressures. The interplay between monetary easing and inflation expectations will be crucial in shaping economic outcomes.

TRADE WINDS SHIFT: NAVIGATING THE ECONOMIC SEAS

The shifting monetary policy landscape is reshaping global trade dynamics. Currency movements, particularly the weakening of the U.S. dollar, are altering the competitiveness of exporters across regions. China's stimulus efforts could provide a boost to global trade volumes if successful in reviving domestic demand. However, ongoing geopolitical tensions and the potential for new trade barriers continue to pose risks to the smooth flow of goods and services. Companies and policymakers alike are navigating this complex environment, with implications for supply chains and economic growth.

ECONOMIC TAPESTRY: WEAVING GLOBAL THREADS

EUROPE'S TIGHTROPE ACT: BALANCING GROWTH AND INFLATION

The Old Continent finds itself in a delicate balancing act as it navigates the crosscurrents of monetary easing, persistent inflation, and exposure to China's economic shifts. The European Central Bank's recent 25 basis point rate cut to 3.50% signals a shift towards supporting growth, but inflation remains stubbornly above target in several member states. Meanwhile, European companies with significant sales exposure to China have continued to underperform regional markets in 2024, despite recent stimulus measures announced by Beijing. Automakers and luxury goods producers, deriving approximately 25% of their revenues from China, are among the most vulnerable.

CHINA'S ECONOMIC REBOOT 2.0 AND GLOBAL RIPPLES

The sleeping dragon of the global economy has roared back to life with a comprehensive stimulus package that caught many observers off guard. The People's Bank of China's surprise 20 basis point cut to the 7-day reverse repo rate, bringing it to 1.50%, is just the tip of the iceberg. A potent cocktail of monetary easing, property market support, and equity market interventions aims to reignite growth in the face of persistent deflationary pressures and weak domestic demand. However, the global market reaction suggests a cautious optimism. European stocks exposed to China have trimmed some losses after the stimulus measures were announced, but they are still down so far this year.

TAMING THE ECONOMIC BULLS AMIDST GLOBAL SHIFTS

The emerging market landscape resembles a high-stakes rodeo, with economies attempting to ride the bucking bronco of global economic shifts. The confluence of a weaker dollar, China's stimulus blitz, and synchronized global monetary easing has created a potent cocktail of opportunities and challenges. Countries with improving current account balances and those benefiting from supply chain diversification trends are poised to attract increased capital inflows. India continues to shine as a beacon of robust domestic growth and increasing global competitiveness.

COMMODITIES AND CURRENCIES IN FLUX

COMMODITY COMPASS: OIL TENSIONS AND GOLD'S GLITTER

The commodities sector is navigating a complex landscape shaped by geopolitical tensions and monetary policy shifts. Oil markets have turned bullish, driven by Middle East tensions and potential supply disruptions, with options traders positioning for higher prices despite earlier expectations of subdued demand.

Meanwhile, gold's outlook has brightened, with forecasts revised upward for the next 12 months. This optimism is fueled by two key factors: the global trend towards lower short-term interest rates, which is driving investment demand, and strong buying from emerging market central banks. These central banks are motivated by heightened geopolitical risks and concerns over US debt sustainability, viewing gold as a hedge against economic uncertainty and potential currency debasement.

CURRENCY CROSSCURRENTS: DOLLAR DYNAMICS AND REGIONAL SHIFTS

The currency markets are in flux as central banks pivot towards easing and geopolitical factors come into play. The US dollar, while weakened by the Fed's rate cut, may find support if the US economy achieves a soft landing while other regions struggle.

European currencies face diverging paths, with the euro confronting potential downside risks as the ECB signals rate cuts, while the pound sterling maintains a relatively stronger position.

The Japanese yen's outlook is tied to the Bank of Japan's policy normalization, with potential for appreciation tempered by US Treasury yield movements. As the global easing cycle unfolds, currency dynamics will be heavily influenced by relative economic performance, policy divergences, and the looming US presidential election.

THE GLOBAL EQUITY SYMPHONY: HARMONIZING REGIONAL MOVEMENTS

WALL STREET'S RENAISSANCE: AMERICA'S MARKET REBIRTH

US equity markets are surging on the back of the Federal Reserve's aggressive 50bps rate cut , this monetary pivot has propelled the S&P 500 to near all-time highs, with expectations of improved corporate profitability, especially for medium and small-cap companies. The rate cut cycle is anticipated to broaden the rally beyond mega-cap tech names, potentially shifting the balance towards more cyclical sectors.

Historically, equity price-to-earnings (P/E) multiples tend to be supported during rate cuts in non-recessionary environments, which aligns with the current base case scenario.

However, investors remain cautious due to potential volatility surrounding the upcoming US presidential elections and the possibility of corporate tax increases depending on the election outcome.

EUROPE'S ECONOMIC ODYSSEY

European markets are cautiously optimistic, with the MSCI Europe Index targets revised slightly upward partly supported by recent Chinese stimulus measures. However, the region faces significant structural challenges, Slow productivity growth over the last two decades is seen as a root cause of European economic struggles.

THE DRAGON'S ROAR ECHOES ACROSS EMERGING MARKETS

China and Hong Kong equities have experienced a dramatic shift in sentiment following a series of coordinated policies and easing measures that exceeded market expectations. This optimism has spilled over to other emerging markets, with the MSCI Asia ex-Japan Index seeing a firm rebound.

In China, the explicit mention of "stop housing price decline" in policy announcements signals a strong commitment to supporting growth and combating deflation.