Daily market commentary by Ben Laidler, global markets strategist at trading and investment platform eToro.
With less than a week left for the new meeting of the Federal Reserve #FED , the expert points out that “hopes for an interest rate cut and the drop in long-term bond yields have “triggered an early Santa rally.”
“This is a frontal attack by the #mercado on the outlook published by the Fed, which will feel doubly unhappy that financial conditions are now more lax than when it started raising rates,” he explains.
The market faces the Fed again
STRUGGLE:
Hopes for a rate cut to #interés and a decline in long-term bonds #rendimientos have triggered an early Santa Claus rally.
Now that the markets are optimistically pricing five rate cuts in the US next year, starting from the March meeting, this is a frontal attack by the market on the outlook published by the Fed itself, which will feel doubly dissatisfied with that financial conditions are now more lax than when they started raising rates.
We expect markets to face reality at Wednesday's FOMC meeting when the Fed revises its forecasts, but the market is rightly less afraid of facing a data-dependent Fed.
And we believe the groundwork has been laid for a rate cut in mid-2024 and a large rotation out of defensive US growth stocks and big tech stocks into more rate-sensitive assets, from real estate to Europe.
ROTATION:
Regardless of near-term reality risks, we believe the course has been set for rate cuts in the US and Europe in mid-2024.
This will trigger a widespread rotation across countries, sectors and styles, from the “winners” of 2023 defensive growth in the US and the magnificent Big 7 tech to the “losers” of 2023 among the cheaper, interest rate-sensitive areas. and out of fashion, from Europe to real estate.
These are much smaller assets, and even a modest turnover could have an outsized effect. The market capitalization of the US is four times that of Europe and that of technology companies is 10 times that of the listed real estate sector.
CONDITIONS:
Markets need to be careful what they wish for. If they ease financial conditions too much, inflation could experience an uncomfortable spike and the Fed would be forced to respond.
The Chicago Fed's national index of financial conditions (see chart) is now at levels before the Fed began raising rates in March of last year.
Its risk and credit components have contributed to this, especially the spreads on Treasury bonds and mortgages and the decline in the VIX volatility index.
The index is constructed so that zero represents the average level of financial conditions since 1971. Currently, a whopping 97 of its 105 tracking variables are looser than this long-term average.
