Markets brace for more rate cut mood swings after wild Q1
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[March 28, 2024] By
Naomi Rovnick and Karin Strohecker
LONDON (Reuters) -Global bond and equity markets are ending the first
quarter on a high, with investors poised for more wild swings after
months of lurching between optimism and pessimism about prospective rate
cuts from major central banks.
MSCI's global share index, which struck record highs in March, has risen
almost 10% since mid-January after traders dropped earlier bets for as
many as seven U.S. rate cuts in 2024 and instead embraced the idea of
cuts starting in June.
After Switzerland surprised with a rate cut last week, traders almost
unanimously expect the Federal Reserve to lower U.S. borrowing costs
from 23-year highs in June and the European Central Bank to cut its
deposit rate from 4% then too.
Dennis Jose, head of equity strategy at Exane BNP Paribas, said that
even if the Fed and the ECB lower borrowing costs around the middle of
the year, they could pause if economic growth improves, jobs markets
tighten and wage growth reignites inflation.
"I think it may be better to travel than arrive at that first rate cut,"
he said.
Equity and bond markets show "too much complacency," said Joe Kalish,
chief global macro strategist at Ned Davis Research. "It wouldn't take
the data to move much in either direction to upset the consensus."
EVERYTHING RALLY
As March closes, however, the hares are still running.
A global government bond index posted its first monthly gain of 2024 in
March as the quarter's rally became a buy-everything frenzy, sending
Japanese stocks past their 1989 bubble-era high and powering stunning
gains for emerging market debt.
Wall Street's S&P 500 index and Europe's STOXX 600 index are near record
levels.
Of major markets, only China has been left out of the party as its
once-roaring industrial growth engine continued to sputter. Elsewhere in
emerging markets, international bonds have enjoyed some stellar rises.
Argentina's international bonds returned more than 25% in the first
quarter, fired by hopes over President Javier Milei's radical reform
agenda.
Pakistan matched those gains when a government emerged from delayed,
inconclusive elections and has set out to secure a multi-billion IMF
deal. Returns for Ukraine also surpassed 25%, while Egyptian debt
benefited from capturing billions of dollars from Abu Dhabi and a new
IMF deal.
"High-yield EM sovereigns have strongly outperformed since 4Q23, buoyed
(by) risk-seeking from (the) Fed pivot," Citi strategist Johanna Chua
said.
In commodities, a supply shortage has pushed cocoa futures to record
highs, and in currencies the paring back of Fed rate cut bets has left
the dollar sailing upwards.
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People walk around the Financial District near the New York Stock
Exchange (NYSE) in New York, U.S., December 29, 2023.
REUTERS/Eduardo Munoz//File Photo
MIXED SIGNALS
With investors banking on a "no landing" scenario, meaning rate cuts
without recessions, some analysts raised the risks of economic
damage.
"This is a weird (economic) cycle where nothing is quite what it
seems and you've got all these conflicting signals right now,"
Andrew Pease, global head of investment strategy at Russell
Investments, said.
"This is not the sort of environment where you want to sit back and
buy into the prevailing optimism."
Even as markets bet on rate cuts, purchasing managers' surveys show
U.S. and euro zone business activity reviving.
Brent crude oil is up 13% over the quarter, after the International
Monetary Fund raised its global growth forecast in January and the
International Energy Agency hiked its oil demand outlook in March.
The dollar index, which measures its value against other major
currencies, ends the quarter up almost 3% as a strong U.S. economy
could make the Fed less likely to ease monetary policy aggressively.
Dollar strength is also pressuring other central banks, with
Japanese authorities hinting they are poised to prop up the weak yen
and analysts unsure the ECB and Bank of England will risk currency
weakness by cutting rates before the Fed.
Japan's yen is languishing around 34-year lows on expectations the
Bank of Japan will move slowly to tighten monetary policy having
just raised rates for the first time in 17 years.
A Deutsche Bank survey of 250 investors this month found almost half
expected no U.S. recession and inflation to still be above the Fed's
average 2% goal by end-2024.
More than half believed the S&P 500, which influences the direction
of stocks worldwide, was more likely to fall by 10% than to rise by
that amount.
"It would be a very different situation (to now) if inflation
surprises to the upside and rate cuts have once again to be pushed
further and further out. Financial markets would suffer," Guy
Miller, chief market strategist at Zurich Insurance, said.
(Reporting by Naomi Rovnick, Karin Strohecker; Additional reporting
by Dhara Ranasinghe; Editing by Dhara Ranasinghe, William Maclean
and Barbara Lewis)
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