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Federal Reserve unwraps early holiday surprise
Macro

Federal Reserve unwraps early holiday surprise

The European markets have experienced a sustained rally, driven by a notable slowdown in inflation, decreasing government bond yields, and growing optimism about potential rate cuts in March 2024.
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19 DEC, 2023

By Johanna Zidani from RankiaPro Europe

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In a surprising turn of events, the recent Federal Reserve meeting has hinted at a shift towards interest rate cuts, leaving the financial world abuzz with speculation and reactions. The implications of this move, coupled with developments in global markets, offer a complex landscape for investors to navigate.

Global Central Banks Respond to Economic Dynamics

The Federal Reserve's decision to consider interest rate cuts has sent shockwaves through financial circles. Members of the rate-setting committee don't anticipate a hike in 2024, projecting a potential cut of 75 basis points by year-end. Fed Chair Jerome Powell underscored the accommodative stance, stressing the necessity of rate cuts to avoid a recession and achieve the 2% inflation target.

This shift is attributed to a significant pullback in inflation, primarily driven by energy factors, and the upcoming presidential elections. Contrastingly, the European Central Bank (ECB) has not signaled a similar change. While lowering growth and inflation forecasts, the ECB expressed concerns about persistent wage pressure. To assuage market expectations, the ECB announced a gradual reduction in its balance, mitigating initial concerns.

Simultaneously, the Bank of England echoes the cautious sentiment, opting for a prolonged pause in rate decisions due to wage inflation. Despite some committee members supporting a rate hike, market sentiment leans towards the Bank of England following the Fed's lead with a potential rate cut by mid-2024.

In a departure from the global trend, the Bank of Norway implemented a rate hike, pushing the reference rate to 4.5%. While this move led to the appreciation of the Norwegian krone, weakening European PMI figures suggest a relative economic strength in the United States.

The repercussions of the Fed's policy shift and positive economic indicators have triggered a 40-basis point drop in US Treasury bond yields for 2-year bonds. The US dollar weakened by 2%, prompting a general rise in equity markets, particularly favoring small-cap stocks. Responding to the evolving landscape, investment strategies are adjusting to an increased exposure to risk assets and an overweight position in small-cap stocks. In the fixed-income realm, a preference for duration persists, providing protection amid inflation retreat and global geopolitical uncertainties.

European Markets: A Month-Long Rally Continues

The European markets have experienced a sustained rally, driven by a notable slowdown in inflation, decreasing government bond yields, and growing optimism about potential rate cuts in March 2024. Despite ECB President Christine Lagarde's cautious tone, most sectors gained ground, with real estate leading the way, followed by construction and materials. Energy faced headwinds from Brent crude prices, and insurers felt the impact of declining bond yields.

Wendel's recent investor day disclosed ambitious plans for higher dividends, Fee Related Earnings (FRE) reaching 150 million euros by 2027, and a significant share buyback. However, Novo Nordisk faced challenges as a Phase 3 trial publication in JAMA affected market confidence in its weight-loss drug Wegovy.

Volkswagen's reported discussions with potential partners, including Renault, for an affordable electric car platform made waves, indicating industry collaboration to achieve cost efficiency. Meanwhile, Air France's rebound post-cost reduction plan announcement instilled confidence in the airline's profitability prospects.

US Market: Federal Reserve's Impact and Corporate Developments

The US markets responded positively to the Federal Reserve's more accommodative stance, with the Dow rising by +2.92% and the Nasdaq gaining +2.94% in the last five trading sessions. The Committee's indication of three rate cuts in 2024, placing benchmark rates between 4.50% and 4.75%, aligns with the market's expectations amid a slowed but elevated inflation scenario.

In the energy sector, Occidental Petroleum's acquisition of CrownRock for $12 billion followed Chevron's move to acquire Hess. Retailer Macy's received a privatization offer, reflecting ongoing changes in the sector.

A California jury ruling against Google's mobile applications monopoly in favor of Epic Games poses a significant threat to the Google/Apple duopoly in a $200 billion market. Meanwhile, Oracle and Adobe faced stock declines due to sales growth missing expectations and weaker-than-expected full-year forecasts, respectively.

Warren Buffett's Berkshire Hathaway reduced its stake in computer manufacturer HP, while X (formerly Twitter) is expected to significantly increase revenues to $2.5 billion in 2023.

Apple's record market capitalization of $3.1 trillion, nearing the entire market capitalization of the Paris Stock Exchange at $3.2 trillion, emphasizes the tech giant's formidable position.

In the healthcare sector, Moderna's +9.2% surge on positive skin cancer vaccine trial results indicates promising developments, with potential FDA approval in 2025.

As global markets continue to digest these developments, investors are navigating a dynamic landscape shaped by central bank decisions, corporate moves, and the ever-evolving geopolitical backdrop.

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