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Rate Cut Expectations: Fuelling the Santa Rally

Rate Cut Expectations: Fuelling the Santa Rally

We navigate through these financial waters, exploring the intersections of economic policy, market sentiment, and technological developments.
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24 NOV, 2023

By Johanna Zidani from RankiaPro Europe


As Thanksgiving approaches, a unique confluence of events is shaping the landscape of financial markets, offering a blend of optimism and challenges. The Federal Reserve's assertive stance on interest rates, a resolute market rally despite a contentious presidential election, and the impending impact of OPEC+ disagreements on the oil market are among the key factors drawing attention from financial experts. In this dynamic scenario, Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, provides insights into investor sentiment, risk aversion, and the prospects of a "Santa rally." Meanwhile, the tech world, particularly AI, experiences its own upheavals, with OpenAI's internal dynamics in flux and Nvidia's results prompting reflections on valuation and market dynamics.

Philip Orlando, Chief Equity Market Strategist at Federated Hermes:

Thanksgiving brings increased travel, falling prices and rallying financial markets. On the economic front, the Federal Reserve has been aggressively raising interest rates over the past 20 months. They have taken them to a 22-year high of 5.25-5.5%, simultaneously shrinking the balance sheet from $9 trillion to $7.8 trillion. With an expected lag, the tighter monetary policy has begun to orchestrate the desired effect. The unemployment rate has risen from a 53-year low of 3.4% in April 2023 to 3.9% in October; CPI inflation has declined from a 41-year peak of 9.1% in June 2022 to 3.2% in October 2023; and GDP growth is poised to slow over the next several quarters.

Even the contentious presidential election has not dissuaded the financial markets from donning their rally caps over the past month. In fact, it seems they have discounted the political turmoil. The S&P 500 has surged by 11% since Oct 27—largely reversing a like-sized decline in stocks during August through October—and is approaching our 4,600 full-year target. Benchmark 10-year Treasury yields have plunged from a 16-year high of 5% on Oct 19 to 4.4% now.

Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited:

We approach December with investors in a more positive place than has been the case for much of 2023. Our proprietary risk aversion indicator has seen a sharp inflection to a more risk-on sentiment, primarily reflecting the reduced likelihood of further rate rises. Central bankers continue to push the higher for longer message but markets will not listen: the only way is down. Equity investors are ready for the festive season and lower rate expectations will be a key catalyst to keep the “Santa rally” going through to Christmas. Weak macro data will further fuel equity indices. We can deal with the bills – and the potential hangover – in the New Year.

Perhaps more pressing will be the volatility in the oil market. Disagreement between OPEC+ countries has resulted in a delay to the policy meeting, which will now coincide with the commencement of COP28. While lower energy prices will be widely welcomed, uncertainty is never appreciated. At a time when the world comes together to discuss climate change, oil may take centre stage for the wrong reasons.

It’s been quite the week for AI. The turmoil at OpenAI seemed to resolve itself as rapidly as it began, although it may take time to unravel how governance and power structures at the non-profit have shifted and what this may mean for the organisation, its key partners and AI more generally. Investors in the space have generally reacted positively, with capitalism rather than altruism deemed the winner. Nvidia’s results gave pause however, with stellar growth surpassing expectations without truly surprising anyone – the share price slipped marginally. Valuing these companies, and determining the market share of the various players – even defining what the market is that they are sharing – continues to prove difficult.

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