The Doves* are back

The Federal reserve (FED) cuts big
European Central Bank (ECB) builds on June cuts
Gold at an all-time high

The month of September has been marked by further consolidation in the financial markets, which was accompanied by the slightly weakening economic data in the major economic areas. Thanks to slowing inflationary pressures, the central banks have announced some big interest rate cut moves during the month, which was greeted by investors with mixed feelings – cheering on the apparent end of the hiking cycle, while assessing the aftermath of the slowing economic activity.

Against that backdrop, developed markets’ equities (measured by MSCI World index) have risen by 1.69%, while emerging markets’ equities (measured by MSCI Emerging Market index) have jumped 6.45%. During the same period yields on bonds have decreased, with 10-year US Treasury bond yields declining to 3.79% from 3.9% a month ago, while German 10-year Treasury bond yields decreased to 2.12% from 2.3% a month ago.

FED’s jumbo cut

The Federal Reserve of the United States has lately been one of the lone major central banks globally not to cut interest rates in response to weakening economic activity. Investors, however, have come a long way from the wild expectations of steep cuts as early as 2024 March by rolling back their forecasts radically over the late spring/early summer months. Therefore, in the build up towards the FED rate cut the market reaction was again reflecting the upcoming cut, although some market participants were still taking cautious approach having been caught by surprise by a quick change of expectations in the beginning of the year. The cut it was. The Federal Reserve has joined the global central banks mid-September by cutting full 0.50% to the new level of 4.75%-5%. Moreover, in the wake of this latest decision the Federal Reserve has updated its own projections, thus showing the expectation of lower interest rates this and next year.

ECB doubles down

Even before that all-important FED meeting in the US, the European Central Bank, on the other hand, has delivered a second interest rate cut this year, having started the easing cycle in early summer, already. With some of the key Eurozone economies on the verge of recession and inflationary pressures receding, the European policymakers were largely expected to continue their interest rate reduction path. However, just like their colleagues on the other side of the Atlantic, ECB has made it clear that the future decisions will be very much dependent on the macroeconomic data and the future interest rate cuts are not pre-determined.

One way or another, what it means essentially is that central banks globally are in the interest rate lowering cycle in full gear which will add additional monetary stimulus to the economic activity around the world. With that said, the large majority of the central bank policymakers regularly state that they do not expect the return of the zero/negative interest rates any time soon, hence the need to manage the expectations of the market participants of what is likely to be achieved in the upcoming years.

Gold shines

Recently, the global economy has been plagued with inflationary pressures and geopolitical risks reignited by the war in Ukraine and then heightened by the Israel-Hamas conflict in the Middle East. Under these circumstances, the conservatively minded investors do search for the supposed safe haven investments, which are supposed to hold their value in the face of political and economic uncertainties. Gold has traditionally been one of such safe haven investments. Its market price has exceeded the previous high of around 2000 USD/ounce in late 2023 and kept on marching north ever since. With central banks now firmly in the interest rate cutting mode (and yields on potential alternative investments dropping), some gold investors certainly took that as another hint to increase the prices of the precious metal even more. At the end of September, the gold price stood close to an all-time high at 2634 USD/ounce, having risen over 25% in this year alone.

Gold price, USD/ounce

Source: Investing.com

Market view

With the regular flow of relatively soft economic data and weakening inflation, the market participants do appear to take a defensive stance in their investment allocations. This positioning is partially justified by the central bank assessments of the economic activity and relevant decisions in the monetary policy. With the potentially volatile autumn political season in the US this autumn, we envision the significant part of the market participants may want to limit their volatility exposures, thus prolonging the defensive trades into autumn months.

* A dove is a policymaker who supports lower interest rates and looser monetary policy, in general.

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