The past two weeks have seen significant market shifts, with the upcoming U.S. presidential elections being a key driver. Markets are positioning for a potential Trump victory, following the cues from betting markets rather than opinion polls. This alignment has influenced sector performances: financials have been outperforming, while oil and other commodities have weakened. Companies with domestic exposure are seeing gains over those with broader global exposures. One notable trend is the persistent climb in U.S. yields, even amid the Fed’s easing cycle, as the “Trump trade”-driven rebound and fiscal policy have added to the curve steepening.
Looking ahead, I anticipate that the Fed will continue its rate-cutting path at the November meeting with a 25 basis point reduction, regardless of the election results, to remain consistent with its data-dependent stance. However, with the strength of recent data—such as a solid September payroll report and a promising Q3 GDP print—a steady pace of 25 basis point cuts seems reasonable. Moving into next year, the rate trajectory will also be influenced by the election’s outcome and global trade developments.
In Europe, Q3 GDP growth data has surprised on the upside but remains relatively weak. The ECB executed a third rate cut in October, with another in December largely priced in. While the ECB’s path toward a neutral rate (around 2-2.5%) may offer temporary economic relief, it won’t resolve the continent's structural issues. Meanwhile, the U.K. recently introduced a budget plan with ambitious spending but shaky revenue projections, projecting a need for much higher borrowing (about £140 billion) through 2028. The markets reacted with a 20 basis point jump in 10-year gilt yields. In Japan, the Bank of Japan maintained its policy rate at 0.25% but offered a hawkish message on inflation, suggesting a possible 50 basis point tightening within the next six months.
Equity markets are mid-way through the earnings season, and the results so far have been weaker than anticipated. This is particularly evident in Europe, where consensus earnings forecasts for the Euro Stoxx 600 have been cut by 4%, settling at around 3.5% for 2024. In the U.S., cuts are milder, with 2024 earnings forecasts up by 8% on a pro forma basis. Despite the volatility, corporate growth is expected to swiftly outpace nominal GDP growth in developed markets, demonstrating resilience amid geopolitical and rate challenges. However, U.S. valuations continue to expand, driven by various factors, and the equity risk premium for the S&P 500 has now fallen below the U.S. 10-year yield. While positive seasonality and a shift in monetary policy are supportive, a degree of caution is warranted given current valuation levels.
Alexandros Tavlaridis
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