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 per cent 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 per cent 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 per cent 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 per cent, 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 upward.
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 per cent 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 per cent 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 per cent 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 per cent 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.
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