• Fed off to an aggressive start to interest rate cuts, slower pace to follow
• Increasingly likely that ECB wil cut interest rates in October
• Chinese economic stimuli not enough

Global equities defied the usual September downturn, with the MSCI AC World Index gaining 2% for the month, despite persistent worries about economic growth and escalating geopolitical tensions. China was the standout performer, as the MSCI China surged 23.3% in response to the country's most significant stimulus announcement since 2015. The People's Bank of China implemented notable rate cuts, which will be complemented by substantial fiscal stimulus. Although specific details on the fiscal measures are still unknown, the scale of the stimulus is promising, and we expect further positive effects as more information becomes available. However, we believe recent policy actions are unlikely to address the long-term structural challenges we are concerned about.

 

The main focus in global markets was the onset of the widely anticipated US rate-cutting cycle. The Federal Reserve kicked off its easing phase with a substantial 50 basis point cut, signaling policymakers' dedication to maintaining low unemployment now that inflation pressures have subsided. Notably, the 10-year Treasury yield increased following the policy shift. The Fed's emphasis on economic resilience raised concerns that the journey to lower rates might be gradual and uneven, and that easing financial conditions could potentially rekindle inflationary pressures.

 

Nevertheless, the yield on 10-year Treasuries dipped slightly during the month. Fixed income markets saw positive returns, with higher-quality segments outperforming more growth-sensitive areas like High Yield. US 10-year yields have now decreased to around 3.70%, down from their peak of 4.70% in April. Our base case of an economic soft landing in the US appears now to be largely reflected in market pricing. At this point, we see limited immediate potential for a significant rise in bond prices. Markets are already factoring in aggressive rate cuts from central banks beyond 2024, which are incorporated into bond valuations. For further repricing to occur, there would need to be a substantial negative surprise to both growth and inflation.

Equity markets may not require the same degree of caution. With global borrowing costs on the decline, economic activity is likely to receive broader support. Overall, the economic outlook is brightening, with US rate cuts and Chinese stimulus likely to benefit a variety of markets. In the US, key economic indicators remained strong, as both retail sales and industrial production saw growth in August. The Citigroup US Economic Surprise Index, although still negative, has shown a significant rise since late August. Additionally, a robust September labor market report (+254,000 jobs) highlighted the resilience of the US economy, easing fears of an imminent downturn in labor market conditions. In the eurozone, economic data has been less encouraging, with services and manufacturing PMIs reaching 7- and 9-month lows, respectively. However, there are positive signs for a European consumer recovery. European households hold substantial savings, and with inflation stabilizing, real wages are increasing.

Markets may experience more uncertainty over the coming months even if the financial and economic climate has brightened significantly. With ongoing geopolitical tensions in the Middle East and Ukraine, and potential volatility ahead of a hotly contested US election, we believe the market environment remains one where investors should brace for increased turbulence. We advise against retreating from equities, as the US economy provides support, along with a strong earnings outlook, rising AI investments, headline inflation near targets and the “central bank put” (central bank support) back in place. We think the odds in favor of a soft economic landing have increased, and we continue to maintain an overweight position in equities.

Please find attached our last Asset Allocation Update for October.