ECB is implimenting another rates cut? Why Japanese Yen is set to strengthen without BOJ intervention?

What do we need to know for the week ended on 11th Oct 24

---

• A brief sell-off hit the equity market due to uncertainty around China's new stimulus announcement.

• The Japanese yen appreciated this week, driven by expectations that the Federal Reserve will adopt a more moderate approach to interest rate cuts in upcoming meetings.

• The ECB is expected to cut interest rates by 25 basis points next week.

• Companies in the UK traded ex-dividend, which temporarily depressed stock prices, causing the UK equity market to move in the opposite direction compared to the upward momentum seen in the US and EU equity markets this week.

• The UK and EU fixed income markets mirrored the US, with bond yields rising due to stronger inflation data and expectations that central banks may scale back aggressive rate cuts.

• Oil prices have jumped more than 10% since Iran's attack on Israel.

US Market Insights

There is a greater than 80% chance that the Federal Reserve will cut interest rates by 25 basis points at its November meeting, with nearly 40% of bond traders betting on a 50 basis point cut. The US dollar has remained strong since the release of last week’s robust payrolls report, reducing the likelihood of a substantial rate cut by the Fed. However, uncertainty persists following a surge in initial jobless claims to 258,000, the highest level in 14 months, largely driven by layoffs in Michigan and states impacted by Hurricane Helene. Despite labor market concerns, the rise in the consumer price index (CPI) underscores the continued presence of inflationary pressures.

Although US inflation has fallen to its lowest level since the pandemic, the Federal Reserve remains cautious as it balances inflation and labor market fluctuations when considering further rate cuts. A 25-basis-point cut is expected to cause a modest dollar weakness, while a 50-basis-point cut could lead to a more pronounced drop in the US dollar, making US goods cheaper abroad but raising concerns over inflationary import costs.

Next week’s corporate earnings reports from major banks like Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup, coupled with housing market data, will play a pivotal role in determining whether the equity market continues its rally. Strong earnings could bolster investor sentiment, while any weakness could increase market volatility.

Recommendation:

Bullish investors should consider taking a long position in the VIX (Volatility Index) with plans to sell next week, as market volatility may rise in response to key earnings reports and housing data.

---

UK Market Insights

Next week’s release of UK inflation data is expected to show a decline, and this will guide the Bank of England (BoE) in its future rate-cut decisions. After holding rates steady at 5% in September following a 25-basis-point cut in August, the BoE indicated it could move more aggressively on rate cuts if inflation continues to ease. A further decline in inflation could strengthen expectations for a rate cut in November, potentially triggering a modest rally in the UK equity market, particularly in rate-sensitive sectors like housing and real estate.

However, BoE Governor Andrew Bailey remains cautious, particularly about rising oil prices driven by tensions in the Middle East, which could complicate the inflation outlook.

Meanwhile, recent UK GDP data showed the economy grew by 0.2% month-over-month in August, driven by growth in the services, construction, and production sectors. This positions the UK for a third consecutive quarter of growth, although a potential contraction in September could flatten quarterly growth.

A rally in the UK equity market is expected next week, supported by easing inflation expectations and positive spillover effects from the US equity market. Strong US stock performance could lift investor sentiment in the FTSE 100, while any US market volatility could increase global risk aversion.

Recommendation: UK investors should consider a defensive strategy, focusing on gold or defensive stocks, and hold these positions until the end of the year due to potential volatility surrounding inflation data and global developments.

---

EU Market Insights

The European Central Bank (ECB) is expected to cut interest rates by 25 basis points next week, marking the third reduction this year. This is driven by easing inflation in Germany, where consumer inflation dropped to 1.8% in September, below the ECB’s 2% target. With growth stagnating in Europe’s largest economy, the ECB aims to support economic activity through continued easing.

The potential rate cut has weighed on the euro, which has experienced its worst weekly decline since July. Hedge funds have increased their bearish positions on the euro following strong US payroll data and expectations of further ECB easing. While the ECB’s rate cut is likely to boost European equities by reducing borrowing costs, the euro’s weakness could negatively impact export-heavy sectors, as a weaker currency raises import costs for European companies.

In France, Prime Minister Michel Barnier unveiled a budget that includes €60.6 billion in spending cuts and tax hikes, financed by a record €300 billion bond issuance. The plan’s proposed tax hikes on the wealthy could lead to capital flight, potentially weighing on investor sentiment in sectors like luxury goods.

The European equity market is expected to rise next week, driven by the anticipated ECB rate cut, easing inflation, and positive sentiment.

Recommendation:

Bullish investors should consider taking a long position in EU equities, with the potential to sell before November 7th, when the Federal Reserve is expected to announce its rate cut decision. The combination of positive sentiment and monetary easing presents a favorable outlook for EU equities in the near term.

Source: CNBC, Bloomberg, FTnews and Reuters.

Market indicator - 11 Oct 24

Disclaimer

The content on this website is for general informational purposes only and does not constitute financial advice. No liability is accepted for any loss or damage arising from reliance on the information provided.