Since the beginning of September the flow of news on financial markets it was particularly rich both on the front of the monetary policy and geopolitical side. He underlines it Crédit Mutuel Asset Management in the analysis edited by François Rimeu, Senior Market Strategist.
Global economy remains resilient
There Fed – explains the expert – the cycle has begun rate cut with a reduction of 50 basis points. A decision that did not surprise us considering the previous communication from the central bank but which, from our point of view, was not necessary considering the current situation in the United States. The economy is slowing but from very high nominal growth and we see no signs of a sudden drop in growth on either side of the Atlantic.
The Bureau of Economic Analysis released numbers for September that point in this direction, with a significant one upward revision in gross domestic income between early 2020 and June 2024 (7% to 11%). The upward revision of the savings rate from 3.5% to 5.2% in June 2024 confirms the good economic health of the country and the solvency of American consumers. It is therefore likely that expectations of rate cuts in the US are too optimistic, even if the risk of inflation appears to be under control.
In the’Eurozone the situation is different: the Olympic Games are over. The two major economies are in great difficulty and all the leading indicators seem to indicate low possibilities for improvement in the coming months (PMI, IFO, ZEW, etc.). Although the southern Eurozone economies are reacting reasonably well, the problematic German and French context should make the ECB more accommodative despite some continuing inflationary risks. We also remain cautious on French assets with an impending fiscal shock expected to negatively impact growth forecasts. It seems practically a certainty to us that the ECB will cut interest rates in October, and the risk of inflation in the medium term remains lower than in the USA.
Risky to move away from Chinese assets
The stimulus decided by Chinese authorities it’s one of the other highlights of autumn. After the failure of previous measures, there may be a temptation to ignore this new attempt but, from our point of view, that would be a mistake. The statements covered different sectors of the economy and sought to respond to China’s main problem: the consumer confidence. The 50 basis point rate cut on existing mortgage lending, the recapitalization of the banking sector ($140 billion) and announcements of consumer support ($140 billion – unconfirmed but very likely) are encouraging and could turn the tide the negative dynamics in which the Chinese economy finds itself at the moment. The impact of these measures on growth is estimated at between 0.3% and 0.9%. Although it is necessary to consider these estimates carefully and not compare them to those of US or European recovery plans during Covidthey are however better than previously attempted. Consequently, we believe it is risky to move away from Chinese or China-related assets, especially due to the negative market positioning.
The oil rally and the American elections
We cannot ignore the rebound recorded from commodities since mid-September. What triggered this rise was the rate cut by the Fed, which was pushed by the Chinese recovery plan and, in recent days, by tensions in the Middle East between Israel and Iran. It is difficult to say whether the price of oil will continue to rise since Chinese demand only partially affects oil prices (unlike iron or copper). Furthermore, beyond the geopolitical risk premium, supply and demand fundamentals do not support an excess demand market.
Despite the geopolitical tensions, attention gradually shifted towards the US elections. We cannot be certain about the winner or the equilibrium at Congress, but this does not justify taking excessive risks. However, we maintain a slightly positive outlook on equities as the global economy is holding up thanks to the US and emerging markets in general, particularly Chinawhich we expect to be at least stabilising. On the bond side, we prefer euro-denominated assets over dollar-denominated assets and the segmentor investment grade versus high yield.
October Outlook
We expect more volatility ahead of the US elections and a possible onset of conflict in the Middle East. Chinese government stimulus and the strong US economy should, however, support risk assets.