This autumn the stock markets are starting off conditioned by various factors of uncertainty ranging from the imminent US presidential election, to the next monetary policy decisions of central banks, to the real stability of the economic situation on opposite sides of the Atlantic and to the prospective dynamics of the dollar exchange rate, elements that are partly linked to each other.
On the key rates front, the recent decisions of the Fed and the ECB to start a phase of reduction of key rates would clear the field of doubts about their real intentions. In fact, while for the ECB the path seemed obligatory, in the sense that the marked economic slowdown in Germany which impacts the entire European industry, caused by the weakness in China and the short-sighted decisions of Brussels on electric mobility, requires rapid monetary easing, for the FED the situation seemed less clear. The US central bank and the Treasury Department could have had an interest in inducing an economic recession in 2025, by maintaining the cost of money higher than the current modest situation can tolerate, in order to reduce in perspective, the interest on the long-term public debt, which is close to 6 trillion per year against a total debt of 32 trillion. This hypothesis was also part of a favorable timing, since next year is the first of the new presidency, giving the Administration all the time to revive the situation within the four-year term. But the recent decision of the FED to reduce the key rate by half a percentage point seems to refute this hypothesis, as it is a marked support for the stability of the economic cycle; therefore, the recessionary hypotheses should be postponed at least to 2026.
In the heat of the moment, the stock markets have welcomed the US decision favorably, but, after today’s technical action, it is best to wait for next week to evaluate the short-term dynamics of the indices. As mentioned, the European economic situation is very weak and will certainly have a negative impact on corporate profits, disappointing investors’ expectations, while even if the US economy holds up, electoral uncertainty could cause the market to correct in the short term. Any corrections in shares should be considered buying opportunities, as this stock market phase preceding the US presidential election presents technical characteristics of accumulation and could precede a bullish phase in the latter part of the year. This hypothesis would be confirmed by the analysis of the levels of systemic liquidity generated by central banks, from which it can be seen that the Asian institutions, BOJ and PBOC, have recently stabilized this aggregate after a six-month pause, while the FED appears decidedly accommodating, in line with the decision on the key rate, and the ECB has also normalized the level of its liquidity. Given that the current accumulation phase involves a lateral movement of the indices, it is important to exploit the sector rotation of demand, which favors both defensive sectors such as public services (utilities), pharmaceuticals, food and cyclical sectors given the recent turnaround in monetary policy. The industrial raw materials sector could be another beneficiary of this credit easing, while potential emerges from alternative areas to renewable energy production, such as nuclear both in terms of mineral extraction and new technologies.
For fixed income investments, attention to the financial quality of the issuer and an average duration of five years remains advisable, as the expected positive repositioning of the yield curve, especially of the dollar, risks being realized through a fall in short-term yields accompanied, however, by a rise in long-term yields, induced by the formidable financing needs of the Treasury, which will require higher coupons to be satisfied.
Nicola Bravetti Data Source: Bloomberg
“This report cannot – nor can – be consider a solicitation to invest in financial instruments”.