The technical accumulation phase of shares of the primary stock markets that began after the “flash crash” of early August, gave way to the subsequent recovery of prices in October, characterized by a certain gradualness, also because the elements of uncertainty, especially geopolitical, abound.
Certainties instead come from monetary policy, oriented in an accommodating manner on the opposite sides of the Atlantic, with the FED and the ECB intending to achieve the objective of a soft landing of their respective economies, a relatively easier task for the US Central Bank, decidedly more burdensome for the ECB, struggling with the technical recession of the largest economy of the Old Continent, Germany. In fact, the recent decision by the FED to reduce the key rate by 50 basis points was slightly surprising, when the economic situation appears to require a cut of only 25 basis points, if necessary. Aside from the unemployment rate near its lowest point and the stock market constantly recording new highs discounting the positive trend in corporate results, this sharp cut cannot be fully understood by considering the inflation dynamics. It is certainly correct to observe that the phenomenon is gradually receding, but there is an exogenous wild card constituted by the fact that the Chinese economy, struggling with a prolonged economic stagnation, exports deflation to Western countries, distorting the real domestic dynamics of the increase.
This observation gains relevance in light of what recently occurred on the Chinese stock market, fresh from a sudden and sharp rise linked to the expectation of important economic and monetary policy decisions that the government is preparing to undertake to stimulate domestic demand. If this were the case, the exogenous deflationary element would disappear, and inflation could soon be less benign than expected. The FED has probably considered this eventuality, so one could assume that the US economic situation is not as healthy as it appears, and that the monetary authority expects it to weaken in the second half of next year. Even the recent sharp increase in ten-year US government debt yields, which went from 3.6% to 4.2%, while apparently contributing to reducing the probability of a recession, given that the yield curve has flattened, which in reality represents a first step in normalizing the curve that has been manipulated by the Fed and the US Treasury over the last two years. In fact, an unusual monetary policy tool known by the acronym YCC, yield curve control, was used, aimed at reducing the cost of debt service, moving new debt issues along the curve in relation to its convexity and market demand. In this way, the duration premium, which is one of the components of the yield offered, was artificially reduced by about 100 basis points. It follows that without this contingent measure, today’s yield would be above 5%. Insiders have been misled for more than two years, interpreting the negatively oriented curve as a recessionary signal, which never materialized. The curve that would still be negative today, which, in reality would be flat, and if the FED were to reduce the key rate by 25 basis points twice more in the next three months, it would be positively oriented, shifting the probability of a recession by at least six months, therefore in the second half of 2025. On the political front, in two weeks the US presidential elections will take place, the outcome of which according to the latest polls is highly uncertain.
The only highly probable outcome is the partial vote for the Senate, which would see a Republican prevalence, while perhaps the Democrats will be able to maintain their majority in the House of Representatives. Looking at the margins that previous Democratic candidates had in the polls before the last 4 presidential elections, the almost non-existent gap of Vice President Harris does not bode well for her success. The moderate rise in US stock indices would seem to discount a victory for former President Trump, as the Silicon Valley giants, which influence the performance of the indices, have recently shown their disappointment with the Democratic candidate who has failed to meet their expectations.
Nicola Bravetti Data Source: Bloomberg
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