By Jan Faure
Global markets rallied in November as cooler-than-expected US and European inflation data boosted investor sentiment. The consensus-beating inflation data supported the view that the current interest rate-hiking cycle in developed markets has reached its peak. This sparked a rally in equities, bonds and real estate assets.
In the US, the S&P 500 gained 8.9% while the tech-heavy Nasdaq Composite surged 10.7%. Meanwhile, Europe’s Euro Stoxx 50 advanced 7.9% while the UK’s FTSE 100 rose 1.8%. In the Asian markets, Japan’s Nikkei gained 8.5%, whereas Hong Kong’s Hang Seng eased 0.4%. Chinese equity markets faced renewed pressure due to concerns surrounding the persistent weakness in the Chinese real estate sector and its potential to undermine economic growth.
The meeting between Chinese President Xi Jinping and US President Joe Biden in San Fransisco culminated in various agreements on energy transition and climate change. The meeting was important for thawing relations and reducing tensions between the two global superpowers, with potential positive implications for markets worldwide.
In the Eurozone, a preliminary estimate showed that inflation surprised to the downside for the third consecutive month in November. The headline inflation rate (CPI) declined to 2.4% year-on-year (YoY), reaching its lowest level since July 2021. UK inflation dropped to 4.6% YoY in October, down from 6.7% in September, and below market expectation of 4.8%. In the US, October CPI slowed to 3.2% YoY, down from 3.7% in September.
With US monetary policy now contractionary (Fed funds rate exceeding headline inflation), the key challenge for Federal Reserve policy makers is accurately timing the first rate cut, while aiming to avoid an over-tightening economic blunder. Developed market companies are navigating unfamiliar territory as a much higher interest rate environment poses challenges, particularly for businesses that are highly leveraged or reliant on cheap funding. Consequently, investors are urged to focus on the strength of company balance sheets (quality).
The Bloomberg Global Aggregate Bond Index, an indicator for global investment grade bonds, closed 5% higher in November as government bond yields declined. This rally across all bond maturities clearly signals a shift in investor sentiment, reflecting the belief that a decisive “Fed pivot” on interest rates is imminent.
While the US economy has been resilient this year, signs of moderation are emerging as higher interest rates impact retail spending and activity levels in real estate. Anticipation persists that the aggressive monetary policy tightening cycle, in response to rampant inflation, will lead to a slowdown in economic growth. Nevertheless, the prevailing consensus view has continued to support the expectation of a soft-landing, or at worst, a shallow recession in developed economies next year. Encouragingly, asset allocation decisions are now, for the first time in many years, guided by healthy real returns in low-risk investment-grade bonds.
Table 1: Global Indicators – Local reporting currencies
