The ECB as “pivot” first-mover, equity strategies and money markets
The ECB might lead the pivot to rate cuts
Markets are convinced that central banks will pivot to interest-rate cuts next year. Who will lower rates first – the Bank of England, the Federal Reserve, or the European Central Bank??
This visualisation tracks the evolution of futures markets to show when a quarter-point cut from the terminal rate has been priced in.? This month, the ECB has taken the lead in the pivot race: its first cut is expected in April, compared with May for the Fed and July for the BoE. (Our next chart discusses the ECB comments that might have prompted this, and explores the effect on German bond yields.)
Germany’s yield curve is compressing
This chart can be applied to different countries using Macrobond’s change region functionality.
German bonds have rallied since ECB official Isabel Schnabel recently suggested there is a limited likelihood of further interest-rate hikes in the eurozone, citing a “remarkable” inflation slowdown.
This chart shows the effect on the German yield curve versus very recent history – the current quarter. From 1-year to 30-year securities, yields are at their quarterly lows.
The right side of the chart tracks the deviation from the quarterly and yearly average yields.?
In search of stock bargains, Latin America appeals
US equities have rallied on the strength of mega-cap tech companies, optimism about a soft landing and hopes for lower interest rates next year. But as a result, they are also richly valued, potentially limiting their upside potential.?
Investors looking for cheap alternatives might use our chart to consider emerging markets. Latin America is the most undervalued, based on relative price-to-earnings (P/E) valuations versus US stocks.
In November, the relative 12-month forward P/E of Latin American versus US equities was lower than its 10-year interquartile range. By contrast, emerging markets in Europe, the Middle East and Africa (EMEA) were relatively close to the 10-year median.?
Some of the political and economic headwinds in the region are easing. Brazil has started cutting interest rates ; in Argentina, markets responded positively to the election of libertarian populist Javier Milei.
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