Eddy's Weekly Market Update

Stock markets are clearly being influenced by a resurgence of ‘FOMO’, in other words the fear of missing out on a (further) market rally. This is partially caused by the fact that there is still a large amount of liquidity worldwide sitting in money market funds, deposits, etc. This currently yields a considerable interest rate, but most market participants expect money market rates to decline. This in turn could trigger a significant flow of funds towards stocks, bonds, and real estate, ?causing the price of these assets to increase.

Additionally, the general sentiment towards the future of Western economies has improved. No recession, rather approx. 0,5% - 1% growth in Europe and approx. 2% growth in the US. This would be low enough to keep wage growth and inflation in check, whilst being high enough for corporate profits to increase.

Furthermore, it is favourable that both the ECB and the Fed have expressed their intention to cut rates during the course of 2024:

- In Europe, wage growth and inflation have decreased to a degree that the ECB expects inflation rates to drop to 2,5% this year and 2% in 2025. Keeping policy rates at their current levels would not make sense in that scenario, because real rates would increase - possibly causing a recession, which would be unnecessary since inflation would already be under control. In our view, recession fears are exaggerated because under decreasing inflation, disposable income in real terms increases.

- Over in the US, matters are more complicated due to the significant fiscal stimulus. Looking at interest rates, however, an argument that would counter this is the Fed’s recent upward adjustment to projected labour force growth (from 0,5% to 1,2% for 2024), which would imply that potential growth is higher than the Fed’s most recent estimate of 1,8%. If in this case the US economy grows at 2% this year, that would be under potential, meaning downward pressure on wages and inflation. Hence the general expectation that the Fed will, like the ECB, execute three 0,25% rate cuts this year and continue loosening policy into 2025.

Everything considered, quite a positive outlook. However:

- The projected US labour force growth will likely halt in several quarters, when the US adopts policies to (drastically) curb immigration. If growth remains at 2%, the Fed’s room to cut rates would immediately tighten in this case. Therefore, we are inclined to assume three Fed rate cuts are exaggerated, rather we expect a maximum of two rate cuts this year.

- Commodity prices appear to have bottomed out and have resumed their upward trend, this would impede a further decline in inflation.

- It appears that non-Western nations are becoming increasingly cautious about holding their capital in the West or owning Western assets (in whichever form or shape); they fear that nowadays there is little hesitation in blocking or even confiscating assets. Especially the US, with high current account and budget deficits, would have difficulty financing these. In other words, upward pressure on US interest rates and downward pressure on the dollar.

- Stock markets are currently implying extremely optimistic conditions. All positive developments have virtually been discounted. In fact, as indicated above more than a few developments could have a negative impact.

Moreover, we maintain our stance that the dollar will strengthen before depreciating in the medium term. Simultaneously, we see long term interest rates rise in the short term and decrease in the medium term.

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Have a pleasant week ahead.

Kind regards,

Eddy