The Pinnacle: September 2024
September 2 0 2 4 • I S S U E 45
September Markets
The third quarter of 2024 presented investors with a mix of robust market performance and cautious optimism across the globe. Markets responded to shifting economic policy, including the US Federal Reserve (Fed) and European Central Bank (ECB) interest rate adjustments, while other macroeconomic factors continued influencing different asset classes. This review highlights major regional markets, to give an updated snapshot of economic health and trends shaping the quarter just passed.
US Markets
The U.S. market continued its ascent in Q3, with the S&P 500 up 5.9% for the quarter, benefiting from strong earnings in the technology and value sectors. Amid moderating inflation, the Fed cut interest rates by 50 basis points in September, helping bolster investor confidence. This dovish turn aided growth in equities and led to a notable decline in government bond yields; two-year yields fell by 111 basis points and ten-year yields falling 62 basis points, signalling market optimism for further easing. The U.S. economy showed resilience with robust labour market activity, though unemployment rose slightly over the quarter, keeping Fed officials cautious about potential insufficient monetary policy easing in the future.
Eurozone
European equity markets posted modest gains, with the Europe ex-UK as a whole seeing a 1.6% rise over the third quarter. In September, the ECB’s second rate cut of the year, reducing rates to 3.65%, supported the market, though challenges remain, particularly in Germany. Weaker manufacturing data, attributed partly to China’s cooling demand, kept growth expectations tempered. Eurozone inflation continued its downward trend, and investor sentiment toward European bonds improved, resulting in a 4% return on sovereign debt. The market expects the ECBs more accommodative policy stance to assist the region’s gradual economic recovery in the coming months.
UK Markets
The UK market outperformed many of its European counterparts, with the FTSE All-Share Index increasing by 2.3% over the third quarter. The Bank of England (BoE) enacted a 25-basis point rate cut in August, prioritizing economic stability as consumer confidence dipped slightly toward the end of the quarter. Persistent wage growth in the labour market have made the BoE take a more cautious stance on future cuts. Despite this, fixed-income markets gained traction, with UK gilts returning 2.4% over the quarter, reflecting a certain degree of investor optimism.
Asia
Emerging markets in Asia experienced notable strength, especially in September, as Chinese policymakers introduced coordinated stimulus measures. The MSCI Asia ex-Japan index ended the quarter with a 10.6% gain, making it one of the strongest performers globally. While for much of the initial Q3 period activity remained steady, China’s late-quarter push with interest rate reductions and property market support initiatives reinvigorated sentiment. Meanwhile, Japanese equities were more volatile due to rate hikes by the Bank of Japan, which led to yen appreciation and pressured equity returns. Japanese equities ended the quarter down 4.9% despite reassurances from the BoJ to stabilize its market.
Commodities
Commodities faced a mixed quarter, with Brent crude oil prices dropping by 17% as demand outlooks softened and supply conditions improved. In contrast, gold continued its rally, reaching all-time highs as investors sought safe havens amid global economic uncertainties. The broader commodity sector returned a muted 0.7%, reflecting varied influences from economic growth trends and fluctuating geopolitical factors. These price shifts indicate cautious sentiment, particularly in energy markets, where volatility could continue depending on future rate cuts and global economic activity.
In summary, Q3 2024 underscored the resilience of global markets against a background of shifting central bank policies and economic adjustments. US and Asian emerging markets led the quarter’s positive performance, while Europe and UK showed steady, albeit modest, growth. Commodity markets revealed a somewhat cautious outlook, particularly within energy. As we head into Q4, market participants remain attentive to potential rate adjustments and geopolitical factors that could impact asset performance. Investors may benefit from a balanced approach not allowing themselves to be overly swayed by short-term noise in the markets.
Interest Rates Update
Global Interest Rates: Where Are We Now and What Lies Ahead?
As central banks globally navigate slowing economic growth and other economic headwinds, the US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) find themselves at critical junctures. Recent policy shifts from each institution signal a pivot towards rate-cutting cycles that could influence global economic conditions and investor sentiment in the coming months. This article explores the motivations behind their actions and the potential impacts on the global economic landscape.
U.S. Federal Reserve: A Shift in Strategy
After maintaining high interest rates for over a year to tame inflation, the Fed recently took a notable step by reducing its interest rate target by 0.5% in September, citing progress toward its 2% inflation goal. This reduction underscores the Fed’s balancing act between cooling inflation and maintaining employment. While Chair Jerome Powell emphasised the Fed is not rushing to cut rates aggressively, he indicated further reductions could be on the horizon, albeit cautiously paced.
Analysts anticipate that the Fed may implement an additional 50 to 75 basis points of cuts before year-end if inflation continues to ease and labour markets remain stable. The move is seen as a way to recalibrate rates from restrictive levels, offering support to economic growth while keeping inflation within bounds. As financial markets adjust, U.S. Treasury yields have already responded to rate cuts, though further gains in Treasuries may depend on how economic conditions unfold.
European Central Bank: A Response to Economic Slowdown
The European Central Bank (ECB) has recently pivoted towards rate cuts after a series of aggressive rate hikes that brought borrowing costs to their highest level in two decades. This decision aligns with signs that inflation in the Eurozone having moderated and growth slowing significantly, especially in Germany, the region’s economic engine.
This shift underscores the ECB’s focus on supporting a fragile economic landscape and simultaneously attempting to avoid igniting renewed inflationary pressures. Analysts note that recent data showing declines in energy and core price growth support the ECB's easing stance. The timing of additional cuts is expected to hinge on sustained reductions in inflation, with policymakers aiming for a balanced approach to stimulate growth without reversing recent progress in bringing inflation down.
Bank of England: Slowing Pace in an Uncertain Economic Climate
In a significant pivot, the Bank of England (BoE) recently implemented a 0.25% rate cut following consecutive hikes and pauses aimed at curbing persistent inflation. This adjustment reflects the BoE's response to a softening UK economy, where inflation, although still above the 2% target, has shown signs of easing. With household spending under pressure from high mortgage and consumer debt costs, policymakers are carefully balancing the need for economic support with the risk of rekindling inflation.
BoE Governor Andrew Bailey emphasised that the bank will closely monitor both inflation and employment metrics, especially as consumer demand adjusts to tighter financial conditions. Analysts expect the BoE to continue a gradual path of rate cuts into 2025. This measured approach is aimed at maintaining economic stability while supporting a challenging recovery environment for households and businesses alike.
Global Implications of Central Bank Actions
The rate-cutting cycles from the Fed, ECB, and BoE are set to reverberate across global financial markets. U.S. Treasury bonds have already seen increased interest, with yields moving inversely to bond prices. A coordinated reduction in rates by major central banks could also influence currency markets, with the U.S. dollar’s performance closely tied to the Fed’s decisions. Should the Fed continue cutting rates, the dollar may weaken relative to other major currencies, impacting global trade balances and investment flows.
For equity markets, the outlook remains cautiously optimistic. Historically, U.S. equities have performed well in non-recessionary rate-cut cycles, with sectors such as consumer discretionary and technology showing resilience. European and UK markets are similarly expected to see gradual improvements as monetary policies shift, though the extent of any rally might depend on macroeconomic data in the coming quarters.
Conclusion: Navigating the New Interest Rate Landscape
As the Fed, ECB, and BoE chart new courses for monetary policy, the global economy faces both opportunities and challenges. While rate cuts are poised to support growth, the risk of economic stagnation remains a concern. For investors, these rate changes present potential opportunities in fixed-income markets, though a diversified approach is prudent given uncertainties in the economic outlook.
Sources
Ninety One - Q3 Market Review
First Citizens Bank - Q3 Market Commentary
J.P. Morgan Asset Management - Q3 Global Market Insights
Winthrop Wealth - Q3 Market and Economic Review
Reuters, CNBC, Financial Times, Wall Street Journal (October 2024).
Reuters: "How markets could fare after first US rate cut" (October 2024)
Reuters: "U.S. Fed policymakers stance on interest rate hikes" (October 2024)
Reuters: "Rates and inflation" (October 2024)