Confidence continues to be a key ingredient in these markets. It takes just one rash comment to spook markets. Communication has become one of the most essential tools for central bankers, but it can quickly become their worst enemy, especially when nerves are on a knife edge.
Over the past month, the Fed, ECB and BOE have kept interest rates steady, but this has not stopped the rumour mill. The market is increasingly pricing in 2024 Fed rate cuts. Over here at Brodie Consulting, in our simplified world, looking at the facts, we fundamentally disagree with this thinking; interest rates are unlikely to go down anytime soon, regardless of recent data, which is too short-term.
What the major central banks have in their favour (excluding Japan) is the ability to tactically manoeuvre - something they have yet to be able to do for many years of easing. While they can reduce rates, it is doubtful in the immediate term. Why would they? This is ultimately their ‘get out of jail card,’ and they have only just reversed out of the loosening cul de sac - of course, they will loosen at some point, but there is still too much risk on the table.
The great liquidity experiment is over, at least for the time being. The status quo of tightening has worked - hot economies are largely no longer running hot, although looking at the US third-quarter growth being revised up to 5.2%, you can question that point. Inflation has been tamed, at least for the time being, with the Eurozone coming in most recently at 2.4%.
We are in a holding pattern. Rumours of a second or third-quarter 2024 rate cut are only rumours. If there is a direction to take, it is still up, which Fed chair Jerome Powell told us on 9 November, should the situation warrant it - comments that saw short-end yields go sky high. The BOE and ECB also fall into this quasi-hawkish camp.
Looking beyond rates and the data makes for depressing reading. While various economists - including Jan Hatzius, Goldman’s chief economist - predict a soft landing, data continues to be dire, particularly for Europe. According to data from the Office for National Statistics, the economy has wholly flatlined in the UK, and even the BOE Governor has brutally described the UK’s growth prospects as the worst he has seen in his lifetime.
With confidence increasing and market participants pricing in a Fed rate drop, most equity markets had an exceptional November. Equity markets started strongly, reacting positively to US jobs slowdown data and an increasing belief that these high rates are having an effect. By the end of the month, the S&P 500 was up by a massive +9%, and the Nasdaq almost +11%, with the likes of Tesla +20%. However, back in the UK, the FTSE 100 lagged most markets, up a comparatively paltry +3.1%, as the more commodity-focused businesses weighed the index down. The Dax followed the US, +9.5%, and the Nikkei 225, +8.5%. China, however, followed its own path as it fails to kickstart its economy, with the Shanghai Composite Index +0.4%.
Equities were rallying, yet commodities were more subdued, with the Bloomberg Commodity Index down -2.2%. Oil did not help and, for much of the month, headed south, weighed down by the global slowdown. There was a significant oil pullback on 7 November, followed by another on 16 November when WTI and Brent fell by around -4%. The drop from back in September to this low was about 25%. Oil then shot up +4% when Saudi Arabia talked about reducing supply in retaliation to Israel/ Gaza. Still, the overall direction was down, and towards the end of the month, eyes turned to the OPEC+ meeting, which saw an agreement to cut supply, but prices continued to fall. By month-end, WTI was -6.7% and Brent -5.3%.
With interest rate rises appearing to have peaked and a weakening USD, which had its worst month for more than a year (while GBP had its best month of the year), gold was once more back through the $2,000 marker, hitting six-month highs and closed +3.1% at $2,055. Silver likewise rallied, driven by the increased confidence, to close at $25.25, +10%.
Crypto flew through the month, with Bitcoin closing up 9.5%. Confidence is primarily based on the belief that the SEC will give spot crypto ETFs the green light; on the back of this, Coinbase stock rose over 60% during the month. Speaking to various crypto bulls, this will take Bitcoin back above the $60,000 market. But should it go the other way, a return to $25,000 and below could be back on the cards.