Multi-Asset Weekly: Onwards and Upwards for US, Europe, and Japan Equities
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Chief Investment Office14 Oct 2024
  • Equities: Better-than-expected earnings boost US; Europe markets higher on hopes of faster ECB cuts
  • Credit: Investors should consider moving cash into credit to capitalise on gains and mitigate risk
  • FX: DXY rebound likely capped at c.103.30; cautious on dovish bias for EUR/USD ahead of ECB meeting
  • Rates: Fed unlikely to pause in November even if data is strong; Fed may pause easing cycle earlier
  • The Week Ahead: Keep a lookout for US Change in Initial Jobless Claims; Japan Industrial Production
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Equities: US, Europe, and Japan markets rose while China and Hong Kong markets retraced

Equity markets were mixed. US stock markets rose, boosted by better-than-expected earnings posted by big banks. Higher-than-expected inflation data and weekly jobless claims tempered market sentiment. The Dow Jones, S&P 500, and NASDAQ gained 1.2%, 1.1%, and 1.1% respectively for the week. In Europe, the STOXX 600 gained 0.7% as investors expect the European Central Bank (ECB) to cut interest rates faster. The FTSE dropped 0.3% for the week. Japanese yen weakness helped Japan’s exports, and the Nikkei 225 gained 2.5%. After surging sharply in late September, China and Hong Kong markets retreated as investors await further policy implementation details that were lacking in the recent press conference. The SHCOMP and the Hang Seng Index dropped 3.6% and 6.5% respectively for the week.

Topic in focus: Fed signals cautious approach amid economic resilience. Following stronger-than-expected jobs data last Friday, markets scaled back expectations for a 50 bps rate cut at the next Federal Open Market Committee (FOMC) meeting, favouring a more modest 25 bps reduction. The September FOMC minutes, released this week, reveal that some officials prefer a gradual approach to rate cuts, reflecting the economy's unexpected resilience despite what the Fed describes as a “restrictive” policy stance.

This gradual easing is a positive for markets, based on historical patterns. Since 1986, there have been four instances where the Fed cut rates in response to economic stress, only for a recession to follow. In these cases, the S&P 500 declined by 3% and 17% over the next 12 and 24 months from the initial cut. In contrast, the Fed’s pre-emptive rate cut in 1995, aimed at avoiding a downturn, led to a strong market rally instead, with the S&P 500 gaining 14% and 70% in 12 and 24 months after the first cut.

Current macro conditions closely resemble those of 1995 with strong GDP growth, growing consumer spending, low unemployment, along with structural drivers like the proliferation of AI, further enhancing productivity, and growth potential. This measured approach has the potential to sustain economic strength while supporting market stability, mirroring the favourable outperformance from 1995.

Figure 1: Gradual rate cuts result in market outperformance

Source: Bloomberg, DBS



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