The US rate cut cycle has begun

As we enter the final quarter of 2024, Saxo Bank’s strategy team highlights a mix of cautious optimism and market risks in its latest quarterly outlook. While inflationary pressures and the Federal Reserve’s rate-cutting cycle take centre stage, Saxo warns of ongoing challenges, such as fiscal imbalances and geopolitical uncertainties. The outlook underscores that while markets have shown resilience, volatility could resurface as central banks continue to navigate complex macroeconomic conditions, particularly in the U.S. and Europe.

In his macro note, Peter Garnry, Saxo’s Chief Investment Strategist, comments on the recent market dynamics: “The setback in equities and technology stocks, following the end of the Japanese yen carry trade, serves as a small reminder of market fragility. Despite this, financial turbulence remains low, and if sustained, this calm environment could lead to a positive outlook for risky assets.”

As we enter Q4 2024, Damian Hitchen, CEO of Saxo Bank MENA and APAC, said, “Global markets are at a pivotal point, influenced by the Fed’s rate cuts and upcoming U.S. elections. These factors are likely to impact inflation and investment sentiment, particularly in the MENA region, which is well-positioned due to robust energy demand. We advise our clients to focus on quality assets and stay agile in their investment strategies to navigate the evolving landscape and capitalize on emerging opportunities effectively.”

Investment Strategy for Q4 2024

Saxo Bank recommends a cautious but opportunistic approach for investors in Q4. High-quality corporate bonds and emerging market debt remain attractive in fixed-income due to resilient real interest rates and controlled inflation in key markets. Equities, healthcare, financials, and energy sectors are expected to benefit from stabilising interest rates and geopolitical developments.

The U.S. election also looms large over global markets, potentially impacting everything from trade policies to fiscal spending. A Trump victory could see the U.S. dollar surge amid increased tariffs and pro-growth policies, while a Harris presidency might lead to a more dovish Federal Reserve, further weakening the dollar.

Saxo’s main calls for Q4 2024:

Commodities: Gold & Silver Continue to Shine Bright

Following an already strong first half, the precious metal sector, led by gold, continued higher in the third quarter as investors sought protection in an uncertain world. This culminated in September with the start of a supportive US rate-cutting cycle.

As we head towards the final quarter and the November US presidential election, we see multiple uncertainties continuing to underpin demand for investment metals, potentially led by silver, provided emerging signs of stabilising demand for industrial metals in China can be sustained.

Additionally, Saxo’s head of commodity strategy, Ole Hansen, states that given the prospect of these underlying demand trends not going away anytime soon, we forecast further upside to gold ahead of year-end and into 2025, when the yellow metal has the potential to reach another psychological mark of USD 3,000.

Equities: Will lower rates lift all boats in equities?

The recent Fed rate cuts, typically positive for equities, have shifted momentum away from the heavily concentrated “Magnificent 7” stocks, as evidenced by the broader U.S. equity market beginning to outperform.

Peter Garnry notes, “Lower interest rates and a soft landing scenario would point to an everything rally where the rest of the market begins to outperform.” This shift indicates that sectors beyond technology, such as real estate and utilities, may benefit from falling rates despite their structural challenges.

In summary, Saxo Bank advises investors to stay engaged, as lower rates could lift a broad range of sectors, creating new opportunities for growth beyond the usual tech-heavy focus.

Fixed Income: Bonds hit reset – a new equilibrium emerges

The fixed-income landscape presents opportunities and risks as we enter the final quarter 2024. Central banks, particularly in the US and Europe, are expected to continue gradual rate cuts, with a more normalised interest rate environment likely by late 2025. However, persistent inflation and fiscal deficits will likely elevate long-term yields, complicating the bond market. Investors should continue to build a defensive buffer, prioritise sound credits, and remain agile in response to potential shifts in monetary policy and fiscal conditions.

Saxo’s Head of Fixed Income Strategy, Althea Spinozzi, advises investors to focus on managing inflation and potential surprises in monetary policy. She emphasises, “Positioning in the short-to-intermediate segments of the yield curve will help investors capitalise on falling rates while reducing exposure to long-end volatility.”

FX: USD in limbo amid political and policy jitters

Currency markets are set for heightened turbulence due to US election uncertainties, impacting fiscal policy, foreign relations, monetary policy, and geopolitics. Additionally, shifts in the global interest rate environment will further contribute to market volatility. Charu Chanana, Head of FX Strategy at Saxo, notes that a potential Harris presidency may emphasise fiscal restraint, leading to deeper interest rate cuts from the Federal Reserve. The USD is also under pressure due to the Fed’s rate-cutting cycle. As Chanana states, “the probability of a Harris victory affecting trade relations positively could weaken the USD in a risk-on environment.” Overall, the outlook for the USD is mixed, heavily dependent on election outcomes and the broader economic context as we approach 2025.

Last Updated on 4 months by News Desk 1