ORLANDO, Florida, Nov 6 (Reuters) - The global
interest-rate cutting cycle has likely peaked. The question now
is when, or if, today's high-flying markets will start to feel
the pinch.
Remarkably, there have been more rate cuts around the world
in the last two years than during the 2007-09 Global Financial
Crisis, according to Bank of America. Although that's the number
of cuts and not the magnitude of easing, it reflects the scale
of the historic inflation-fighting rate hikes in 2022-23.
But the cycle now appears to have turned. This doesn't mean
global easing has stopped. Central banks - most notably the U.S.
Federal Reserve - are still expected to cut further. Rather, the
number of cumulative cuts will decline moving forward.
On the face of it, the end of super-easy monetary policy
should mean less accommodative financial conditions ahead.
But, perhaps counterintuitively, history suggests otherwise.
Peaks in the last three major global easing cycles were followed
by a broadening of the earnings cycle and solid equity market
gains.
Are we about to see this again? Maybe, but given the frothy
valuations in many of today's markets, it's not a given this
time around.
LESS CONCENTRATION, MORE ROTATION
The peak of the easing cycle could be a bullish signal for
Wall Street, say analysts at Societe Generale, who argue that it
is a sign that earnings growth is going to broaden out and
accelerate.
Manish Kabra, head of U.S. equity strategy at SocGen, says
the cycle peak is a "powerful signal" to diversify into other
areas of the market like small caps and less levered stocks. He
notes that reducing equity exposure would typically come later
when investors start pricing in the start of the hiking cycle.
"When the easing cycle peaks, it's traditionally a sign of
market conviction that earnings growth is going to accelerate,"
Manish says, pointing to previous "peaks" in August 2020 and
September 2009 - which were both followed by strong equity
performance.
Of course, there's a big difference between now and these
episodes, namely today's stock prices and valuations. Wall
Street was only beginning to emerge from historic crashes in
September 2009 and August 2020, whereas now it has never been
higher.
This might suggest that a more defensive risk profile may be
warranted today.
Kabra downplays talk of bubbles, however. S&P 500 earnings
growth this year is running at around 12%, but if you exclude
'AI boom' stocks, that falls to only 4%.
IT ALL COMES BACK TO LIQUIDITY
Almost every major asset class has risen this year, apart
from oil, the dollar and some long-dated bonds. Even unloved and
much-maligned U.S. Treasuries have gotten a bounce.
But globally, these rallies have had many different drivers.
In equities, the AI boom has been rocket fuel for Wall Street,
bets on a defense spending splurge have boosted European stocks,
and the prospect of significant fiscal easing has lifted stock
prices in Japan and China.
However, the unifying force that has lifted all these boats,
according to Standard Chartered, is liquidity. And plenty of it.
Eric Robertsen, the bank's global head of research and chief
strategist, says the broad rally from the April lows, impacting
stocks, bonds, commodities and cryptocurrencies, can be deemed a
'financial conditions trade'. How else can nearly every asset
class rise together in a world of extreme economic and
geopolitical uncertainty?
Of course, 'liquidity' is not solely or even primarily a
function of monetary policy. Bank reserves, the availability of
and demand for private sector credit, and general risk appetite
are key factors that contribute to the rather amorphous concept
that is 'liquidity'.
But if interest rate changes can be viewed as a loose proxy
for liquidity or at least a directional signal, then we are at
an inflection point.
Robertsen posits that the "abundant" liquidity from well
over 150 rate cuts in the last 12 months has more than offset
investors' concerns over growth. Their risk appetite may be put
to the test if the liquidity taps are being turned off, even if
only gradually.
"Can markets thrive at this altitude without additional
oxygen?," Robertsen asks.
We may be about to find out.
(The opinions expressed here are those of the author, a
columnist for Reuters)
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