LONDON, Sep 19 – Major global investors have become wary of market volatility following a sharp cut in interest rates in the United States. This has created confusion over whether growth in the world’s major economies is accelerating or slowing down . This has dampened the prospects for global stocks, bonds and currencies.
Global shares (.MIWD00000PUS) hit record highs on Thursday, a day after the Federal Reserve cut borrowing costs by 50 basis points from a 23-year high , with US stocks surging after an initial reaction to the Fed’s rate cut .
But one reason policymakers outside the United States are concerned about the Fed cutting interest rates is that the Bank of England kept interest rates steady on Thursday, citing uncertainty about inflation and global demand.
Traders have cut forecasts for a UK interest rate cut , with some money managers warning the Fed is providing more support than necessary to an already strong US economy, which would boost global growth but could weigh on commodities and push up prices of consumer goods.
“I think it’s more likely that the Fed will cut interest rates significantly and the economy will recover,” said Trevor Grissom, head of multi-asset at Royal London.
“Until then, there will be no significant reduction in (global) interest rates,” he said, adding that he expects more volatility in the market.
“I’m seeing more volatility and higher risk,” said Tim Dressen, head of economics at Legal & General Investment Management, citing the possibility of a U.S. recession.
He said LGIM, Britain’s biggest asset management company, was not taking a hard stance on global stocks and bonds at the moment.
Deviation?
Traders believe the Fed’s funds rate will fall by 72 basis points this year and by 195 basis points by October 2025.
They also lowered their expectations for a 25 percentage point rate cut in the UK in November to a near unanimous 80% and lowered the chances of the European Central Bank cutting interest rates next month to 12%, but investors believe such forecasts are not sustainable.
These European rate setters are grappling with slower growth but more stable inflation than the United States. Their policy paths and the markets depend on many unpredictable conditions in the US economy.
Lower growth rates in the United States and the United Kingdom could lead to sharp interest rate cuts by the Bank of England and boost British government bonds, known as gilts, said Shamil Gohil, portfolio manager at Fidelity International.
But he said it had weakened as prevailing expectations for further US interest rate cuts proved misplaced.
“There’s probably going to be a sell-off in all markets,” he said, adding that overall he expects increased volatility in global markets.
Gohil said his portfolio is defensive and prefers investment-grade corporate bonds.
Neil Mehta, portfolio manager at BlueBay Asset Management, warned that the Fed is cutting into a “too hot” economy, with GDP growth at 3% and inflation still above target.
With core inflation below 3%, euro zone policymakers are divided on whether to cut interest rates in the future after lowering borrowing costs in June and September .
But Grissom said if the Fed continues to move in this direction, the euro’s further strength against the dollar would make exports less competitive and increase pressure on the European Central Bank.
Marcus Jennings, fixed income strategist at Schroders, said the weak euro zone economy combined with the Fed’s accommodative stance had made the market more resilient.
The German Revolution was more fascinating.
But investors warned that the outlook for global central banks could change if US data changes views on the Fed’s next steps.
“If you start to see (U.S.) employment contract, they (the Fed) are going to be more aggressive,” said Dario Perkins, head of macro at TS Lombard. “They have no idea what’s happening. If employment starts to grow again, that would mean policy is not as tight as they think it is.”
The stock market’s implied volatility VIX (.VIX) index fell to 16.6 on Thursday, well below its high of 66 during market turmoil in early August, which was triggered by an unexpected rise in the fallout from a weak US jobs report and its fallout, which led to little volatility in currency markets.
The MSCI World Equity Index (.MIWD00000PUS) has also risen more than 10% since August 5 .
Marlboro Chief Investment Officer Sheldon MacDonald said market volatility is likely to increase as stock market valuations suggest interest rate cuts will boost the US economy, but government bond pricing points to a recession.
If the Fed avoids falling into recession, it would intensify trading around central bank disagreements, such as bets on tighter restrictions from the Bank of England, which remain strong, said Ben Gutteridge, multi-asset manager at Invesco.
But he said a US slowdown would weaken global equities and boost bond markets, reducing regional market diversity.
“If you don’t want to lose money, you have to get the Fed on the right track.”
