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Financial Bulletin

Global market reversal: just a "brief carnival" created by coincidence?

Release Time:2023-11-07

Last week, U.S. stocks and bonds rose amid expectations that the Fed's interest rate hike cycle was coming to an end. Many analysts warned that the current rebound in U.S. stocks is more like a bear market rebound without fundamental support, while the oversupply of U.S. Treasury bonds and the unsustainability of the fiscal framework may continue to trigger the market's sell-off of U.S. debt.

The U.S. 10-year yield hit a one-month low last Friday, falling by more than 10 basis points for three consecutive days and falling by about 26 basis points last week. The Nasdaq has risen for five consecutive weeks, rising more than 6%, the S&P has set a new high since October 17 for two consecutive days, and the Dow has set a new high since September 21. Global stock markets also posted their biggest weekly gains in the past year, with the MSCI World Index posting its biggest five-day gain in ten months this week.

Regarding the rise in U.S. stocks and U.S. bonds last week, Brian Jacobse, chief economist at Annex Wealth Management, believes that this is a perfect coincidence. First, the U.S. Treasury Department’s new quarter refinancing bond issuance was lower than market expectations, falling to $776 billion. Then the Federal Reserve signaled that the interest rate hike cycle was over, and the two events happened one after another to boost market enthusiasm.

And can this rebound in both stocks and bonds be sustained?

Michael Wilson, chief strategist at Morgan Stanley, said that due to the bleak corporate profit outlook, weak macroeconomic data and deteriorating analyst views, the current rise in U.S. stocks lacks technical and fundamental support. "It is difficult for us to be excited about a rebound at the end of the year." .

Wilson said that this wave of gains " looks more like a bear market rebound than the beginning of a sustained rise in U.S. stocks ." Wilson said:

The fall in U.S. Treasury yields has more to do with lower-than-expected debt issuance and weak economic data than an optimistic reading that the Federal Reserve will cut interest rates early next year.

BlackRock analyst Jean Boivin believes that any rebound in U.S. stocks at the end of the year is likely to be short-lived because the stock market has not fully reflected the prospect of interest rates remaining higher for a longer period of time, and U.S. bond yields have climbed to multi-year highs. The highs came as investors braced for the Federal Reserve to keep monetary policy tight for an extended period, with history showing Treasury bonds and stocks tend to be negatively correlated. Boivin said:

"The question we ask is whether the surge in interest rates has been transmitted to the stock market, and our answer is not yet. We think there will be more downward corrections, but we expect a better environment in 2024 once the correction is completed. "

U.S. Treasury supply and demand remain unbalanced

Analysts pointed out that U.S. Treasury bonds are still facing an oversupply problem, with few buyers. The huge amount of U.S. debt issuance is putting the United States on an unsustainable fiscal path. Investors are increasingly worried about the U.S. fiscal deficit, or U.S. Treasuries are facing further selling.

Albert Edwards, an analyst at Societe Generale, pointed out in a report that the huge supply of U.S. debt is worrying:

Although the scale of refinancing bond issuance in the new quarter was US$112 billion, lower than market expectations of US$114 billion, it is obvious that the overall issuance of US debt is still huge, and the United States is on an unsustainable fiscal path.

According to projections from the U.S. Congressional Budget Office (CBO), the U.S. debt-to-GDP ratio may climb from the current 120% to 200% in the long term.

There are few signs that the U.S. government will curb spending anytime soon. The International Monetary Fund speculates that the U.S. government budget deficit is expected to exceed 8% of the country's gross domestic product this year , and net borrowing is expected to remain at a high of 7% of gross domestic product within five years. According to the Congressional Budget Office, annual deficits averaged 3.6% of GDP between 1973 and 2022.

Jim Cielinski, chief investment officer of fixed income at Janus Henderson, said that the unsustainability of the fiscal framework may be the biggest factor causing people's fear of bonds, and there is no evidence that the fear will disappear :

At the same time, as part of the Federal Reserve's tightening policy, the Federal Reserve continues to conduct quantitative tightening (QT), selling off its U.S. debt holdings at a rate of up to $60 billion per month, while the U.S. Treasury Department is still issuing large-scale debt. The matching of the two The level is obviously unsustainable, which exposes U.S. debt to liquidity risks and causes U.S. debt to fall sharply.

Quentin Fitzsimmons, senior portfolio manager at U.S. asset management firm T Rowe Price, said that you can see changes in the bond market from the Treasury announcement and the large increase in supply, which is the real issue for bond yields.

It’s still too early to bet on a Fed rate cut

The Fed held back on raising policy rates in part because of previous tightening financial conditions, particularly rising bond yields, a stronger dollar and falling stock prices. It may seem like a circular argument, but the rebound in stock and bond prices over the past week, coupled with an easing of the U.S. dollar, could further head off the forecast slowdown.

All of this suggests that while the Fed may not raise rates further, it may be too early to cut rates in 2024.

Former U.S. Treasury Secretary Summers warned investors not to rush to judge that the Federal Reserve has completed its mission and should be wary of optimism in financial markets that the Federal Reserve has actually won the war against inflation.

People are a little too eager to declare that we have implemented all the monetary policy needed... We have seen a very dramatic reaction this week, with Treasuries and stocks rising, which makes me less convinced than many that the job of containing inflation is accomplished, conflict It's over.

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