Goldilocks meets Santa as global stocks power to best month in three years

Applied Energetics

30/11/2023 06:00

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      Best month for world stocks in 3 years
    

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      ICE BofA index of IG bonds set for best month on record
    

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      Equity investors pin hopes on soft landing for world
economy
    

  
    By Naomi Rovnick
       LONDON, Nov 30 (Reuters) - November has shaped up to be
a fairytale month for equities, with the festive Santa rally
investors traditionally hope for coming early as traders bet on
a Goldilocks scenario of inflation falling and central banks
lowering interest rates. 
    MSCI's world stock index  .MIWO00000PUS  is set to close the
month up around 9%, its best performance since November 2020,
when markets cheered the arrival of COVID-19 vaccines. 
    Easing inflation has boosted talk that the U.S. Federal
Reserve, the European Central Bank and others are done with
aggressive rate hikes, lifting bond and stocks while hurting the
dollar. 
    Global bond prices have soared, with an ICE BofA index of
global investment-grade bonds in major markets set to return
3.4% in November, the best month on record going back to 1997.
 .MERGBMI .
    Yields on U.S. Treasuries, which move in the opposite
direction to prices, are set for the biggest monthly drop since
2008. 
    That's taken the sting out of a summer bond rout, while
major stock markets are on track to reverse 2023's sharp falls. 
    But there's a caveat, warn investors, cautioning that
equities could be ignoring the recession risks that typically 
bode well for safe-haven government debt. 
    "The equity market is too optimistic right now and bond
markets have it right," said Altaf Kassam, head of investment
strategy and research, EMEA, for State Street Global Advisors.
    "There is still room for interest rates to come down and
disinflation to continue but we think for that to happen growth
will also slow down and the lagged effect of monetary tightening
will come." 
    BROAD BASED 
    November's equity rally has been broad based, with Wall
Street's S&P 500  .SPX  8.6% higher on the month and Europe's
Stoxx 600 index  .STOXX  adding 6%. Global growth stocks in
high-tech sectors are up 11%  .dMIWO0000GNUS  while value
stocks, which are mainly in cyclical industries and offer high
dividends, have gained 6.5%  .dMIWO0000VNUS .
    Major central banks have jacked up rates by a hefty 3,965
bps since late 2021 and investors sense a peak has been reached.
    Traders are already pricing roughly 100 bps of Fed and ECB
rate cuts next year while most big economies have paused rate
rises to see how much the tightening bites.
    "We've now had this rebound (in equities) and what we need
to see is tangible supporting evidence that this is not a head
fake policy pivot," said Zurich Insurance Group chief market
strategist Guy Miller. 
    Joost Van Leenders, senior investment strategist at Dutch
bank Van Lanschot Kempen, said he expected U.S. and European
equities to fall from here as monetary tightening impacts the
economy.
    U.S. home sales slumped to a 13-year low in October, euro
zone bank lending to businesses fell by the first time since
2015 last month as a recession in the bloc looms, while China's
economic performance remains weak.
    Equity markets are also ignoring the downside of lower
inflation, Van Leenders said, because companies that have passed
on higher prices to customers have achieved higher nominal
growth in revenues and profits. 
    "It's all the more difficult (for company earnings) when
inflation is falling," he said. 
    And a cloudier outlook for stocks suggests a divergence
could open up between again between stocks and bonds. 
    Until recently eyeing a third year of straight losses,
November's rally means government bonds have eked out a 0.7%
positive annual return.  .MERW0G1 . The broader global index is
set to return 1.6% for the year.
    Asset managers had expected a good year for bonds, a
scenario that failed to materialise as rates rose further and
government and consumer spending buoyed the U.S. economy.    
    Van Leenders said he expected further gradual falls for
Treasury yields. Ten-year Treasury yields, trading at 4.2%, are
down from a peak above 5% hit in October. Germany's benchmark
Bund yield too has pulled back from recent highs above 3%.
    "We're looking for softness in the U.S. next year," State
Street's Kassam said. "And on balance we prefer fixed income
right now because the lack of growth is what's going to keep
equities in check."     

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Rates and inflation Rates and inflation    https://tmsnrt.rs/3U8HdD2
Global stocks rally to best month in three years    https://tmsnrt.rs/46zXXIl
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 (Reporting by Naomi Rovnick; Additional reporting by Yoruk
Bahceli and Dhara Ranasinghe; Editng by Dhara Ranasinghe and
Christina Fincher)
 ((Naomi.Rovnick@thomsonreuters.com;))