Despite some volatility, global markets recovered to reach record highs towards the end of the quarter. The global economy remains resilient, and with inflation slowing, central banks have begun cutting rates to help boost markets further.
Global equity markets overview
Global markets fell from record highs at the end of July after investors rotated away from large tech stocks. With investors growing more cautious about artificial intelligence (AI), there was some movement away from the tech giants to smaller companies in anticipation of US Federal Reserve (Fed) cuts.
With inflation cooling faster than expected, some investors shifted their money into smaller equities on the expectation that the Fed could soon cut interest rates. This is because smaller companies tend to do well when rates are low. After all, they typically rely more on borrowing to finance their growth.
While President Joe Biden dropped out of the 2024 presidential election and endorsed Vice President Kamala Harris, this had little overall impact on markets. This was mainly because Harris is seen as the continuity candidate.
At the beginning of August, there was further volatility over fears of a US recession, rising Japanese interest rates, and falling tech equities, which led to a meltdown. The market turmoil began after new figures showed rising US unemployment, sparking recession fears.
Japan’s Nikkei index suffered its worst day since Black Monday in 1987, dropping more than 12% before recovering its losses. The sharp drop in Japanese equities was partly due to the yen’s appreciation against the dollar following the Bank of Japan’s interest rate hike. US and European indexes also saw huge losses, but markets soon recovered after new US data calmed worries of a possible downturn.
Global markets welcomed the Fed’s decision to cut interest rates towards the end of the quarter, with US equities soaring to record highs. Chinese equities also surged after the government launched new stimulus measures to lift its economy.
Central banks are now shifting from controlling inflation to safeguarding economies and fostering growth. Rate cuts were experienced in the UK, US, China, and New Zealand, providing welcome news to borrowers.
New Zealand market overview
Rates and inflation: Crystal ball gazing
We look forward to when interest rates and inflation are no longer a key talking point. But, with inflation now at 2.2%, within the target range of 1% to 3%, the burning question is: what can we expect at the next OCR update in November?
While we cannot predict what the RBNZ will do next, the latest OCR cut of 50 basis points (bp) to 4.75% was higher than expected. We looked around to see what leading NZ economists are forecasting:
Stephen Toplis at BNZ projects a 50bp cut, with a potential for 75bp and continuing aggressive cuts in 2025, depending on the economy’s condition.
Westpac’s senior economist Satish Ranchhod projects 50 bp in November and February.
Tony Alexander suggests that the OCR will sit around 3% by the middle of next year, and we could see low 3-5-year fixed mortgage rates.
“If I were borrowing at the moment, I would be fixing for either 6, 12, or 18 months, looking to eventually fix for 3-5 years, perhaps in 2026, perhaps 2027. It is impossible to say at this stage”
– Tony Alexander, Tony’s View, 24 October 2024
No fix ‘till 26
This year’s motto, ‘Survive to 25’, embraced by businesses and mortgage-holders alike, is now penning a new slogan, ‘no fix ‘till 26’.
While the NZX50 is still 6% below its early 2021 highs, lagging behind Australia and the US, which have had significant gains. New Zealand’s mature, defensive companies haven’t seen the same boost of rising corporate profits that the US have experienced, primarily through their tech sector.
Interest rate cuts could benefit the export sector and encourage consumer spending. Economist Tony Alexander suggests that better times do lie ahead for our economy.
What to watch
The next quarter for markets traditionally features the Halloween effect and the Santa rally, but November 5 is also a date to watch. Not only will it be Melbourne Cup day, but Americans will officially head to the polls to vote for their next President. While it will be a social win to see a female President, a Trump win could signal reduced global trade flows. Remember, Presidential elections happen every four years and don’t tend to make shockwaves across markets. Historically, there can be market volatility leading up to the election due to uncertainty; there may be sector-specific reactions based on policies of the incoming administration, followed by a post-election rally regardless of the winner. We are not experiencing big swings in volatility, so let’s see what the outcome brings.
27 October 2024
By Jenaia Clarke, Operations Director and Financial Adviser
Economic Commentary Q3 2024
Despite some volatility, global markets recovered to reach record highs towards the end of the quarter. The global economy remains resilient, and with inflation slowing, central banks have begun cutting rates to help boost markets further.
Global equity markets overview
Global markets fell from record highs at the end of July after investors rotated away from large tech stocks. With investors growing more cautious about artificial intelligence (AI), there was some movement away from the tech giants to smaller companies in anticipation of US Federal Reserve (Fed) cuts.
With inflation cooling faster than expected, some investors shifted their money into smaller equities on the expectation that the Fed could soon cut interest rates. This is because smaller companies tend to do well when rates are low. After all, they typically rely more on borrowing to finance their growth.
While President Joe Biden dropped out of the 2024 presidential election and endorsed Vice President Kamala Harris, this had little overall impact on markets. This was mainly because Harris is seen as the continuity candidate.
At the beginning of August, there was further volatility over fears of a US recession, rising Japanese interest rates, and falling tech equities, which led to a meltdown. The market turmoil began after new figures showed rising US unemployment, sparking recession fears.
Japan’s Nikkei index suffered its worst day since Black Monday in 1987, dropping more than 12% before recovering its losses. The sharp drop in Japanese equities was partly due to the yen’s appreciation against the dollar following the Bank of Japan’s interest rate hike. US and European indexes also saw huge losses, but markets soon recovered after new US data calmed worries of a possible downturn.
Global markets welcomed the Fed’s decision to cut interest rates towards the end of the quarter, with US equities soaring to record highs. Chinese equities also surged after the government launched new stimulus measures to lift its economy.
Central banks are now shifting from controlling inflation to safeguarding economies and fostering growth. Rate cuts were experienced in the UK, US, China, and New Zealand, providing welcome news to borrowers.
New Zealand market overview
Rates and inflation: Crystal ball gazing
We look forward to when interest rates and inflation are no longer a key talking point. But, with inflation now at 2.2%, within the target range of 1% to 3%, the burning question is: what can we expect at the next OCR update in November?
While we cannot predict what the RBNZ will do next, the latest OCR cut of 50 basis points (bp) to 4.75% was higher than expected. We looked around to see what leading NZ economists are forecasting:
No fix ‘till 26
This year’s motto, ‘Survive to 25’, embraced by businesses and mortgage-holders alike, is now penning a new slogan, ‘no fix ‘till 26’.
While the NZX50 is still 6% below its early 2021 highs, lagging behind Australia and the US, which have had significant gains. New Zealand’s mature, defensive companies haven’t seen the same boost of rising corporate profits that the US have experienced, primarily through their tech sector.
Interest rate cuts could benefit the export sector and encourage consumer spending. Economist Tony Alexander suggests that better times do lie ahead for our economy.
What to watch
The next quarter for markets traditionally features the Halloween effect and the Santa rally, but November 5 is also a date to watch. Not only will it be Melbourne Cup day, but Americans will officially head to the polls to vote for their next President. While it will be a social win to see a female President, a Trump win could signal reduced global trade flows. Remember, Presidential elections happen every four years and don’t tend to make shockwaves across markets. Historically, there can be market volatility leading up to the election due to uncertainty; there may be sector-specific reactions based on policies of the incoming administration, followed by a post-election rally regardless of the winner. We are not experiencing big swings in volatility, so let’s see what the outcome brings.
27 October 2024
By Jenaia Clarke, Operations Director and Financial Adviser
CP Wealth