A couple of big news items from yesterday, with the final text from COP28 being released and the US Federal Reserve all but confirming that the only way is down for interest rates.
The final statement from this year’s COP summit was probably more than many had hoped for, given the controversy surrounding the hosting of the event. It took some wrangling to get to the point – but then it usually does – and the statement did include agreement to “transition away from fossil fuels”, but not everyone walked away happy , as there isn’t a timeline on the transition away and, according to some, there are more holes than Swiss cheese in the agreement which makes it ambiguous at best. Other takeaways include the creation of a loss and damage fund which is to help poorer nations deal with impacts from climate change. The fund managed to raise $790m in commitments over the 2 weeks, which is woefully short of what would actually be needed. A big positive was the agreement to triple renewable energy capacity globally by 2030, which seems really obvious but with a COP agreement in place, hopefully that provides an impetus for governments to double down on their efforts to support the change. Next year we see Azerbaijan host COP29 – another country not short of controversy, or petrodollars!
The Federal Reserve gave license for markets to rally last night as they left interest rates unchanged but softened their previously hawkish bias in the subsequent statement. The Fed are now suggesting that interest rates will fall by 75 basis points next year – even though the market is pricing 150 bps of cuts – and that the “Fed doesn’t need a recession to start cutting rates”, according to Jay Powell, FOMC chairman. The upshot from the meeting was that stock markets rallied, and the Dollar fell, as the prospect of easier monetary conditions boosted optimism and reduced the competition between bonds and stocks in terms of yield. The Dow Jones broke 37,000 for the first time ever, the S&P500 is above 4,700 and the Nasdaq put in a strong performance too – the Nasdaq was hardest hit when rates started to increase as tech company valuations had big multiples, which meant bigger discounting when interest rates went up.
So the firing gun has been started on the Santa Claus rally and we’ve got the Bank of England and the European Central Bank to go today. We expect the BoE to be more reserved than the Fed and are likely to try and retain a hawkish stance given that UK inflation is less controlled than the US. It’s likely to be a split vote from the monetary policy committee on whether to raise or hold rates, but the market is almost 100% sure that there won’t be another rate rise. The conflict on being hawkish is that GDP numbers from the UK showed a 0.3% decline in
October, which was well below what was expected and rates staying higher for longer will only increase the chances of future economic decline. If we do get a hawkish rhetoric, the Pound will be the biggest beneficiary, as the yield of a Pound over 2024 will be materially higher than that of a Dollar.
That’s all for now, we’ll give you the rundown of what Andrew bailey and Christine Lagarde had to say, tomorrow.
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Travel Tuesday, motion supported by Hungarian parliament to allow Sweden to join Nato, Trump's legal bill continues to grow interest with US monetary conditions at their tightest level in 22 years, and today's data.
Macro Monday, report from the BCC on the impact on British businesses from Red Sea disruption, Ukraine president announces number of deaths since the Russian full-scale invasion, and data releases today.
Friday feeling, what's happened in the last two years of the Russia-Ukraine conflict, and more hawkish views from the Fed.
Thought for Thursday, House of Commons ceasefire vote decision, minutes released from Federal Reserve monetary policy meeting, geo-political update in Russia and Gaza, and looking at today's data.
Word of the week Wednesday, data indicates public sector net borrowing in surplus, this afternoons House of Commons vote for a ceasefire in Gaza, and release of FOMC policy me.eting minutes
Travel Tuesday, changes for China's property market, attacks on Red Sea Vessels cause further shipping disruption, EU defensive naval operation launched, and US propose a UN Security Council Resolution in the Middle East.
Macro Monday, update on Israel-Gaza conflict, town in Ukraine in full control of Russian forces, and pressure for creation of more public-private partnerships in the UK from insurers.
Friday Feeling, Labour take comfort in by-election results, potential for income tax cut plans to be dropped, president of European Commission speaks on European Union defence production.