Global bond and equity markets have wrapped up the first quarter on an upbeat note, despite facing a rollercoaster of emotions, swinging between hope and concern over potential rate cuts by major central banks. The MSCI global share index notably soared, achieving record highs in March and marking a 10% increase since mid-January. This surge came after investors adjusted their expectations, moving from anticipating up to seven U.S. rate cuts in 2024 to celebrating the prospect of cuts commencing in June.
Switzerland initiated a cycle of easing among large, developed economies last week. Traders are almost certain that the Federal Reserve will reduce U.S. borrowing costs from their 23-year peak in June, with similar expectations for the European Central Bank's deposit rate. However, a cautious stance is likely to follow. According to Dennis Jose, head of equity strategy at Exane BNP Paribas, central banks might lower borrowing costs in the summer but could pause if economic growth picks up, potentially tightening the labor market and fueling wage growth and inflation.
The global government bond index recorded its first monthly gain of 2024 in March, as the quarter's rally turned into a frenzy to buy everything, pushing Japanese stocks beyond their 1989 bubble-era peak and driving remarkable gains in emerging market debt. The S&P 500 and Europe's STOXX 600 index are flirting with record levels, with China being the only major market not participating in this rally due to its slowing industrial growth.
Emerging market bonds, particularly those with high yields, have seen exceptional performance, driven by optimism and support from the Federal Reserve's policy shift, easing external financing conditions, and increasing financing support from the IMF and GCC. Argentina, Pakistan, Ukraine, and Egypt have all seen their international bonds soar, benefiting from various positive developments at the national level.
In the commodities market, cocoa futures have reached new highs due to supply shortages, while the dollar has strengthened nearly 3% against other major currencies, adding pressure on both major and emerging economies. This strength comes as markets watch closely for potential Japanese intervention to support a yen trading near 34-year lows.
Despite the prevailing optimism and bets on rate cuts, conflicting economic signals have emerged, with some analysts cautioning about the unusual nature of the current economic cycle. While purchasing managers' surveys indicate improving business activity in the U.S. and eurozone, Brent crude oil prices have risen 13% over the quarter, reflecting increased global growth and oil demand forecasts. Yet, the risk of a U.S. recession remains a concern, underscoring the importance for investors to stay informed about market drivers and potential risks.
A recent Deutsche Bank survey revealed mixed expectations among investors regarding the U.S. economy, with almost half not anticipating a recession and expecting inflation to remain above the Fed's 2% target by the end of 2024. However, more than half believe the S&P 500 is more likely to fall by 10% than to rise by that amount, highlighting the uncertain outlook for financial markets.
