Weekly comment: Fed rate cut sends stocks to new highs

3 minute read

Weekly podcast – Market overview

This week's host, Investment Manager, Andrew Cartwright is joined by Head of Fixed Interest Research, Richard Carter and Head of MPS, Simon Doherty. Among the topics discussed- central banks, interest rates, inflation and much more.

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Market overview – Richard Carter, Head of Fixed Interest Research

In a week where headlines focused on key monetary policy rate changes from some of the world’s biggest economies, the MSCI All Country World Index (MSCI ACWI) rose 1.3%, bringing its year-to-date increase to 17.0%.

United States stocks:
Reacting to the Federal Reserve’s first rate cut in over four years, US large caps posted a gain of 1.4% (20.8% YTD) to trade at new record highs, as investors reacted positively to a larger than expected move from the central bank. Growth stocks outperformed value shares, and small caps outpaced large caps, ending the week 9% below their all-time high at 2.1% (11.0% YTD). Tech stocks continued their strong performance, adding 1.5% (20.2% YTD).

European stocks (excl. UK):
European large caps ended the week lower, with the MSCI Europe ex UK sliding -0.5% (8.7%), while major stock indexes on the continent where mixed as European monetary policy stayed hawkish on near-term rate cuts. German large caps advanced slightly by 0.1% (11.8% YTD), French large caps increased by 0.5% (2.2% YTD), and Italian large caps rose by 0.6%. The euro strengthened slightly against the dollar, closing the week at 1.12.

United Kingdom stocks:
In the UK, the Bank of England held its key policy rate at 5.0%, with the committee voting 8-1 in favour of no change. The bank did however provide expectations on the future rate path, noting that a “gradual approach to policy restraint remains appropriate.”

In response, UK large caps returned -0.5% (9.6% YTD) and mid caps decreased by 0.2% (8.5% YTD). The British pound appreciated against the dollar, ending the week at 1.33.

Fed slash US rates by half a point

Last week, the US Federal Reserve's rate announcement stole headlines after its policy meeting on Wednesday. Before the meeting, markets were confident that rates would be cut, but it was unclear whether the cut would be 25 or 50 basis points.

The Fed decided to make a significant move by cutting rates by 50 basis points to a range of 4.75-5%; the first rate cut of any size since March 2020. In the accompanying statement, the Federal Open Market Committee expressed "greater confidence" about inflation, although it remains "somewhat elevated."

Futures markets are predicting additional US rate cuts before the end of the year, with most expecting the policy rate to fall to 4.25-4.5%, suggesting either another half-point reduction or, seemingly more likely, a 25 basis point moves lower in each of the two remaining meetings in 2024.