It was a challenging week for most investors. Leading stock indices were down with increased volatility across the board.
While there was no bad news from the financial markets, geopolitical tension has escalated in the Middle East.
Most military conflicts are followed by a stock selloff as investors shift into a defensive position. They reallocate capital into less volatile assets, often turning into cash and short-term high-quality government debt.
They take time to re-evaluate market conditions and see what sectors or commodities are most affected. If nothing critical breaks, the markets often get back to normal quickly.
This time, we hope it will be no different.
While the situation in the Middle East remains difficult, it has a limited effect on the global economy. Oil prices kept declining after a short surge early this week.
It’s clear that investors don’t see a sustainable supply disruption from the neighboring countries. If Saudi Arabia gets involved, however, it may impact the oil market meaningfully. So far, it’s not been the case.
In short, we expect markets to get back on track sooner rather than later. There is a good reason to think so.
Last week, the US Bureau of Labor Statistics released inflation numbers for September. Consumer Price Index (CPI) was stable at a 3.7% year-over-year growth rate. Exactly as expected. Annual growth in Core CPI, which excludes food and energy, dropped from 4.3% to 4.1% in a month.
It’s a positive dynamic that shows that the Federal Reserve is doing a good job at taming inflation. The Fed may not need to raise interest rates again during this tightening cycle.
The next most anticipated step is the “pivot”, or an interest rate cut. When the central bank gets back to easing its monetary policy, it will unleash the next stage of asset appreciation.
A “Pivot” Will Be Good for Markets, But These Megatrends Will Continue Regardless
Right now, analysts expect the Fed to keep the interest rates unchanged for a few months. This will ensure that inflation is not a threat to the economy, and it’s safe to ease monetary conditions. However, the odds of interest rate cuts point toward mid-2024.
FedWatch, a tool that measures the odds of potential changes in the U.S. interest rates, shows a high probability of an interest rate cut in June. It may seem like a long time, but the markets are forward-looking. Investors will adjust their models before the actual event. Asset prices will reflect that as well.
With a strong labor force, declining inflation, and decent overall economic conditions, the U.S. has a good chance of dodging a recession. This is what the Fed is trying to achieve with its “soft landing” agenda.
If the Western economy remains on the same path, we should see markets return to steady growth.
This will be good for commodities, especially those related to long-term economic development. These critical commodities are vital for the green future project, regardless of interest rates, inflation, or labor market conditions. Governments are releasing billions of dollars to fund this megatrend.
Some states will limit sales of fossil-fueled cars in the near future. They have to substitute these with battery electric vehicles. This will require a massive amount of critical minerals for the new generation of electric vehicles (EVs) and related infrastructure.
EV chargers, updated power lines, recycling centers, and many more are going to appear all over the world. These require substantial investment and support from the government.
We keep our bullish outlook for these megatrends and keep you up-to-date as they unfold.
Thank you for your loyal readership,
The Financial Star team