Global markets are showing renewed strength, buoyed by a shift in expectations regarding US Federal Reserve policy. After a period of concern fuelled by both artificial intelligence doubts and fears of continued high interest rates, markets have staged a notable recovery. Just last week, money markets indicated a mere 30 per cent chance of a Fed rate cut in the coming weeks. However, dovish signals from Fed speakers have dramatically altered the landscape.
In a swift turnaround, the probability of a rate cut in December has surged to around 87 per cent, after briefly hitting 90 per cent. This shift has been a primary driver of market volatility, according to former PIMCO chief executive Mohamed El-Erian. The renewed confidence in potential rate cuts has seemingly outweighed ongoing concerns about an AI bubble, which contributed to a substantial sell-off last week.
Despite some analysts remaining cautious, the prospect of easing monetary policy appears to be enough to spark a potential rally into the end of the year. Societe Generale strategist Albert Edwards, one of the most prominent market bears, has conceded that he struggles to see an imminent macro trigger for a major bear market, despite his belief in an AI bubble. The relentless rise in the market has pressured investors to participate, even those who remain wary.
While concerns about US debt levels and potential future inflation remain, the immediate focus is on the possibility of the S&P 500 surpassing the 7000-point barrier. The speed with which market narratives are shifting suggests further volatility ahead, but for now, investors are welcoming the more dovish outlook from the Federal Reserve.
