December, historically the second-best performing month for financial markets worldwide, is kicking off with high optimism. The markets are eagerly anticipating an interest rate cut by the Federal Reserve (Fed), possibly as early as March. However, indications from the US central bank have yet to support such an optimistic scenario.
US Central Bank's Stance
Fed governor, Jerome Powell, has cautioned against such premature expectations, underscoring the continuation of a more restrictive monetary policy until inflation nears the target of 2%. He also hinted at the possibility of further policy tightening if required. Still, markets continue their upward trajectory, spurred by a calming inflation rate and supportive comments from the Fed, hinting at an end to the interest rate hike cycle.
Analysts from Deutsche Bank foresee a 1.75 percentage point rate cut by the Fed next year, attributing this to a mild recession. However, futures markets show a more conservative expectation of a 1.25 percentage point reduction throughout 2024.
European markets are less auspicious, grappling with high inflation and stringent financing conditions that are impacting the real economy and banking system. Despite the seasonal trends aligning with historical patterns, including November's robust performance and expectations for a 'Santa Claus rally' in December, European banks face challenges such as dwindling loan demand and rising loan losses. Correction in European real estate markets could compound these issues.
Nejc Apšner from Nekster Finance comments on the selective growth in New York markets, highlighting that major tech companies like Apple, Tesla, and Nvidia are primarily driving the S&P 500's rise.
Commodity Prices Surge
Commodity prices, particularly gold, have soared to record highs in anticipation of interest rate cuts, with gold surpassing its 2020 peak. Meanwhile, despite legal issues encircling the FTX exchange, Bitcoin is reaching its year's highs. A study underscored Bitcoin's significant water footprint due to the cooling requirements of large computing systems used in mining, raising environmental concerns in addition to its already known energy consumption.