Rate cuts are not a miracle cure for markets if the economic backdrop is deteriorating and there is still enough of a case for a slowdown, if not outright recession, to justify caution. Even if rates were to fall by a couple of percentage points over the next year, the effects of the higher rates regime we are in means we are likely to see further consequences for the real economy. There have been many times in the past year when investors have bet that central banks have reached the end of their tightening cycle only to be disappointed and this could yet happen again. Having said that, there are still significant valuation anomalies around…ĭespite the almost exclusively good news in the paragraph above, it is important to realise that the dramatic falls in bond yields and pick up in equity markets represent a form of loosening of policy, which in itself might make the Federal Reserve less likely to cut rates. This is a very major turnaround in sentiment and has seen an especially strong response from those areas of the market that were most beaten up on concerns over rates staying higher for longer – property, tech and US smaller companies have been notable beneficiaries along with mid-cap names here in the UK. Recent inflation numbers on both sides of the Atlantic have shown very significant progress and some weakness in the employment market has emboldened market participants to bet that not only have rates peaked for this cycle but also that we will see rate cuts sooner than previously expected. Ultimately, this is being driven by investors moving closer to the conclusion that the Federal Reserve (and indeed other central banks) is through with raising interest rates in this cycle. It is difficult to overstate then the sense of relief being felt in markets as the first two weeks of November have seen a strong rally in both equities and bonds.

October was a truly awful month for risk assets, with investors taking fright over the move higher in bond yields and uncertainty surrounding events in the Middle East.

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