Market Insights - October 21, 2024

The dollar defies expectations!

After a notable summer slump, the dollar is regaining strength in October. Economic figures surpassing expectations seem to be driving this rebound. However, periods of monetary policy reversal often threaten the major balances between key currencies. These transitional phases are indeed conductive to shifts in currency trends. Notably, the potential for easing is greatest across the Atlantic. Following an initial rate cut in September, the Fed anticipates further reductions of approximately 1.5% by the end of 2025, followed by another 1% drop in 2026. In contrast, interest rates are not expected to decrease as much in the Eurozone, and even less in Switzerland. Consequently, the dollar's diminishing appeal could lead to depreciation against other currencies, particularly in the event of a Republican victory in the upcoming presidential election this November. As we know, Donald Trump has frequently suggested implementing a weak dollar policy to boost the competitiveness of American industry.

Europe: The recovery is not at risk! 

As anticipated, the European Central Bank lowered its key interest rate to 3.25% during last week's meeting. On one hand, the disinflation process is now well underway, as evidenced by the September inflation rate, which has fallen to its lowest level in three years. On the other hand, the European economy has experienced a slowdown in activity since the summer. The persistent weakness of the manufacturing sector remains a major concern, especially since consumer spending is subdued, with households preferring to take advantage of high interest rates to continue increasing their savings. Germany's near recession also draws media attention, given the significance of its industrial sector, which has been severely impacted, and its heavy reliance on China. Meanwhile, the political uncertainties in France further add to investor apprehensions. This gloomy environment also overshadows the resilience of peripheral countries, which are benefiting not only from a strong recovery in tourism but also from investments in energy transition and digital infrastructure, financed by the European recovery fund.

Nonetheless, there is no cause for undue pessimism, as the medium-term outlook remains more promising. Both the European Central Bank and the Bank of England have initiated a cycle of monetary easing and have significant room to further lower interest rates, thereby stimulating domestic demand. A gradual recovery is therefore expected across all sectors of the economy that had been most affected by the recent tightening cycle, including consumption, construction, and real estate. Early signs of recovery are already emerging in the real estate sector, particularly in interest rate-sensitive economies like the UK and Sweden. Given the significant drop in inflation and the fragile economic conditions, markets could even be surprised by the scale of monetary easing that central banks are prepared to implement. Leveraging its commercial openness, Europe should, at a later stage, benefit from the global economic recovery, particularly from China's rebound, should Beijing's stimulus measures gain traction.

Following a volatile summer, European stock markets have regained momentum. While regional equities may struggle to generate widespread enthusiasm among investors, several indices have recently reached new historic highs. The combination of central bank monetary easing and a nascent economic recovery is creating a favorable environment for European equities, whose valuations and, more importantly, yields remain attractive by global standards.

This week’s figure:
- 4.5%

Despite geopolitical tensions, WTI crude oil prices have fallen by 4.5% since the beginning of the year. After numerous false alarms, the markets appear to have resolved to pay less attention to tensions in the Middle East unless they witness significant disruptions to supply.