A far weaker than expected US jobs market and minutes from the US Federal Reserve’s July meeting have put further pressure on the Dollar, with Sterling now trading at a one-year high against the greenback.
One market analyst said: “The economic fortunes of the US and UK seem to have reversed.”
Yesterday, the Bureau of Labor Statistics (BLS) published data showing that the number of people who secured employment in the year to March 2024 dropped by 818,000 from an initial 2.9m jobs. This was the largest drop in jobs revisions for 15 years, confirming suspicions that the labour market has been cooling much quicker than initially thought.
Experts from the US and UK have shared their views on what asset classes could benefit from the Fed cutting. Mauricio Sanchez, Founder and Chief Investment Officer at Texas-based Portafolio Capital Management, says that while fixed income and money market funds could see outflows, “interest rate-sensitive sectors” are destined to see price appreciation, including tech equities, consumer discretionary and real estate: “Real estate could see increased demand on both commercial and the residential side, as individuals begin to lock into lower rate mortgages.
“Increased appetite for riskier assets found in emerging markets could inspire investors to seek a return in such, but not until at least two cut-cycles.”
Meanwhile, Paul Della Guardia, Economist and Founder at Sovereign Vibe, said emerging markets could rally: “A rate cut by the US Federal Reserve would push yield-hungry capital towards emerging markets (EM), though the surprise element of monetary policy is also important. Loosening faster than currently expected would potentially accelerate flows to EM.
“Quantitative tightening matters, too. The Fed curtailed QT in May, which is broadly positive for risk assets, including EM. Further steps to reduce or scrap QT, or even reinstating QE, would be EM-positive. Fed monetary loosening weighs on the USD, reducing FX pressure on EMs with hard currency debt, external deficits and those reliant on imported food and energy.
“If the Fed’s rate cuts don’t push oil prices up too much, pockets of value are to be found in countries that meet these criteria, especially where there is a meaningful growth differential with DM (developed markets). Keep an eye on how these factors converge in countries such as Egypt, Kenya, South Africa, Jordan, the Philippines and Paraguay.”
Gabriel McKeown, Head of Macroeconomics at Sad Rabbit Investments, shared much the same view: “A decision by the Fed to cut interest rates in September could have far-reaching implications for asset flows, with easing monetary policy driving investors to shift focus to higher-yielding assets, in particular emerging-market equities.
“Commodity exporters like Brazil and Mexico could benefit from the weaker US dollar, boosting commodity prices and reducing borrowing costs for these countries. Other emerging markets, such as Indonesia and the Philippines, could also benefit from improved trade dynamics and increased capital inflows.
“The rate cut is expected to reduce borrowing costs across the economy, making it cheaper for companies to raise capital and boosting corporate profits. Technology and other high-growth sectors, which have historically relied heavily on borrowing for expansion, could see a further increase in investor demand. Consumer discretionary sectors, such as automotive and retail, could also receive a boost from improved consumer spending.”
Lastly, James Eagle, Founder at Eeagli, observed: “The economic fortunes of the US and UK seem to have reversed. From 2021 to 2023, the US economy outpaced Britain, buoyed by strong consumer spending and a robust labour market. However, the tide appears to be turning.
“Recent data suggest a slowdown in the US economy, with unemployment rising to 4.1% in June 2024 and inflation stubbornly high at 3.2%. Conversely, the UK’s prospects are looking brighter, with the International Monetary Fund revising its 2024 growth forecast upwards from 0.5% to 0.7%.
“This reversal of fortunes has had a noticeable impact on currency markets. The pound sterling has strengthened considerably, recently touching a one-year high against the US dollar at $1.3328. This shift reflects a reversal in economic narratives, which has been priced into exchange rates.”
Eagle also said gold could continue to outperform: “The surge in gold prices this week was driven by a trifecta of global economic forces. We’re seeing unprecedented central bank purchases, particularly from emerging markets like China and India, as they hedge against global economic fragmentation.
“Geopolitical tensions, heightened by conflicts in Gaza and Ukraine, are fuelling a flight to safety. Finally, the market expects the US Federal Reserve to cut interest rates in the coming months in response to fading inflation and weakening job numbers. This would lower real interest rates and weaken the US dollar, making gold more attractive, particularly to buyers in emerging markets using other currencies.”
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