ROI-Markets brace for life after global easing cycle: McGeever

By Jamie McGeever

ORLANDO, Florida, Nov 6 (Reuters) - The global interest-rate cutting cycle has likely peaked. The question now is when, or if, today's high-flying markets will start to feel the pinch.

Remarkably, there have been more rate cuts around the world in the last two years than during the 2007-09 Global Financial Crisis, according to Bank of America. Although that's the number of cuts and not the magnitude of easing, it reflects the scale of the historic inflation-fighting rate hikes in 2022-23.

But the cycle now appears to have turned. This doesn't mean global easing has stopped. Central banks – most notably the U.S. Federal Reserve – are still expected to cut further. Rather, the number of cumulative cuts will decline moving forward.

On the face of it, the end of super-easy monetary policy should mean less accommodative financial conditions ahead.

But, perhaps counterintuitively, history suggests otherwise. Peaks in the last three major global easing cycles were followed by a broadening of the earnings cycle and solid equity market gains.

Are we about to see this again? Maybe, but given the frothy valuations in many of today's markets, it's not a given this time around.

LESS CONCENTRATION, MORE ROTATION

The peak of the easing cycle could be a bullish signal for Wall Street, say analysts at Societe Generale, who argue that it is a sign that earnings growth is going to broaden out and accelerate.

Manish Kabra, head of U.S. equity strategy at SocGen, says the cycle peak is a "powerful signal" to diversify into other areas of the market like small caps and less levered stocks. He notes that reducing equity exposure would typically come later when investors start pricing in the start of the hiking cycle.

"When the easing cycle peaks, it's traditionally a sign of market conviction that earnings growth is going to accelerate," Manish says, pointing to previous "peaks" in August 2020 and September 2009 - which were both followed by strong equity performance.

Of course, there's a big difference between now and these episodes, namely today's stock prices and valuations. Wall Street was only beginning to emerge from historic crashes in September 2009 and August 2020, whereas now it has never been higher.

This might suggest that a more defensive risk profile may be warranted today.

Kabra downplays talk of bubbles, however. S&P 500 earnings growth this year is running at around 12%, but if you exclude 'AI boom' stocks, that falls to only 4%.

IT ALL COMES BACK TO LIQUIDITY

Almost every major asset class has risen this year, apart from oil, the dollar and some long-dated bonds. Even unloved and much-maligned U.S. Treasuries have gotten a bounce.

But globally, these rallies have had many different drivers. In equities, the AI boom has been rocket fuel for Wall Street, bets on a defense spending splurge have boosted European stocks, and the prospect of significant fiscal easing has lifted stock prices in Japan and China.

However, the unifying force that has lifted all these boats, according to Standard Chartered, is liquidity. And plenty of it.

Eric Robertsen, the bank's global head of research and chief strategist, says the broad rally from the April lows, impacting stocks, bonds, commodities and cryptocurrencies, can be deemed a 'financial conditions trade'. How else can nearly every asset class rise together in a world of extreme economic and geopolitical uncertainty?

Of course, 'liquidity' is not solely or even primarily a function of monetary policy. Bank reserves, the availability of and demand for private sector credit, and general risk appetite are key factors that contribute to the rather amorphous concept that is 'liquidity'.

But if interest rate changes can be viewed as a loose proxy for liquidity or at least a directional signal, then we are at an inflection point.

Robertsen posits that the "abundant" liquidity from well over 150 rate cuts in the last 12 months has more than offset investors' concerns over growth. Their risk appetite may be put to the test if the liquidity taps are being turned off, even if only gradually.

"Can markets thrive at this altitude without additional oxygen?," Robertsen asks.

We may be about to find out.

(The opinions expressed here are those of the author, a columnist for Reuters)

Enjoying this column? Check out Reuters Open Interest (ROI), your essential source for global financial commentary. ROI [https://www.reuters.com/commentary/reuters-open-interest/] delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn [https://www.linkedin.com/company/reuters-open-interest/] and X [https://x.com/ReutersOI].

Global rate cuts in last 2 years now top GFC - Bank of America https://tmsnrt.rs/43WL10v [https://tmsnrt.rs/43WL10v]

Global central bank rate move tracker - SocGen https://tmsnrt.rs/49CpnlO [https://tmsnrt.rs/49CpnlO]

(By Jamie McGeever. Editing by Mark Heinrich)