Anticipation of rate cuts fuels risk-on sentiment
Conflict and political uncertainty
From a geopolitical standpoint, the start of 2024 has been bleak – conflicts in the Middle East continue to rage on, with an increasing probability that more countries will become directly involved. The additional conflict in the Red Sea has threatened the global supply chain, as this stretch of water is crucial for trade between Asia, Europe and Africa. Although the situation continues to escalate, the impact on the markets has been muted this far.
Wall of cash
With GIC rates rising along with short term rates, inflows into short term GICs and money market instruments have skyrocketed, reaching an unprecedented level of around U.S.$6Trillion. This trend may start to reverse shortly, as short-term yields are expected to decline along with policy rate cuts, at which point investors who have been on the sidelines are likely to start reinvesting the money into risk assets.
Magnificent 4 driving S&P 500 to new high
Bullish sentiment continued in January, helping the S&P 500 index reach a new record with the megacap names driving most of the gains. The recent earnings reports point to an extremely narrow market, with “Magnificent 4” (Nvidia, Apple, Microsoft and Alphabet), being responsible for the majority of returns in the fourth quarter of 2023, magnifying concerns about these companies moving into euphoria territory.
