The Final Steps

The Final Steps
 

It has been a long year in terms of events and volatility with good opportunities and entry points across risk assets. We had the final showdown on Wednesday where the FED chair Jerome Powell most probably cut rates for the last time in his tenor.

On the back of the intact interest rate easing narrative, global stock indices regained confidence and are now close to record highs post the volatility spell we saw early November. But let’s see exactly what happened at the FOMC meeting which provided a good runaway path for the SANTA rally to take place. Fed Chair Jerome Powell, cut rates by 25bps as expected and affirmed the dot plot projections to 1 rate cut for 2026. The committee also revised growth projections indicating a promising forward state for the economy. More importantly, they announced reserve management purchases of T bills in the amount of $40bn per month. The market was expecting such an announcement in January, however the FOMC decided to start the process from next week to alleviate any funding pressures at the end of the year. What does that mean in simple terms? The FED is expanding its balance sheet going forward, adding liquidity in the market and anchoring the front-end rates. The market now believes that the number of purchases might even increase next year, citing banks with expectations of $60bn. This is obviously bullish for risk assets with a steepening bias for now on the rates curve. In terms of expectations, the market is pricing 2 cuts by year end 2026 (see table below).

In Europe we saw the hawkish rhetoric of rate hikes in 2026 to get a bit more traction as some ECB members mentioned that they would be comfortable with that. Bunds traded back to the year-to-date wide at 2.89%, only to retrace a bit post the FOMC meeting. Moreover, one of the biggest AI barometers in terms of AI spending, the ORACLE Corporation, issued their Q3 results with a 12% move lower in its stock taking place, erasing $105bn market value. The stock price movement was on the back of increased capex in data centers which by default implied an even more negative free cash flow, for now at least. This caused an underperformance of the tech sector, but it was not enough to keep the rest of the indices at a lower level. On the geopolitical side, there is an expected meeting on Saturday with US, Ukraine and European counterparts to discuss the 20-point peace plan. It remains to be seen if there is going to be a positive outcome, nonetheless President Zelenskiy is open to place a referendum and give the decision to the people regarding Donbass and its independence, a must have condition placed by the Kremlin to proceed forward.
In terms of prices moves, US equity indices are trailing gains of up 3% with small caps out performing. In Europe, equity indices are gaining traction again given the recent under performance, with gains up to 1.5% and with European banks staging another great week, trading 3.5% higher WoW. Gold has continued its positive trajectory, adding another 2.5% this week with more interest in Gold mining companies. EURUSD appreciated post the hawkish comments by the ECB council members, trading in the 1.17-1.175 context.

Looking ahead…

We are a few weeks before year end, nevertheless, it will be busy in terms of data, as they will define the risk mood for the first quarter. We expect NFP, CPI and retail sales out of the US which will anchor short term expectations on Fed rate cuts. Moreover, we are expecting PMIs out of Europe and the final vote of the French 2026 budget. In the meantime, we expect a very busy new issue calendar in January with all eyes attached on mega scalers and their need of funding for data centers.

I would like to wish everyone a good holiday and all the best and hopefully we will have an exciting year like the one we had in terms of market opportunities and returns. Merry Christmas!

Written by: Michael Konstantinou, Senior Portfolio Manager