Europe's Rush for Rate Cuts Shifts Global Market Power Away from US

• The Bank of England has sent a new signal that borrowing costs will fall earlier and further across Europe than in the United States, setting markets up for major shifts as investors play a monetary policy divide opening up across the Atlantic.
• Investors see European stocks and debt leading global markets this year as rate cuts boost spending, softer inflation burnishes bonds, and weaker currencies lift exports. Traders stepped up bets for UK easing after the BoE on Thursday held rates at 16-year highs of 5.25% but trimmed inflation forecasts, pushing sterling down and stocks higher.
• That came after Sweden cut rates for the first time since 2016, while Switzerland cut rates in March, and the European Central Bank flagged a June cut. In contrast, the U.S. Federal Reserve is set to keep rates high for longer.
• "This is the European pivot," said Florian Ielpo, head of macro at Switzerland's Lombard Odier Investment Management, who is positive on European and UK stocks. Since 2020, the United States has generated the lion's share of global equity gains.
• Paul Flood, multi-asset portfolio manager at Newton Investment Management, said he was buying UK stocks on valuation grounds and was positive on UK government bonds because there was more potential for BoE rate cuts ahead. "This is the European pivot," said Florian Ielpo, head of macro at Switzerland's Lombard Odier Investment Management, who is positive on European and UK stocks. Since 2020, the United States has generated the lion's share of global equity gains.
• European government bonds could outperform the U.S. but are likely to stay volatile as the inflation path worldwide remains unpredictable, investors and analysts said.
• The BoE, the ECB, and other European central banks might regret sounding too dovish too soon, Lombard Odier's Ielpo said. This statement suggests that central banks might face challenges due to prematurely cutting rates in terms of still unclear inflationary pressures. In the U.S., the Fed sent a strong signal in December that rate cuts were coming but then turned more hawkish after financial conditions became euphoric and inflation stalled above its target.

(Source: Reuters)