Markets Update March 2024 - Interest rate turnaround and tech boom push markets to new heights

The stock markets have continued their positive trend in recent weeks, reaching new all-time highs. In addition to strong earnings growth in the technology sector, the current momentum is being driven by the markets' general expectation that the US economy will achieve a "soft landing". The latest decisions by the US Federal Reserve have also failed to dampen investor optimism. Despite a disappointing decline in inflation, the Fed is sticking to its plan to cut key interest rates by a total of 75 basis points in three steps this year. The hawks, who favor higher interest rates to combat inflation, were unable to prevail.

The Fed is clearly betting that the disinflation trend will continue. This explains why it is prepared to cut interest rates in advance this year despite inflation rates above the 2% mark. On the one hand, this balancing act is necessary, as monetary policy has a delayed effect on the real economy. On the other hand, this approach risks lowering key interest rates too early - and thus unleashing another wave of inflation. As the fine-tuning of monetary policy to economic realities is currently a very difficult undertaking globally, the risk of a second wave of inflation should be taken seriously. The recent rise in gold prices could be an indication that investors are beginning to prepare for this scenario.

How far will monetary policy in Japan go?

At its latest monetary policy meeting, the Bank of Japan raised its key interest rate for the first time in 17 years. Nevertheless, Japanese monetary policy remains ultra-expansive, as the key interest rate was raised from negative to slightly positive territory in a rather symbolic move. If the BoJ continues on this course, a sustained appreciation of the yen is to be expected. There could also be new turbulence on the global markets. Due to low interest rates, Japanese investors have invested over USD 4 trillion worth of yen liquidity on the international capital markets. A progressive turnaround in monetary policy in Japan is likely to lead to a repatriation of capital. The associated withdrawal of liquidity could trigger new sell-offs. The markets are still a long way from this scenario. However, forward-looking investors should include this as a possibility in their planning.