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Markets vs the Fed

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

· Market participants bet on a Fed Pivot, causing financial conditions to ease most on record

  • Has the market got it right this time

Too much romance between the markets and the Fed has led to this flirting with a soft-landing narrative.

Markets are front-running the Fed’s actions, expecting policymakers to ease financial conditions by cutting rates 5 times next year.

That has caused the Goldman Sachs Financial Condition Index to drop the most in its 43-year history, which might be viewed as the future path for the Fed policymakers.

A graph showing the size of a price

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Source: ZH

However, one should not get too complacent that the market has it right this time.

Last year, a similar scenario took place, where Mr. Market expected rate cuts for 2023 that never happened.

This led to Bonds having a turbulent year and were on track to mark their 3 rd straight year of losses, until the November rally took place. In a stunning reversal, the 10Y Treasury Bonds nosedived 80 basis points on softer inflation data over the last few weeks.

Although the US Central Bank has not yet lowered its market rates yet, borrowing costs plunged, and rate-cut optimists skyrocketed stocks, causing the S&P 500 to climb 9% in November.

However, market participants seem to be selectively listening to only the FOMC dovish members.

Fed Chair Powell has kept his more hawkish stance, reiterating that it’s still early to declare a victory lap on the inflation fight.

This week’s US job openings dropped to a 2.5-year low in October, indicating that higher rates are cooling off demand for labour.

Next year, the economy will likely continue to slow down as the Fed makes sure it does not lower its key rates prematurely, leading to a re-surge in inflation similar to what happened in the 1980s.

The market dreams of significant rate cuts of nearly 125 basis points, with the first one likely occurring in March of 2024, implying that the cause for that will be a recession next year.

A graph showing the rate cuts

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Source: ZH

Markets have their own reality, and it’s certainly plausible that they could be carried away expecting too many cuts too quickly in the same manner they over-reacted to the „higher for longer“ stance earlier this fall.

And again, there is no reason to believe that the market has it right this time.

The OPEC+ cartel recently agreed to cut output in 2024, war continues in Ukraine, and escalating geopolitical conflict in the Middle East will all keep the likelihood of future oil shocks elevated.

If oil prices reverse and labour markets continue to show strength, inflation could again surprise the upside, leading to a sharp re-reprisal of risky assets.

Finally, a lot of critical data will come in the two weeks leading up to the Christmas holidays, including inflation prints and the FOMC meeting on December 13th. This will shed more light on the Fed’s future policy path and whether the market agrees or continues to disagree with it.

Investors can long the S&P 500 using our 3x US 500 , 5x US 500

Alternatively, they can short the S&P 500 using our -3x US 500

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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