Central Bank Support and Global Market Sentiment

Last week, U.S. major equity indices capped a six-week rally, pushing risk-related asset prices within 3% of their 52-week highs. This rebound came after August’s steep declines, which reflected global market instability, challenges in emerging markets, and a weakening Chinese economy.

Central banks around the world signaled continued support for growth:

• China’s five-day policy assembly indicated a stronger inclination toward stimulus to maintain a 7% growth target over the next five years.

• The Bank of England appeared likely to hold off on rate hikes, citing inflation concerns.

• European Central Bank President Mario Draghi stated that officials would reassess the adequacy of their QE program at the December meeting.

These developments helped calm markets and contributed to the sustained rally.

Strong Jobs Report Shifts Fed Expectations

Friday’s U.S. nonfarm payroll report exceeded expectations, adding 271,000 jobs—the largest gain since December 2014. The previous month’s total was revised upward by 12,000, and the unemployment rate fell to 5.0%. Notably, average hourly earnings rose 2.5% year-over-year, the strongest increase since 2009.

These robust labor market figures have shifted market expectations for interest rate hikes. According to CME Group data, the probability of a December rate hike jumped to 70%, up from 58% before the report and just 38% following the Fed’s previous policy statement. The conversation has now moved from when rates will rise to how much and how fast.

A Cautious Outlook Despite Market Gains

Despite recent gains, several market indicators suggest this rally may be fragile:

• The 10-year Treasury yield has risen to 2.30%, its highest since July

• The U.S. dollar is gaining strength

• Small-cap stocks are underperforming

• Price-to-earnings ratios remain elevated despite modest earnings growth

• The number of new 52-week highs is not expanding

• Market breadth remains narrow

These warning signs suggest that the recent uptrend could reverse quickly. As such, we remain committed to our disciplined approach to risk management. If market conditions deteriorate or equities fail to maintain current levels with conviction, we are prepared to reduce exposure accordingly.

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