Global stocks and investment-grade bonds had their best monthly performance in November, with global stocks having their best monthly performance in three years and global investment-grade bonds having their best month on record. However, the Santa rally may be at risk as central banks like the U.S. Federal Reserve and the European Central Bank may start pushing back against market euphoria. They are wary of excessive optimism and may tighten financial conditions to prevent it. This raises the question of whether equities and bonds can rise together next year. Stocks have priced in lower borrowing costs and steady growth, while government bonds have benefited from signs of pain caused by previous rate hikes. The upcoming U.S. jobs report on December 8 will provide valuable insights into the state of the economy and the potential for monetary policy easing by the Fed. A strong number in the jobs report could hinder the rally in stocks and bonds, while a weak number may indicate a possible economic downturn. The Bank of Japan's tightening campaign and the impact of higher interest rates on businesses and the economy will also be closely monitored. Additionally, political turmoil in Germany, the Netherlands, Spain, and Portugal adds to the uncertainty in the upcoming election year. Despite these challenges, November has been a positive month for emerging market stocks and bonds, giving hope for potential gains in December. The outlook for December will depend on bond yields and risk premia. Many investment houses remain hopeful.
Global government bonds have posted their longest rising streak since December, as the worldwide market consensus swings toward more interest-rate cuts this year. A Bloomberg gauge of sovereign bond returns rose for a fifth straight session Wednesday as investors ramped up monetary easing wagers from the US to Australia. Traders have escalated rate-cut bets in the past week, emboldened by a slew of softer-than-expected US economic data and the Bank of Canada’s decision to ease monetary policy. The European Central Bank’s policy decision later Thursday will be a key point of focus for traders, with a rate cut predicted by analysts polled by Bloomberg. Swap markets show investors are penciling the chances of more rate reductions than not for now. Swaps tied to the Federal Reserve’s policy rate show a 90% chance of two quarter-point cuts by year-end compared with 47% at the end of May. Futures traders are penciling a 51% chance of a rate reduction by the Reserve Bank of Australia by December from 9% at the end of last month. [eac7a68a]