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This is how to play the Fed cut abroad

Published 05/25/2024, 05:00 AM
Updated 05/25/2024, 05:01 AM
© Reuters This is how to play the Fed cut abroad

Goldman Sachs analysts revealed their perspective on monetary easing globally in a note Tuesday, with G10 central banks initiating monetary easing cycles.

The bank explained that while the Federal Reserve is not expected to cut rates imminently due to persistent core inflation, other central banks, such as the ECB, BoE, and BoC are projected to begin easing in June. Despite gradual rate cuts due to ongoing wage and price growth, the broader easing trend presents distinct possibilities for investors.

Goldman Sachs emphasizes that the real potential lies in emerging markets (EM) rather than developed markets (DM).

With early hiking cycles in Latin America and CEEMEA leading to favorable inflation outcomes, these regions have maintained highly restrictive real policy rates. This caution, driven by concerns over currency depreciation against the US dollar, is likely to diminish when the Fed eventually starts to cut rates, unlocking significant investment opportunities in EM rates markets.

Furthermore, the bank also points to China’s economic performance as further evidence of this perspective.

While industrial production surged by 6.7% year-on-year in April, the housing market continues to struggle, prompting policymakers to introduce additional easing measures. Despite these challenges, Goldman Sachs notes that China’s GDP is forecasted to grow by 5.0% this year, slightly above consensus.

As US growth decelerates, the landscape for global investment shifts. The investment bank says the modest recovery in rates markets, coupled with benign inflation data and weaker US growth, supports a cautious yet optimistic outlook for yields and credit spreads.

Consequently, Goldman Sachs says investors should look beyond traditional markets and consider the opportunities in emerging markets as central banks worldwide begin to ease monetary policies.

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