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Market Comment - September

On September 18, the Federal Open Market Committee shifted its focus from prices (inflation) to jobs and announced a most anticipated change in monetary policy. The new policy of monetary easing was kicked off with a bang and a 50-basis point reduction in the Federal Funds Rate down to the range of 4.75% to 5.00%. As usual, the best economist on the planet - the US 2-Year treasury note yield – “predicted” how far the Fed was “behind the curve.” While trading at 3.55%, the Federal Funds Rate was cut just below 5%, showing a stunning spread of over 100 basis points. Investors quickly rushed to the conclusion that the US central bank is still far "behind the curve” and another 100 basis points of rate cuts are backed in the cake. This assumption remains valid, as long as the 2-Year notes continues to trade at the current level. While short-termrates remained unchanged until the end of the month, the long end of the yield curve started to rise sharply. It was not enough to fulfill a meaningful bottom for higher price targets, but the yield curve did exactly what we had been expecting. Our price targets for the 2-Year yield curve stands between 0.84% and 1.44%. That is to say, that if our expectations are correct, the FED needs to push the 2-Year yield down to 3.00% to achieve a 3.84% yield for the 10-Year yield. As it ended the month at 3.78%, we could argue that long-term bonds are becoming a bad investment, as we do not see any potential for price appreciation going forward. It is worth mentioning that the global debt based financial system is heading for a refinancing cycle, meaning, that supply for longer term bonds will remain elevated. When it comes to equity markets, our expectations that a larger than expected rate cut could be viewed as a panic signal, hence moving markets into a risk-off mood proved to be wrong. Mr. Powell chose his words wisely and communication was excellent. While the meeting of the US Central Bank was able to cut the losses of the first half of the month, the stimulus package announced by the Chinese Government during the last week of September lifted the bulls out of their cage, setting off a veritable rodeo in the Chinese equity market, erasing any appetite for investors to reduce risk. Subsequently, global equities rose a little bit more than two percent during the past four weeks. We are now witnessing equity markets not only deviating from the 10-Year Cycle, but also from election year seasonality. According to our study, there is still some fuel in the tank left for a couple of equity indices, but the more we run during 2024, the less potential is left for 2025. While Central Banks will continue to provide liquidity, the refinancing cycle will use a lot of that fuel. Currently, inflation expectations are firmly anchored to the price of crude oil. Bearishness among commodity traders, as well as negative media reports helped to push the price down by 7.31% in September. We cannot make a prediction yet. There is an option for a price target range 51 – 54. But the same was the case beginning 2023 and the setup did not materialize. Since we remain in a well-established trading range, there is no need to anticipate a bear case. Extreme sentiment remains a solid provider for market bottoms and market tops.

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