Economy

LONDON (Reuters) -Stock market peaks typically coincide with troughs in cash holdings – but a regional skew to that picture may be messing with the signal for anyone still wary of U.S. equities.The overwhelming, almost unnerving, bullishness about Wall Street stocks for 2025 is now pretty clear. Not one of 16 annual outlooks collected by Reuters from top brokers and investors sees the S&P500 lower in 12 months’ time, for example.And yet the vanishingly small number of “refuseniks” point to one significant reverse indicator to support their case – near historically low global allocations to cash.Bank of America’s closely-watched survey of asset managers around the world this week spotlighted that average cash levels in portfolios fell below 4% in December for only the second time since June 2021, triggering what it considered another “contrarian” sell signal for equities.Pointing to 12 such signals since 2011 that resulted in an average global equity loss of more than 2% in the subsequent month, BofA underscored the finding by showing that net cash allocations relative to funds’ benchmarks had plummeted by the most in five years to a record 14% underweight, versus 4% overweight in November.Underweight cash positions even close to this month’s record were in the past marked by deflating equity markets in early 2002 and 2011. Tallying with nose-bleed levels of record U.S. equity exposure and economic optimism, where only 6% of funds see a “hard landing” over the next 12 months, the global rotation out of cash and into stocks in the month since the election of Donald Trump has been the biggest in more than 10 years.Nervous?Well, that alarming picture masks a number of factors that don’t quite fit the bill.For a start, it seems to fly in the face of still swelling assets under management at cash-like U.S. money market funds, which at a record $6.77 trillion last week have jumped by a quarter of a trillion dollars since the election and are up a cool trillion over the past 12 months.While there may be a number of factors driving that persistent rise in money fund AUM – such as reinvested interest earnings or households’ ongoing migration from lower-yielding commercial bank savings accounts – it hardly reflects the sort of drop seen in global funds’ cash levels and allocations.What’s more, the money fund coffers have continued to expand even since the Federal Reserve began reducing short-term interest rates in September – and amid expectations it will execute its third cut in the cycle on Wednesday.TRANSATLANTIC FLOWThe clue lies in seemingly unshakeable faith among global investors in the “exceptional” U.S. economic and investment story – also clearly reflected in this month’s BofA survey.The poll showed funds at their most overweight U.S. equities relative to euro zone stocks in 12 years – the nadir of the euro debt crisis.What’s more, a subset survey cut of just European asset managers shows where the depth of the cash aversion really lies – with average cash levels among regional funds there almost a full point below global levels and near the lowest in more than a decade.That figures, given the speed and depth of European Central Bank and Swiss interest rate cuts compared with the relative foot-dragging at the Fed. The ECB and SNB have cut four times each already, with the latter now 160 basis points below the Fed’s policy rate and the Swiss base rate almost back at zero.With the European economy set to lag the United States significantly again next year, exposed to Trump’s promised trade wars and domestic political upheavals, and rates expected to tumble further as the Fed hesitates, cash appetite is bound to differ.But judged by the record 36% of European asset managers who report being overweight U.S. equities, and the 30% who expect U.S. stocks to be the best-performing global asset next year, that rundown of cash is heading straight across the Atlantic.That flow has likely been underway for months and explains much of outsize 6% surge of the dollar against the euro over the past three months, the parallel Wall Street outperformance against euro stocks and the 60-basis-point widening of the transatlantic 10-year debt spread.And those flows may have further to run.The key point is the low global cash level reflects the European picture more than the U.S. one.If the Fed stalls on further rate cuts after this week, then U.S. cash levels could well remain high while they are cut elsewhere in the world – leaving the apparently strange sight of rising U.S. stocks and cash levels intact. Only some revision to those extreme assumptions of U.S. exceptionalism – possibly involving some radical rethink of the stubborn Fed view – would start to balance that picture.Neither look likely early next year, but mid-2025 might throw a different light.The opinions expressed here are those of the author, a columnist for Reuters.(By Mike Dolan; Editing by Jamie Freed) More

The far-right AfD is in second place with 18%, followed by the Social Democrats at 16%. The Greens and the far-left BSW are trailing behind with 13% and 6% respectively. The liberal FDP is polling at 4%, suggesting a potential failure to cross the required 5% threshold, which could result in them not being represented in the next Bundestag.These opinion polls align with the UBS Evidence Lab Political Probability Monitor, a tool that tracks implied probabilities based on betting odds from leading bookmakers. The monitor currently shows an 86% probability of the CDU/CSU winning the most seats, followed by AfD at 15% and SPD at 11%.It’s worth noting that in 2021, the polls saw significant shifts in the two months leading up to the election. In July 2021, the SPD was trailing the CDU/CSU by a similar margin as present (15% and 30%, respectively). However, on the election day, the SPD managed to secure a win with 25% of the votes, surpassing the CDU/CSU who secured 22%.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

LONDON (Reuters) – Next (LON:NXT) year’s top pick for hedge fund strategies is so-called macro, with U.S. President-elect Donald Trump centre-stage as investors bet on how global policy decisions will impact economic conditions and play out in financial markets.Hedge fund returns benefited this year from wild market swings sparked by politics such as November’s U.S. election, and twists in monetary policy such as Bank of Japan rate hikes.And investors are readying for more volatility in the year ahead, seven hedge fund investors and portfolio managers told Reuters and a recent survey showed. ” Macro (BCBA:BMAm) seems interesting now given a more turbulent political backdrop and what it means for both fiscal and monetary policy,” said hedge fund investor Craig Bergstrom, chief investment officer at Corbin Capital Partners (WA:CPAP).U.S. tariff hikes under a new Trump administration could deal the global economy a fresh blow, further weakening China’s yuan and the euro, while adding to inflationary pressures that slow the Federal Reserve’s ability to cut rates.Although hedge funds specialising in cryptocurrency trounced other strategies in 2024, with data provider Preqin estimating a 24.5% annualised return, investors are less convinced for 2025.Macro ranked first and crypto last in a list of hedge fund strategies for 239 investment firms surveyed by Societe Generale (OTC:SCGLY) in November. Around two fifths of those surveyed aimed to invest in macro, the client note seen by Reuters said, adding that interest in government bond trading had fallen. Meanwhile, funds trading commodities and equities ranked second and third.  Jordan Brooks, co-head of the Macro Strategies Group at investment management firm AQR agreed that sovereign bonds were becoming less of a key investment theme.”Inflation is now more balanced. From here, we think things are less certain across the board,” said Brooks, adding that the $7.5 trillion a day currencies market would be in focus.    CRYPTO? NOT YETAlthough Trump has embraced digital assets, promising friendly regulation and to accumulate a stockpile of bitcoin, some hedge fund investors are not convinced. “We haven’t seen a lot of institutional investor demand on the solutions side for crypto trading strategies,” said Carol Ward, head of solutions at the $175 billion Man Group (LON:EMG).Benjamin Low, a senior investment director at Cambridge Associates, said some Asia-based funds had explored small-scaled crypto investing, but nothing had come of it yet.Crypto might serve as a good diversifier that trades differently to broader markets, said Low, whose advisory firm links hedge funds with investors and undertakes fund manager selection and allocation for clients.”But the volatility is so high, when you talk crypto, what are you trading, is it just the cryptocurrencies, are you buying into companies or equities?” said Low.”The definition is so broad and wide that it might invite more questions from existing investors,” he added.     Nevertheless, attitudes are changing and many funds have updated their investor documents in the last couple of years to allow them to include crypto exposure, said Edo Rulli, CIO of hedge fund solutions at UBS Asset Management. “Larger exposures in non-specialist hedge funds are not there yet. Digital asset exchanges are not regulated and some carry reputational and fraud risk,” said Rulli, adding that some hedge funds have found ways to trade crypto indirectly.NextGen Digital Venture, a Hong Kong-based hedge fund specializing in crypto stocks, jumped 116% this year through November, thanks to its exposure to stocks like Coinbase (NASDAQ:COIN), MicroStrategy, and Marathon Digital (NASDAQ:MARA) Holdings.  Founder Jason Huang is preparing his second crypto-focused fund and while optimistic, cautioned that bitcoin could reach a cyclical peak next year.Meanwhile, hedge funds including Millennium Management, Capula Management and Tudor Investment raised their exposure to U.S. spot bitcoin ETFs in the third quarter, filings showed. And multi-strategy funds have bought the convertible bonds of software company MicroStrategy, the largest corporate holder of bitcoin, whose shares have soared nearly 500% this year.Skybridge founder Anthony Scaramucci said it should take a while for crypto to lure more big allocators, as potential regulatory discussions have just started.”We’re creating now a regulatory runway. Big institutions, endowments, big enterprises, they don’t want to get fired. They’re sitting on top of piles of money, and it’s their job to take measured risk,” he said.  More

WASHINGTON (Reuters) – The Federal Reserve will conclude its final meeting of 2024 on Wednesday, and next year will likely be Fed Chair Jerome Powell’s last full one at the helm of the U.S. central bank, with his four-year term due to expire in May of 2026.Powell’s more than six years as Fed chief have been consequential, but the coming months could present new challenges as well as an opportunity to close out some unfinished business.If he has a 2025 wish list tucked in his drawer, here’s what may be on it:CLEAR ‘STOP’ SIGNPowell’s main mission is “completing the ‘soft landing’ with inflation at 2% and full employment, in what’s likely to be trickier weather” with tax, tariff and immigration policies that could make the economic landscape harder to read, said Donald Kohn, a former Fed vice chair who is now a senior fellow at the Brookings Institution. For all the criticism the Powell-led Fed received for not raising interest rates quicker once inflation accelerated in 2021, the rapid rate hikes that were eventually delivered and the return of the global economy to a more normal footing after the COVID-19 pandemic have brought inflation close to the U.S. central bank’s 2% target. But the job isn’t done. Over the next year Powell will have to guide debate among policymakers over when to stop the rate cuts without going so far that inflation rebounds or going so slow that the job market starts to decay, all while factoring in the policies of the new Trump administration.STABLE FISCAL ENVIRONMENTPresident-elect Donald Trump has promised broad changes in tax, trade, immigration and regulatory policy that could make the Fed’s job of maintaining stable prices and full employment more challenging.With an economy likely operating at or above its potential, lower taxes or looser regulation could spark higher inflation by boosting demand and growth even further; widespread deportation of immigrants could constrain labor supply and put upward pressure on wages and prices; tariffs could boost the cost of imported goods.But the effects won’t be one-sided – higher prices for imports could weaken demand or shift consumers to local substitutes, for example – with the Fed left to try to understand the full impact of policies that may take time to enact and implement.Determining how it all nets out for the things the Fed cares about – inflation and the unemployment rate – may be one of Powell’s chief challenges for the last phase of his leadership of the central bank.QUIET END TO QUANTITATIVE TIGHTENINGThe Fed’s holdings of U.S. Treasuries and mortgage-backed securities exploded during the pandemic as part of its efforts to keep markets stable and support an economic recovery. Now the central bank is shrinking its balance sheet as maturing securities expire, a process known as quantitative tightening.There’s a limit to how far the balance sheet can shrink before it leaves the financial system short of reserves. All things equal, Powell and his colleagues would like the run-off to continue as long as possible, yet they also want to avoid disrupting overnight funding markets as happened in 2019.Finding the right stopping point and deciding how to manage the balance sheet moving forward is one bit of unfinished business from the pandemic-related financial rescue that Powell needs to complete to return monetary policy to “normal.”STURDIER FRAMEWORKPart of Powell’s legacy will be tied to the changes in monetary policy strategy the Fed debated in 2019 and approved in 2020 when the pandemic had shifted the central bank’s focus to fixing what was then massive unemployment. With a prior decade of low inflation as context, they adopted a new operating framework that put more weight on a jobs recovery and pledged to use periods of high inflation to offset prior inflation misses.The approach fast grew out of step with an economy in which the labor market recovered quickly and that by 2021 showed signs of intensifying inflation.Powell has acknowledged the changes he oversaw in 2020 were too focused on what was likely a unique set of circumstances, and a review this year will determine if the framework should be amended again.One challenge: How to be sure the operating guidelines avoid over-committing to either of the Fed’s two mandates.”If the Fed comes out of this episode with a diminished focus on employment relative to inflation, we risk returning to an environment where inflation undershoots the target and employment recoveries from recessions take longer than unnecessary,” said Ed Al-Hussainy, senior global rates strategist at Columbia Threadneedle.AVOID A REGULATORY WARAlong with fiscal policy, the Trump administration may try to overhaul how banks are regulated, an area where the Fed has both direct responsibility as a supervisor and broader financial stability and monetary policy interests as the economy’s “lender of last resort” to otherwise creditworthy financial institutions facing market strains. Powell focused a lot of his energy as Fed chief in building relationships with members of Congress, and those ties may be important as lawmakers debate possible changes in bank regulations and the supervisory structure used to enforce them.”I suspect there are going to be some major pushes from the Trump administration to change how the federal government implements financial policy,” said David Beckworth, a senior research fellow at George Mason University’s Mercatus Center. “There may also be calls for reforming the Fed writ large. I hope Chair Powell … puts the Fed in the best position possible to deal with potentially big change.” More

NEW YORK (Reuters) – The Federal Reserve appears likely to take a step on Wednesday to nudge cash off its balance sheet as it enters a more uncertain period in what many see as the final months in its effort to draw down its balance sheet. Economists broadly expect the Fed to announce it’s cutting the rate it pays money market funds and others to park cash at its overnight reverse repo facility, or ONRRP, by a bigger margin than the expected cut to its policy rate. While the federal funds rate target is seen being trimmed by a quarter-percentage-point to between 4.25% and 4.50%, the reverse repo rate, or RRP, is seen falling to 4.25% from its current setting of 4.55%. The Fed has adjusted the rate differential between fed funds and ONRRP previously, but those changes were aimed at keeping the funds rate in the desired range or navigating periods of near-zero rates. Harmonizing the spread now, Fed watchers reckon, could help the central bank gain some flexibility as it sheds bond holdings, referred to as quantitative tightening, or QT.“It makes sense to me that at some point the [Federal Open Market] Committee would want to return the overnight RRP offer rate to the bottom of the target range,” said Patricia Zobel, former manager of the New York Fed team that implements monetary policy and now head of macroeconomic research and market strategy at Guggenheim Investments. Changing the rate “will be effective at encouraging people to find alternatives” to parking money at the Fed and it will likely lower money market rates as well, she said. The Fed’s reverse repo rate is designed to set a soft floor for short-term interest rates. Along with the rate paid to deposit-taking banks for reserves, it helps keep the Fed’s policy rate within its targeted range. From near zero usage in spring of 2021 to a peak of $2.6 trillion at the end of 2022, the reverse repo facility, which takes in cash primarily from money market funds, has contracted as the Fed has shrunk its balance sheet from a record $9 trillion in the summer of 2022 to $7 trillion by allowing some of its Treasury and mortgage-backed securities holdings to expire and not be replaced. For months, though, ONRRP totals have been range-bound and have yet to slide below $100 billion.Fed officials who have weighed in on the matter have indicated they’d like to see ONRRP move back to negligible levels, and that doing so is important for QT. Draining the Fed facility will mean excess liquidity has largely been removed and allow bank reserves to finally start falling, ultimately allowing QT to stop. Active usage of the ONRRP facility “was always something that was meant to be temporary,” said Derek Tang, an analyst at LH Meyer. But “temporary has lasted for a long time.”The facility has made the Fed “a provider of safe assets to the money fund industry,” he said, but that was never the Fed’s intention, and it appears the central bank wants to close that chapter. STICKY MONEYStill, observers note making it less attractive to park cash at the Fed may not be enough: Some of the money funds are large enough to have challenges placing cash elsewhere. “Part of the reason the RRP facility has been so sticky is that some money funds use RRP as a source of liquidity because of the ease of scaling in and out of the facility on a daily basis – especially late in the day if they have late-day inflows,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “I think lowering the RRP rate will increase the opportunity cost of keeping cash in the RRP facility but may only marginally decrease the remaining cash in the facility.” The Fed itself also sees possible challenges to getting cash out of ONRRP and QT’s end, given the potential for a reintroduction of the government debt ceiling next year. Possible “substantial shifts” in government cash management “could mask the effects of ongoing balance sheet runoff on money market conditions and pose challenges in assessing reserve conditions,” according to the meeting minutes from the Fed’s November meeting. Banks surveyed by the New York Fed ahead of the Fed’s November policy meeting expected QT to end in May and the Fed then to keep its balance sheet steady at around $6.4 trillion. While the November meeting minutes suggest to many a strong chance of an ONRRP rate tweak on Wednesday, analysts at Wrightson ICAP (LON:NXGN) think the Fed will hold off until January and move the rate down at a meeting when the fed funds rate is left unchanged, as rate futures markets currently expect.Whatever happens on Wednesday, the weeks ahead will be unsettled for money markets, adding to the difficulty in predicting an end to QT. Quarter-end volatility has been rising with broad expectations that ONRRP will see a year-end spike, while cash is also expected to go to the Fed’s standing repo facility, or SRF (NS:SRFL). But even that is widely expected to be just a bump in the road with no greater bearing on the QT endgame. More

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U.K. inflation rose to 2.6% in November, the Office for National Statistics said Wednesday, in line with the forecast of economists polled by Reuters.
Core inflation, excluding energy, food, alcohol and tobacco, came in at 3.5%, just under a Reuters forecast of 3.6%.
“This upwards trajectory looks set to continue over the next few months,” Joe Nellis, economic adviser at accountancy MHA, said in emailed comments on Wednesday, citing the energy market and “the long-term pressure of a tight domestic labor market.”

The columns of Royal Exchange are dressed for Christmas, at Bank in the City of London, the capital’s financial district, on 20th November 2024, in London, England.
Richard Baker | In Pictures | Getty Images

LONDON — U.K. inflation rose to 2.6% in November, the Office for National Statistics said Wednesday, marking the second straight monthly increase in the headline figure.
The reading was in line with the forecast of economists polled by Reuters, and climbed from 2.3% in October.

Core inflation, excluding energy, food, alcohol and tobacco, came in at 3.5%, just under a Reuters forecast of 3.6%.
Headline price rises hit a three-and-a-half year low of 1.7% in September, but was expected to tick higher in the following months, partly due to an increase in the regulator-set energy price cap this winter.
“This upwards trajectory looks set to continue over the next few months,” Joe Nellis, economic adviser at accountancy MHA, said in emailed comments on Wednesday, citing the energy market and “the long-term pressure of a tight domestic labor market.”
Nellis added that these structural issues would be “exacerbated by recent decisions made by the Government,” including higher public sector pay settlements, an increase to the minimum wage and pressure on businesses caused by a hike in tax contributions for employers.
Persistent inflation in the services sector, the dominant part of the U.K. economy, has led money markets to price in almost no chance of an interest rate cut during the Bank of England’s final meeting of the year on Thursday. Those bets were solidified earlier this week when the ONS reported that regular wage growth strengthened to 5.2% over the August-October period, up from 4.9% over July-September.

The November data showed services inflation was unchanged at 5%.
Research group Capital Economics said the print “firmly rules out” a BOE December rate cut.
However, the overall inflation figures were broadly in-line with BOE projections, George Dibb, associate director for economic policy at the Institute For Public Policy Research (IPPR), said by email.
“The real concern is the U.K.’s weaker-than-expected growth, now lagging behind the Bank’s own projections,” Dibb said.
The U.K. economy unexpectedly contracted by 0.1% in October, in the second consecutive monthly downturn.
The British pound continued to trade 0.06% lower against the U.S. dollar and 0.19% lower against the euro following the release of the print.
If the BOE leaves monetary policy unchanged in December, it will finish out the year with just two cuts of its key rate, bringing it from 5.25% to 4.75%. The European Central Bank has meanwhile enacted four quarter-percentage-point cuts and this month signaled a firm intention to move lower next year.
The U.S. Federal Reserve is widely expected to trim rates by a quarter point at its own meeting on Wednesday, taking total cuts of the year to a full percentage point. Some skepticism lingers over whether it should take this step, given inflationary pressures. More