Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

World stocks rose on Tuesday, regaining their poise after wobbling the previous day and lifted by an extended upswing in tech and AI sentiment as investors also continued to wager the Federal Reserve will lower U.S. interest rates next week. 

More on that below. In my column today I look at how overseas demand for U.S. equities has re-acclerated in recent months and is running at its fastest pace on record. The big question, of course, is can this continue into next year?

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When the Fed entered the 'blackout period' last week ahead of its Dec 9-10 policy meeting, rates markets were pricing a near 100% chance of a rate cut. That fell to as low as 80% after manufacturing ISM data showed prices rising in October even though activity contracted again.

An 80% probability is still overwhelmingly strong odds for a cut. But what if Friday's PCE inflation is higher than expected? Will traders reduce their rate cut bets further? The Fed would be loath to surprise markets, so Chair Powell will no doubt be hoping the PCE report is broadly in line with forecasts.

If global signals are worth anything, the U.S. PCE inflation report on Friday may indeed offer an upside surprise. Last week figures showed Tokyo inflation slightly stronger than expected, supporting BOJ rate hike bets; on Tuesday, flash euro zone inflation estimates were also slightly higher than forecast, cooling any outside bets on ECB easing next year.

From a bond market persepctive, the upshot is long yields creeping higher and curves steepening. Long-dated JGB yields are at record highs and the 2s/10s curve is the steepest since 2012; benchmark U.S. and euro zone curves are not far from their steepest levels since 2022-23.

Although Wall Street hasn't revisited its peaks from late October, AI sentiment is driving a wider recovery that has delivered six 'up' days in the last seven. Tech is up around 8% in that time, and the Philadelhia Fed semiconducter index's gains are double that. 

The latest 'Big Tech' tie-up will see Amazon's AWS cloud computing unit adopt key Nvidia technology in future generations of AI computing chips, while Amazon also introduced new versions of its AI models known as Nova. Announcements like these are becoming more frequent, and sometimes they are treated with caution. Not today.

Given the outperformance of many major European and Asian equity markets over Wall Street this year, it might appear that foreign investors are turning sour on U.S. equities. 

But that's not the case. Not only are overseas private sector inflows into U.S. stocks running at record levels, they have re-accelerated in recent months. The big question now is whether this can be sustained next year. 

The latest official Treasury International Capital data - which comes with a lag but is the gold standard for measuring overseas appetite for U.S. assets - shows that net purchases of U.S. stocks from foreign private sector investors in the 12 months through September totaled $646.7 billion.

Indeed, TIC data shows that inflows from abroad have been breaking records by this measure almost every month this year, having smashed through the previous peak of $392 billion, from 2021, in January.