Market Quote: Fed Stays on Hold, Sustainable Investing Waits on Rates, Mining Stocks Underwhelm
Author: The editor's desk
January 31, 2024
A mid-week analysis of what’s happening in global financial markets from the perspective of AGF’s investment management team.
Barely Pivotal
Strains in the U.S. regional banking sector reverberated through financial markets Wednesday morning, but the U.S. Federal Reserve’s Federal Open Market Committee (FOMC) delivered what was widely expected. The bias to further rate hikes was removed from its statement, signaling that the next move is likely to be to lower rates.
The FOMC cautioned against a near term move until there is greater confidence that their inflation target will be sustainably achieved and Fed chair Jay Powell pushed back even harder during the press conference, suggesting that a rate cut in March was likely too soon. Future data releases as well as the inflation seasonal factor revisions on February 9 will continue to be of focus to Fed watchers.
In for the Duration
Sustainable investing themes generally lagged the market during the past two years, largely because longer-term interest rates were on the rise. But given strong supply and demand dynamics due to structural policy support, we believe investors could warm up to some of these themes again if central banks start cutting interest rates later this year as expected.
Namely, we point to the theme of energy transition, which is a major industrial and technology investment cycle beholden to the cost of capital when considering new investments versus legacy technologies. As such, we continue to have our eye on the U.S. 10-year Treasury yield as a good proxy for tracking borrowing costs for this group as well as sustainability-related stocks more broadly.
Digging Through a Rough Patch
The mining sector has had a rough start to the year, with fourth quarter operating results and 2024 guidance largely underwhelming the market. In particular, guidance releases to date suggest that operating cost pressures have not abated as much as consensus is estimating: a general trend across all commodities. Some companies in the process of building new mines have also reported continued upward pressure on capital costs.
The positive is that commodity prices are expected to remain largely supported at current levels, so once the 2024 guidance band-aid is ripped off, we believe companies could continue generating healthy free cash flows. Copper remains one of the commodities with the tightest supply/demand dynamics, with current price levels not yet high enough to support developing new assets.
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The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of January 31, 2024 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.
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