Weekly Wrap – Equity Markets Poised for Potential Surge Amid Rate Cut Speculations


With discussions around cutting interest rates intensifying, there is considerable speculation that equity markets could see significant benefits in the coming months. This is mainly due to the potential reinvestment of over $6 trillion, which is currently being held in money market funds.

  • Talks of massive inflows to equity might be exaggerated
  • US bond yields retreat
  • Oil steadies near two-month highs
  • Euro hits three-week high


As interest rates start to decline, the potential investment of cash being housed in money markets could significantly boost equity market performance, counteracting economic headwinds caused by higher interest rates. However, opinions on this outlook are divided. Here’s a look at both sides of the argument.


Analysts who believe that equities are set to benefit from lower interest rates base their assumptions on the fact that equity will provide better returns than money markets. It could be argued that these analysts are also more tolerant of the increased risks that equities pose. Some of their arguments include:


Advocates of this view believe that equities offer attractive returns, particularly in the current economic environment. With the anticipated decline in interest rates, equities may start to yield better returns than money market funds. In addition, the anticipated return from equities is often higher than the yield on money market funds, making equities more appealing to investors who are happy to take on more risk with the prospect of better returns.


Certain sectors, such as technology and healthcare, are positioned to grow significantly. These sectors are driven by innovation and demographic trends, which continue to attract investor interest. Companies within these sectors often have higher growth potential, making them attractive targets for investment. For instance, the technology sector’s rapid advancement and the healthcare sector’s ongoing innovation provide compelling reasons for investors to shift their funds from money markets to equities.


Historical trends support the idea that as interest rates fall and monetary policy eases, significant cash reserves will eventually flow into the stock market. Following the 2008 financial crisis, substantial inflows into equities were driven by low interest rates and quantitative easing measures. A similar scenario could unfold if economic conditions stabilise, and investor confidence returns.


On the other side of the debate, analysts who believe the move to equities is overstated are not convinced that the risk-reward trade-off is at a point to draw investments away from money markets into equities. In addition, many believe that economies are not out of the woods yet because inflation and geopolitical risks are still driving market volatility. Their arguments include:


Currently, money market funds offer high yields, providing attractive returns on a risk-adjusted basis. This attractiveness could deter investors from moving their funds into the more volatile equity markets. For example, the current yields on money market funds are competitive with those of some low-risk equities, making them a safer option for risk-averse investors.


The global economic landscape is fraught with uncertainties, including a global economic slowdown, inflationary pressures, and geopolitical tensions, such as the ongoing conflict in Ukraine and strained US-China relations. These are all contributing to market volatility and may encourage investors to maintain their cash positions as a safer alternative.


Corporate profits are under pressure due to rising costs and slowing sales growth. Reports indicate that US corporate profit margins are expected to contract, which could negatively impact stock values. Concerns about a slowdown in the United States (US) economic activity, reduced US consumer demand, and the resulting effects on company earnings could further deter investors from allocating substantial funds to equities in the near term. For example, if corporate profits decline, stock prices may follow suit, making equities less attractive to investors.


The recent resilience in global and US share prices has been driven by a narrow group of large-cap stocks. The broader market, as measured by equal-weighted indices, has not shown the same resilience. This lack of breadth suggests that the market rally may not be as robust as headline indices imply, raising questions about the sustainability of any potential inflows.


The relationship between interest rates and equity performance is complex. Typically, lower interest rates benefit growth stocks, while higher rates favour value stocks. With current high interest rates, value stocks might see more inflows, but the overall equity market will remain sensitive to interest rate fluctuations and central bank policies. For example, if interest rates remain high, value stocks may perform better, but growth stocks may struggle, affecting overall market performance.

While there is potential for substantial inflows into equity markets, driven by large cash reserves (although it is important to note that the current rolling value of these cash reserves is not above long-term averages) and attractive sectors, barriers remain. High yields on money market funds, economic and geopolitical uncertainties, and corporate profit pressures all present challenges to this proposed influx of capital to equity markets. Investors must navigate these factors carefully, balancing their investment decisions with their desired outcomes and investment objectives.


The yield on the US 10-year Treasury note declined to 4.35% on Wednesday, down from a recent high of 4.46%. This drop followed economic data that bolstered expectations for a US Federal Reserve (Fed) rate cut in the nearer term. The Institute for Supply Management (ISM) reported that US services sector activity experienced its steepest decline in four years in June, a stark contrast to the anticipated expansion. Further, the ADP report indicated fewer private sector jobs were added than forecasted, and continuing unemployment claims increased for the ninth consecutive week, reaching their highest level since 2021. Despite positive surprises in job openings and job cuts data earlier this week, market consensus is now tilting towards the Fed implementing the first of two 25 basis point rate cuts for this year in September.

In the United Kingdom (UK), the 10-year Gilt yield was around 4.18% on Thursday, having dipped from 4.28% earlier in the week. This movement coincided with parliamentary elections across the UK, where this morning it was announced that the Keir Starmers’ centre-left Labour Party has unseated Prime Minister Rishi Sunak’s Conservative Party. Labour has taken the approach of a “pro-business and pro-worker” agenda with a new industrial strategy, steering away from talks of tax hikes or a tighter fiscal belt.

South Africa’s 10-year government bond yield hovered around 10%, its lowest level in over a week. Investors welcomed the reappointment of Enoch Godongwana as Finance Minister and David Masondo as his deputy, viewing it as a commitment to fiscal discipline. The South African Reserve Bank Governor, Lesetja Kganyago, reiterated the central bank’s commitment to its inflation target, hinting that interest rates might remain high for some time, although a strengthening rand is expected to help rein in inflation.


Brent crude futures stabilised around $86.8o/barrel, near a two-month high. This was supported by a substantial drop in US inventories, with the Energy Information Agency reporting a 12.2-million-barrel decrease, far exceeding expectations. Additionally, weaker US economic data has raised hopes for a rate cut in September, boosting confidence in US and global economic growth and energy demand.

Gold prices approached $2,360/ounce on Thursday, nearing a four-week high. The recent economic data increased expectations for a Fed rate cut in September. Additionally, safe-haven demand for gold rose amid escalating tensions in the Middle East following a senior Hezbollah commander’s death, leading to retaliatory actions near the border.


US stocks mostly closed higher on Wednesday, ahead of the US’s 4th of July, Independence Day, public holiday. The S&P 500 rose 0.5% to a record 5,537, and the Nasdaq 100 gained 0.8% to a record 20,187, while the Dow slightly decreased. Weak US economic data bolstered investor confidence that the Fed might start its rate-cutting cycle soon. Electric vehicle manufacturer, Tesla, continued its rally, gaining over 24% since the beginning of the week.

The UK-based FTSE 100 increased by more than 0.5% on Thursday, driven by medical technology company Smith & Nephew, which surged 6.7% after investment firm, Cevian Capital, acquired a 5% stake in it. In Europe, Germany’s DAX rose by 0.4% to 18 450, continuing from a 1.2% gain from the previous day.

In Japan, the Nikkei 225 Index jumped 0.82% to 40,914, and the Topix Index rallied 0.92% to 2,899. Japanese shares hit new all-time closing highs, supported by a weakening yen, which enhances the profit outlook for export-heavy industries.

The South African JSE All Share Index climbed to around 81,340, reflecting optimism about potential US Fed rate cuts, as well as improved sentiment following the peaceful formation of a Government of National Unity (GNU) and the long-awaited announcement of the cabinet. Investors’ focus now shifts to monitoring the new government’s measures to stimulate economic growth.


The US Dollar Index held around 105.3 on Thursday, weighed down by weak US economic data, which increased the likelihood of Fed rate cuts as soon as September. Investors are now focused on today’s non-farm payrolls report for more labour-market insights.

The euro rose to approximately $1.08/€, its highest level in three weeks, following the European Central Bank’s expression of concerns over increasing inflation trends and any further potential rate cuts. While the timing of these cuts remains uncertain, investors are speculating on the likelihood of further monetary easing.

The pound remained steady at $1.27/£, near its three-week high, as the UK election unfolded. The Labour Party’s victory is expected to boost the pound in the short term, after which the focus will shift to expectations for a Bank of England rate cut in August.

The rand appreciated to trade near R18.30/$ at the close of trade on Thursday, recovering from a near one-month low. This appreciation was largely driven by a weaker dollar. The newly formed cabinet will be closely monitored in terms of both policy and stability of the GNU government.

Global markets continue to navigate a complex environment shaped by economic data releases, central bank policies, and political developments.

Key Indicators:

USD/ZAR: 18.21

EUR/ZAR: 19.79

GBP/ZAR: 23.27


GOLD: $2,365.52

Sources: Reuters/Refinitiv, Bloomberg, BCα Research, Seeking Alpha, Morningstar Market Watch, Goldman Sachs Asset Management and Trading Economics.

Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.

Weekly Wrap content provided by Citadel Pty Ltd.