Global investors are keeping a close eye on the market's volatile fluctuations. Concerns over whether the US economy will prosper or fall into recession have been sparked by the Federal Reserve's significant interest rate cuts, resulting in chaotic prospects for global stock markets, bonds, and forex markets.

The US Federal Reserve announced a 50 basis point rate cut on Wednesday, above the 25 basis points expected by most economists and market participants. Following the Fed's interest rate decision, the euro, pound, and currencies such as Norwegian krone and Australian dollar strengthened against the US dollar, and US stocks rose sharply (although they closed with a slight decline on Wednesday).

However, the Bank of England announced on Thursday that it would keep interest rates unchanged due to uncertainty in inflation prospects and global demand. This is a sign that the rate cuts by the Federal Reserve have unsettled policymakers outside the US.

Traders have lowered their expectations for rate cuts by the Bank of England. Some fund managers have warned that the aggressive rate cuts by the Federal Reserve could provide too much support to the already robust US economy, thus boosting global economic growth but also pushing up prices of commodities and consumer goods.

Trevor Greetham, Head of Multi-Asset at Royal Bank of London, said, "I believe it is more likely that the aggressive rate cuts by the Federal Reserve will accelerate economic growth. There may not be a significant amount of rate cuts on a global scale." He also expects increased market volatility going forward.

Tim Drayson, the Chief Economist at Legal & General Investment Management, said, "I believe the market will experience more volatility, there are too many risks." He is referring to the prospect of a slowdown in the US economy.

Traders have almost universally reduced the expectation of a 25 basis point rate cut by the Bank of England in November to around 80%, and believe that the European Central Bank is unlikely to cut rates next month. However, investors believe that this forecast is not stable. European rate setters are struggling to address the problem of economic growth lower than the USA, but with more challenging inflation, and their policy path and market depend on various unpredictable situations in the US economy.

Shamil Gohil, portfolio manager at Fidelity International, said that weak economic growth in the USA and the UK may prompt the Bank of England to accelerate its rate cuts and boost UK government bonds. However, he also added that if the current expectations of further rate cuts by the Fed are proven wrong, these bets could easily be affected, 'this could lead to a situation of selling in all markets.' He also said that overall, he expects global market volatility to increase.

The eurozone's core inflation rate is slightly below 3%, and after rate cuts by the European Central Bank in June and September, there are differences among the policymakers on the future rate-cutting path. Trevor Greetham said that if the Fed continues to cut interest rates, further strength in the euro-to-dollar exchange rate will weaken Europe's export competitiveness, putting greater pressure on the European Central Bank.

Marcus Jennings, fixed income strategist at Schroders, stated that the dovish Fed, together with the weak Eurozone economy, makes German bonds more attractive. Sheldon MacDonald, Chief Investment Officer at Marlborough, said that market volatility could increase, as stock market valuations imply that the US economy will be boosted by interest rate cuts, but bond pricing implies an economic downturn.

Investors also warned that if US economic data changes the market's view of the next steps by the Fed, the outlook for global central banks could change. Ben Gutteridge, multi-asset manager at Invesco, said that if the Fed prevents an economic recession, this will boost trades based on central bank policy differences, such as betting that the Bank of England will tighten policy to strengthen the British pound against the US dollar. However, he also stated that a softening of the US economy will drag down global stock markets and support the bond market, thus narrowing regional market differences.

Editor/Lambor