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Goldman says risk rally is on as investors reassess Fed, oil

The Fed is expected to hold steady when it issues its interest rate decision Thursday.
The rebound in risk appetite can continue, according to Goldman Sachs Group.

“The market is once again pricing a data-dependent Fed, the US midterm elections are behind us, and we see early signs of a China-driven stabilization of EM growth,” Goldman strategists James Weldon, Matthieu Droumaguet and Charles Himmelberg wrote in a note Thursday. There’s scope for each of those factors to continue boosting investor demand for riskier assets, they said.

Listen: US midterm results boost appetite for EM currencies

Market concerns about Fed tightening have stabilised in the past two weeks, and the realisation that the central bank remains data-dependent should make signs of further hawkishness easier to digest, Goldman said. If growth continues to disappoint in line with the recent repricing, the Fed will still have room to adjust the pace of hikes, the strategists added. That’s in addition to the passage of the midterm elections and corresponding removal of uncertainty, which are widely seen as positive for markets.

The Fed is expected to hold steady when it issues its interest rate decision Thursday.

In September through late October, the S&P 500 Index fell 10% from its record high amid concerns about Fed tightening and the pace of growth. From Oct. 29 through Wednesday, it gained much of that back, rallying about 6.5%. The gauge was off 0.2% as of 9:45 am Thursday.

The US isn’t the only country giving Goldman reason to see gains ahead.

“Recent actions suggest that the Chinese government is serious about the ‘policy put,’ and our macro factor model shows early signs of a rebound in markets’ expectations for EM growth,” the strategists wrote.

They cited further loosening signals from Beijing, as well as a meeting between President Xi Jinping and a group of private-sector entrepreneurs that boosted corporate sentiment, as helping markets. President Donald Trump’s comments last week about a potential US-China trade deal may be encouraging EM investors, they added.

Furthermore, the bullish narrative on commodities remains intact, according to the report. Brent crude is now oversold and there’s too much pessimism in metals given that Chinese demand remains relatively strong, the strategists wrote.

© 2018 Bloomberg L.P

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