The Federal Reserve has started a 50-basis-point rate cut as scheduled, officially kicking off a new easing cycle, and global liquidity will enter a new loose cycle; affected by this, global stock markets have risen collectively, with the S&P 500 and Dow Jones indices continuing to hit new highs, and Asia-Pacific stock markets performing brilliantly; the crypto market is enjoying the benefits of the rate cut, with the BTC price breaking through $66,000, and a new round of upward momentum may be brewing.
Before this month's FOMC meeting, the US released the latest non-farm and inflation data: the latest US non-farm employment increased by 142,000, less than expected; August CPI rose 2.5% year-on-year, declining for 5 consecutive months. In the context of the current rate cut, the weaker-than-expected non-farm data may actually be positive, increasing market expectations for a rate cut.
Subsequently, under the market's attention, the US Federal Reserve announced on the 18th local time that it would lower the target range for the federal funds rate by 50 basis points, to a level between 4.75% and 5.00%. After four years, the Federal Reserve has finally ushered in a new rate cut cycle. At this point, the global liquidity cycle will enter a new loose stage, and investors can breathe a sigh of relief.
After the rate cut in 2024, the main changes in major assets are as follows:
1. US Treasuries: US Treasuries usually rise before a rate cut, as the market reflects the expectation of a rate cut in advance. After the rate cut, volatility may increase in the short term, but over time, the trend of interest rates will diverge depending on the economic recovery situation.
2. Gold: Gold often performs well before a rate cut, as the demand for safe-haven assets increases. After the rate cut, gold may continue to be favored, but the specific situation will also depend on whether the economy "soft lands" and other market factors.
3. Nasdaq: In a recessionary rate cut, the performance of the Nasdaq depends on the repair of the fundamentals. After a preventive rate cut, the stock market often rises due to the positive economic effects brought about by the rate cut.
4. BTC: Compared to the 2019 rate cut cycle, the impact of the 2024 rate cut expectation on BTC will come earlier. Although BTC may experience volatility or a correction in the short term, the long-term outlook is bullish, and the magnitude and duration of the correction are expected to be smaller than in 2019.
After the rate cut, the flows into gold ETFs and stock ETFs can reflect the changes in market preferences for different assets. The Federal Reserve's adjustments to its forecasts for GDP growth, unemployment, and inflation will affect the market's outlook on the economic outlook, thereby affecting asset prices. Although the rate cut may boost market sentiment and increase the demand for risky assets, the gap between market expectations and actual economic data will also cause fluctuations in sentiment, and these changes are influenced by economic data, market expectations, policy trends, and other factors.
The magnitude of this rate cut is slightly higher than Wall Street's expectations, after all, in history, the Federal Reserve has only taken aggressive 50-basis-point cuts in the event of an economic recession.
However, in Powell's speech, the US economy is still operating under control, and there is no major recession concern. As mentioned in our previous monthly report, the Federal Reserve's current rate cut is a "preventive rate cut", and the 50-basis-point start demonstrates the Federal Reserve's attitude towards fighting recession risks. An aggressive start does not mean sustained aggression. The Federal Reserve has lowered its GDP growth forecast (from 2.1% to 2.0%) and significantly raised its unemployment forecast (from 4.0% to 4.4%), cautiously maintaining the path of economic soft landing.
Historically, unless it is an emergency rate cut after a recession, previous preventive rate cuts have led to a bull market in global assets, and the increase in US dollar supply has also led to a depreciation of the US dollar. This rate cut is a typical preventive rate cut, and we have reason to believe that it will further drive the recovery of asset prices.
The market was extremely divided before and after the rate cut. In the beginning of the month on the 3rd and 6th, the US stock market experienced two days of big declines; after the rate cut, the US stock market directly opened higher and continued to rise, with the S&P 500 hitting a new high again.
As analyzed in the previous section, in the case of a preventive rate cut, asset prices tend to be bullish. Although the 50-basis-point start may raise concerns about a recession, causing gold prices to continue to rise, we still believe that there are opportunities in the US stock market - the easing of liquidity and the decline in borrowing costs will offset the underlying recession concerns in the market.
Generally speaking, rate cuts first benefit small-cap stocks, as the change in market risk appetite will first lead to capital inflows into high-volatility stocks. The market has indeed been moving in line with this expectation, as seen from the Russell 2000 index.
However, hedge funds don't seem to think so. According to Goldman Sachs' prime broker weekly report as of September 20, hedge funds bought US tech, media and telecom stocks at the fastest pace in four months last week, continuing their theme investments related to AI.
On the day of the Fed's interest rate decision, the Nasdaq 100 index recorded its biggest intraday gain since early August. However, on a weekly basis, the Russell 2000 index outperformed the tech-heavy Nasdaq 100 index. On the surface, gold, small-caps and large-caps are all rising, but behind the scenes, some are betting on a recession, some are trading the rate cut, and some are still embracing AI, so the market doesn't have a unified expectation, but overall there is a logical enjoyment of the dividends of liquidity easing.
From a global market perspective, the rate cut has indeed brought very good feedback to the market. This month, in addition to the S&P 500 and Dow Jones, Germany's DAX, India's Mumbai Sensex30, Indonesia's Jakarta JKSE, and Singapore's Straits Times Index STI have all hit new highs, with the Asia-Pacific market performing very brilliantly. Therefore, from a global perspective, investors are generally very confident about the investment environment after the rate cut, and we also look forward to the continuation of the bull market.
The impact of the rate cut is not only reflected in the traditional financial market, but also extends to the crypto field. Although spot ETF data does not directly determine price trends, it can reflect the sentiment of US investors. Previously, investor sentiment was low and purchasing power was weak, but after the first rate cut, investor risk appetite has risen. The latest BTC spot ETF data shows that only three institutions have unchanged holdings, Grayscale has slightly reduced its holdings by 9 BTC, while other institutions such as BlackRock, Fidelity and ARK have increased their holdings by more than 1,000 BTC.
BTC price experienced several large bearish candles at the beginning of the month, and then entered a rebound, rebounding from the lowest level of not even $53,000 to over $66,000, which can be described as a major counterattack. As a risky asset, BTC will inevitably enjoy sufficient rate cut dividends. From the BTC ETF inflow data, since the rate cut on the 18th, US BTC ETFs have been showing a net inflow trend.
From the inflow data of ETH, it is rare for ETH to see consecutive inflows since its listing.We believe the ETH/BTC exchange rate has fallen below 0.04, which is already highly cost-effective, and in the subsequent asset allocation, we can follow the Ethereum ETF to buy the dips to a certain extent.
During the rate cut cycle in 2019, although BTC had a brief rally after the first rate cut, it then entered a downward trend, falling back from the high point and experiencing a 175-day adjustment period, with a price drop of about 50%.Unlike 2019, this year the adjustment of BTC came earlier due to the constant changes in market expectations for rate cuts.Since reaching the annual peak in March, BTC has experienced 189 days of fluctuating correction, with a maximum decline of 33%.Historical data shows that although BTC may continue to fluctuate or correct in the short term, the magnitude and duration of the adjustment are expected to be smaller than the 2019 cycle.In the long run, the outlook for BTC remains bullish.
This month, BlackRock's latest research report on Bitcoin - "Bitcoin: A Unique Diversification Tool" - has attracted much attention.The subtitle of the report is: The appeal of Bitcoin to investors lies in its separation from traditional risk and return drivers.The article is authored by Samara Cohen, Chief Investment Officer of BlackRock's ETF and Index Investments, Robert Mitchnick, Head of BlackRock's Digital Assets, and Russell Brownback, Head of Global Macro Fixed Income at BlackRock.
The report points out that Bitcoin's high volatility makes it a "high-risk" asset when viewed in isolation. However, most of the risks and potential return drivers facing Bitcoin are fundamentally different from those of traditional "high-risk" assets, making it unsuitable for most traditional financial frameworks, including the "risk on" and "risk off" frameworks used by some macroeconomic commentators. Currently, the market's understanding of this emerging asset is still immature.
It is worth mentioning that BlackRock's report points out that many people have consulted BlackRock for advice on increasing Bitcoin in their asset allocation, as they are concerned about the US debt problem and are trying to find investments to hedge against US dollar risk, and Bitcoin has become their focus.This naturally decentralized asset can hedge against the structural risks inherent in centralized central banks.
Therefore, as the global investment community strives to address the increasingly acute geopolitical tensions, concerns about US debt and deficits, and the escalation of global political instability, Bitcoin may be seen as an increasingly unique diversification tool that can withstand some of the fiscal, monetary, and geopolitical risk factors that investors may face in their portfolios. We also have reason to believe that this will become a consensus among global investors, as we have never stopped on the path of seeking risk hedging.
The era of loose liquidity has arrived as expected, with the Federal Reserve's 50 basis point pledge demonstrating its determination to fight economic recession, and all global assets (whether risky assets or safe-haven assets) are heading upwards, each vying for their own expectations.In the context of US dollar easing, there is no need to overly worry about the "this rises, that falls" situation caused by uneven liquidity allocation.Therefore, embracing cryptocurrencies may be a wise move to enjoy the "double whammy" of loose liquidity and hedging against the US debt problem.
