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 expansionary period; as a result, 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 well; the crypto market is enjoying the benefits of the rate cut, with the price of BTC 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 payroll increased by 142,000, less than expected; the August CPI rose 2.5% year-on-year, declining for the fifth consecutive month. In the current context of rate cuts, the weaker-than-expected non-farm data may actually be positive, increasing market expectations for rate cuts.
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 entered a new rate cut cycle. At this point, the global liquidity cycle will enter a new expansionary phase, 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 rate cuts, as the market reflects the expectation of rate cuts 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 rate cuts, 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 preemptive rate cut, the stock market often rises due to the positive economic effects of the rate cut. 4. BTC: Compared to the 2019 rate cut cycle, the impact of the 2024 rate cut expectations 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 GDP growth, unemployment, and inflation forecasts will affect the market's outlook on the economic outlook, and thus affect asset prices. While 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 volatility, 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 such 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 "preemptive rate cut", and the 50-basis-point start reflects the Federal Reserve's attitude to combat the risk of recession. 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 preemptive 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 preemptive rate cut, and we have reason to believe that it will further drive the historical trend of asset prices.
The market was highly divided before and after the rate cut. In the first three and sixth of the month, the US stock market experienced two days of sharp declines; after the rate cut, the US stock market directly opened higher and continued to rise, with the S&P 500 setting a new high again.
As analyzed in the previous section, in the case of a preemptive rate cut, asset prices tend to rise. 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 market's underlying recession concerns.
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 assets. Looking at the Russell 2000 index, the market has indeed been moving in line with this expectation.
However, hedge funds do not seem to think so. According to Goldman Sachs' prime brokerage 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 second day of the Federal Reserve's interest rate decision, the Nasdaq 100 index recorded its largest intraday gain since early August. However, on a weekly basis, the Russell 2000 index outperformed the Nasdaq 100 index dominated by tech stocks. 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 does not 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 Bombay Sensex 30, Indonesia's Jakarta JKSE, and Singapore's Straits Times Index STI have all hit new highs, with the Asia-Pacific market performing very well. Therefore, from a global perspective, investors are generally very confident in 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 domain. Although spot ETF data does not directly determine price trends, it can reflect the sentiment of US investors. Previously, investor sentiment was depressed 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' holdings remained unchanged, Grayscale slightly reduced its holdings by 9 BTC, while other institutions such as BlackRock, Fidelity, and ARK increased their holdings by more than 1,000 BTC.
The price of BTC experienced several large bearish candles at the beginning of the month, and then entered a rebound, rising from below $53,000 to over $66,000, completing a major comeback. As a risky asset, BTC will inevitably enjoy sufficient rate cut dividends. Looking at the BTC ETF inflow data, since the rate cut on the 18th, US BTC ETFs have consistently shown a net inflow trend.
Looking at the inflow data for ETH, ETH has rarely seen consecutive inflows since its listing. We believe that the ETH/BTC exchange rate has fallen below 0.04, which is already highly cost-effective, and in subsequent asset allocation, we can follow the ETH ETF to buy the dips to a certain extent.
