The Federal Reserve began to cut interest rates by 50 basis points as scheduled, and the interest rate cut cycle officially began. Global liquidity will enter a new easing cycle. Affected by this, global stock markets rose collectively, the S&P 500 and the Dow Jones Index continued to hit record highs, and stock markets in the Asia-Pacific region performed well. The crypto market enjoyed the dividend of the interest rate cut, and the price of Bitcoin broke through US$66,000. A new round of upward trend may be brewing.
Before this month's FOMC meeting, the United States released the latest non-farm and inflation data: the latest non-farm payrolls in the United States increased by 142,000, which was lower than expected; the CPI in August rose by 2.5% year-on-year, falling for five consecutive months. At the current juncture of interest rate cuts, non-farm data that is lower than expected may be a positive, increasing market expectations for interest rate cuts.
Subsequently, under the attention of the market, the Federal Reserve Board of the United States announced on the 18th local time that it would lower the target range of the federal funds rate by 50 basis points to a level between 4.75% and 5.00%. After four years, the Federal Reserve finally ushered in a new interest rate cut cycle. At this point, the global liquidity cycle will enter a new easing phase, and investors can breathe a sigh of relief.
After the interest rate cut in 2024, the main changes in various major assets are as follows:
1. US Treasuries: US Treasuries usually rise before rate cuts, and the market reflects the expectation of rate cuts in advance. Volatility may increase in the short term after rate cuts, but over time, interest rate trends under different economic recovery scenarios will diverge. 2. Gold: Gold tends to perform better before rate cuts because of rising safe-haven demand. After rate cuts, gold may continue to be favored, but the specific situation also depends on whether the economy has a "soft landing" and other market factors. 3. Nasdaq: In recessionary rate cuts, the performance of the Nasdaq depends on the repair of fundamentals. After preventive rate cuts, the stock market tends to rise due to the positive economic effects of rate cuts. 4. BTC: Compared with the 2019 rate cut cycle, BTC's correction came earlier due to the expectation of rate cuts in 2024. Although BTC may fluctuate or pull back in the short term, it is bullish in the long term, and the intensity and duration of the correction are expected to be smaller than in 2019.
After the rate cut, the flow of gold ETFs and stock ETFs can reflect the changes in the market's preference for different assets. The Fed's forecast adjustments for GDP growth, unemployment and inflation will affect the market's view of the economic outlook, thereby affecting asset prices. Although rate cuts may boost market sentiment and increase demand for risky assets, the gap between market expectations and actual economic data will also cause sentiment fluctuations, and these changes are affected by multiple factors such as economic data, market expectations, and policy trends.
The magnitude of this rate cut is still slightly higher than Wall Street's expectations. After all, historically, the Federal Reserve will only take an aggressive 50 basis point approach when the economy is in recession.
However, in Powell's speech, the US economy is still operating under control, and there is no great concern about recession. We mentioned in the last monthly report that the Fed's interest rate cut this time is a "preventive interest rate cut", and the 50 basis point start shows the Fed's attitude against the risk of recession. A radical start does not mean continued radicalism. The Fed lowered its GDP growth forecast (from 2.1% to 2.0%), and raised its unemployment forecast (from 4.0% to 4.4%), cautiously maintaining the development path of a soft landing of the economy.
Historically, unless it is an emergency rate cut after a recession, the previous precautionary rate cuts have led to a bull market in global assets, and at the same time, the dollar has depreciated due to the increase in the supply of US dollars. This rate cut is a typical precautionary rate cut, and we have reason to believe that this will further promote asset prices to repeat historical trends.
The market diverged greatly before and after the rate cut. On the 3rd and 6th of the month, the U.S. stock market experienced two days of sharp declines; after the rate cut, the U.S. stock market opened higher and hit a record high, with the S&P 500 hitting a new record high again.
As analyzed in the previous chapter, asset prices tend to go bullish in the case of preventive rate cuts. Although the 50 basis point start inevitably raises concerns about recession, causing gold prices to continue to rise, we still believe that there are still opportunities in the US stock market - the easing of liquidity and the decline in borrowing costs will offset the recession concerns hidden in the market.
Generally speaking, interest rate cuts are first beneficial to small-cap stocks, because changes in market risk preferences will first cause funds to flow into high-volatility stocks. Judging from the Russell 2000 Index, the market is indeed moving in accordance with this expectation.
However, hedge funds do not seem to think so. According to Goldman Sachs Group's prime broker weekly report as of September 20, hedge funds bought U.S. technology stocks, media stocks and telecommunications stocks at the fastest rate in four months last week, continuing their AI-related thematic investments.
On the day after the Fed’s interest rate decision, the Nasdaq 100 recorded its biggest intraday gain since early August. However, on a weekly basis, the Russell 2000 outperformed the tech-heavy Nasdaq 100. On the surface, gold, small-cap stocks, and large-cap stocks are all rising, but behind the scenes, some people are betting on a recession, some are trading on rate cuts, and some are continuing to embrace AI. The market does not have a consistent expectation, but overall, it is logical that everyone is enjoying the dividends of loose liquidity.
From the perspective of the global market, the interest rate cut has indeed brought good market feedback. This month, in addition to the S&P 500 and Dow Jones, Germany's DAX, India's Mumbai Sensex 30, Indonesia's Jakarta JKSE, and Singapore's Straits Times Index (STI) have all hit record highs, and the Asia-Pacific market has performed very well. Therefore, from a global perspective, investors are generally very confident in the investment environment after the interest rate cut, and we also look forward to the continuation of the subsequent bull market.
The impact of the rate cut is not only reflected in the traditional financial market, but also spread to the crypto field. Although spot ETF data does not directly determine price trends, it can reflect the sentiment of American investors. Previously, investor sentiment was low and purchasing power was weak, but after the first rate cut, investors' risk appetite has increased. The latest BTC spot ETF data shows that only three institutions have unchanged positions, Grayscale 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.
The price of Bitcoin experienced several large negative lines at the beginning of the month, and then rebounded from a low of less than $53,000 to more than $66,000, which can be said to have completed a big counterattack. As a risky asset, Bitcoin will inevitably enjoy sufficient interest rate cut dividends. Judging from the Bitcoin ETF inflow data, since the interest rate cut on the 18th, the US Bitcoin ETF has been showing a net inflow trend.
Judging from the inflow data of ETH, it is rare for ETH to have continuous inflow since its listing. We believe that the ETH/BTC exchange rate has fallen below 0.04, which is already very cost-effective. In the subsequent asset allocation, we can follow the Ethereum ETF to make some bottom-fishing.
In the 2019 rate cut cycle, although Bitcoin (BTC) rose briefly after the first rate cut, it then entered a downward trend, fell from its peak, and experienced a 175-day adjustment period, with a price drop of about 50%. Unlike 2019, this year, due to the changing market expectations of rate cuts, BTC's adjustment came earlier. Since reaching its annual peak in March, BTC has experienced a 189-day oscillation correction period, with the maximum drop reaching 33%. Historical data shows that although BTC may continue to fluctuate or pull back in the short term, the magnitude and duration of the adjustment are expected to be smaller than the 2019 cycle. In the long run, BTC's outlook remains bullish.
This month, BlackRock's latest report on Bitcoin research - (Bitcoin: A unique risk diversification tool) - has attracted much attention. The subtitle of this research report is: Bitcoin's appeal to investors lies in its departure from traditional risk and return drivers. The article is signed by Samara Cohen, Chief Investment Officer of BlackRock's ETF and Index Investment Department, Robert Mitchnick, Head of BlackRock's Digital Asset Department, and Russell Brownback, Head of BlackRock's Global Macro Fixed Income Positions.
The research report points out that Bitcoin is highly volatile and is clearly a "high-risk" asset when viewed alone. However, most of the risks and potential return drivers faced by Bitcoin are fundamentally different from traditional "high-risk" assets, making it unsuitable for most traditional financial frameworks, including the "risk on" and "risk off" frameworks adopted by some macro commentators. At present, the market's understanding of this emerging asset is still immature.
It is worth mentioning that BlackRock pointed out in its research report that many people have consulted BlackRock about adding Bitcoin to their asset allocation. These people are worried about the US debt problem and are trying to find investment products to hedge the risk of the US dollar, and Bitcoin has become their focus. This naturally decentralized asset can hedge the structural risks inherent in centralized central banks.
Therefore, as the global investment community grapples with growing geopolitical tensions, concerns about the U.S. debt and deficit situation, and increased global political instability, Bitcoin may be seen as an increasingly unique risk diversification tool that can protect against 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. After all, we have never stopped on the road of seeking risk hedging.
The liquidity easing cycle has arrived as scheduled. The Federal Reserve’s 50 basis points have pledged its determination to fight the economic recession. Global assets (whether risky assets or safe-haven assets) are moving in a step-by-step upward direction, each playing its own game. In the environment of loose US dollars, there is no need to worry too much about the "growth and loss" caused by uneven distribution of liquidity. Therefore, embracing cryptocurrencies may be a wise move to enjoy the "Davis double-click" of loose liquidity + risk-averse US debt problems.
