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now that the fed has cut interest rates, how will it affect the capital market?

in the early morning of september 19th, beijing time, the federal reserve released its september interest rate statement, lowering the target range of the federal funds rate by 50 basis points to 4.75%-5%, the first rate cut in four years.

the fed said in its september statement that the committee will carefully assess incoming data, the evolving outlook, and the balance of risks when considering further adjustments to the federal funds rate target range. the fed said the committee is firmly committed to supporting maximum employment and returning inflation to its 2% target.

in response to this major event that has disturbed the global market, many public funds said that the start of the overseas interest rate cut cycle may have a positive impact on the global stock market from the perspective of risk preference, and it will also open up further space for domestic monetary policy, which is expected to benefit the domestic economic fundamentals. at the same time, many institutions also admitted that there is still a certain degree of uncertainty in the current global economic and geopolitical risks, and it is necessary to continue to observe the changes in subsequent economic data.

"as the federal reserve continues to push forward with its interest rate cuts, gold etf investors and other trading platforms may continue to bring in capital inflows, and are expected to work with global central banks to push gold into a new round of major uptrends." said liu tingyu, fund manager of yongying csi shanghai-shenzhen-hong kong gold industry stock etf.

li zhan, chief economist of the research department of china merchants fund, also believes that in the long run, the fed's entry into a rate cut cycle will become a catalyst for the "long bull" of the gold market. after the catalysis of the rate cut, the key support for the medium- and long-term rise in gold prices lies in the weakening of real interest rates driven by the slowdown of the us economy.

fed rate cut may benefit asia-pacific stock markets

after the fed announced its decision to cut interest rates, u.s. stocks rose, u.s. bond yields fell, and gold rose. however, due to the hawkish signal released by fed chairman powell at the press conference, assets reversed sharply, u.s. stocks gave up all gains and returned to the low point before midday, and the bond market, gold market, and foreign exchange market also reversed 180 degrees.

"this is mainly because powell said the fed is only 'moderately calibrating its policy stance' and has no pre-set policy route. it will continue to make decisions based on economic data at each meeting, and the pace of future rate cuts may be fast, slow, or even paused, meaning it will still be data-dependent. overall, powell's remarks dispelled the market's aggressive bets that 'a substantial rate cut of 50 basis points will become the new normal,'" robeco explained.

china europe fund also believes that considering the current state of overall resilience and uneven performance of the us economy, a relatively large rate cut is conducive to the gradual recovery of interest rate sensitive sectors such as us manufacturing and real estate, while income sensitive sectors such as consumption and services are already in good condition. an early and large rate cut means that there may not be much room for subsequent rate cuts. powell stressed that 50 basis points should not be regarded as a new pace, which also means that in the eyes of fed officials, the current operation is a preventive rate cut.

morgan asset management pointed out that the federal reserve's 50 basis point rate cut at its september meeting marked the beginning of the normalization of u.s. interest rate policy, and as the rate cut cycle begins, more rate cuts are coming; powell described the actions of this meeting as a policy "recalibration" at a press conference, suggesting that the federal reserve does not think they are lagging behind in interest rate policy, but are taking proactive preventive measures.

"although the scale of this rate cut is slightly larger, unless the economy slows down more substantially, it is expected that this round of easing policy will still be gradual," said morgan asset management.

in addition, in the view of morgan asset management, the economic forecast released this time is also more dovish. the committee expects gdp to slow down slightly, inflation may fall faster, and the unemployment rate may rise slightly this year and next year; the interest rate dot plot indicates that there is still a 50 basis point interest rate cut this year, but the market has begun to price in a rate cut of about 70 basis points this year.

"overall, against the backdrop of a soft landing of the economy, the federal reserve has started a cycle of interest rate cuts, which is positive for both the stock and bond markets. however, as there is still some uncertainty in economic and geopolitical risks, and there may be a gap between market expectations and actual policies, there may still be some volatility. investors should avoid the risk of excessive concentration and focus on improving the quality and diversification of their investment portfolios," morgan asset management concluded.

yongying fund admitted that although the fed and powell's statements believe that the economy remains relatively resilient, in fact, whether it is the fed officials' medium- and long-term forecasts for the economy and employment, or the event of a 50bp interest rate cut to start the interest rate cut cycle, it actually means that the fed's confidence in the economy and employment is weakening. the fed's shift from saying that the economy is completely fine to immediately turning to a larger interest rate cut is also a bit fast. and powell did not give clear guidance on the subsequent policy path. this may increase market concerns about recession, but specific changes in subsequent us economic data still need to be observed.

looking ahead, yongying fund said that the start of the interest rate cut cycle is a foregone conclusion, but economic changes and policy paths are still unclear, and the market still needs data from the next 1-2 months to form a consensus. "however, what is certain is that the fed's interest rate cut will reduce the constraints on my country's monetary policy, and my country's monetary policy space may gradually open up, which is expected to benefit the domestic economic fundamentals."

li zhan, chief economist of the research department of china merchants fund, believes that if the us economy does not enter a recession, the fed's interest rate cut will be beneficial to the asia-pacific stock market, and most markets are expected to perform relatively positively. specifically, high-growth, high-interest rate countries such as india and vietnam have very limited room for interest rate cuts, but their fundamentals will still support their stock markets. singapore still enjoys a large amount of capital inflows, which keeps its central bank hawkish and its currency strong.

"changes in domestic monetary policy may have to wait until the domestic economic situation and the policy path of us trade with china become clearer. the monetary policy path may be clearer, but due to factors such as current bank interest rate spreads, the room for interest rate cuts is expected to be limited." li zhan further pointed out that since the currency is pegged to the us dollar, hong kong's interest rate cut may be the same as that of the federal reserve, making it the region with the largest interest rate cut in asia-pacific, which is expected to boost hong kong's economy and market.

the domestic equity market is expected to continue to reflect a structural market

in the context of the fed’s interest rate cuts, which assets may present investment opportunities?

based on historical experience, bosera fund's macro strategy department believes that in the absence of a recession, after the start of the interest rate cut cycle, the us bond interest rate may enter a bottoming stage, the global stock and commodity markets are expected to be boosted, and the improvement of financing conditions is also expected to promote the recovery of the real estate market. "the current us economy is still far from a recession, but the market's expectations of a weakening economy have not been completely eliminated. it may take about 3 to 7 months from the start of the interest rate cut to the stabilization and rebound of the economy. the interest rate cut trade and the recession trade may switch back and forth."

china europe fund said that in general, in the preventive interest rate cut, the further downward space of us bonds may be relatively limited, while us stocks and the us dollar tend to fluctuate and strengthen, and gold may be under pressure to rise further. however, the consensus on the strengthening of the numerator still needs further verification. the next interest rate meeting will be on november 8, and the two employment reports and one inflation report before that are key variables affecting the subsequent rate cut rhythm. in addition, the us election will also be settled by then, and the election situation of the us election will also add uncertainty to the asset trend.

as for the international market, china-europe fund said that since this round of interest rate cuts is not a recession-induced cycle, the short-term weakening of the us dollar is expected to drive up metal prices. based on historical experience, this fed rate cut will also correspond to a short-term decline in the us dollar index, thereby reducing the pressure on emerging markets to stabilize exchange rates.

for the domestic market, china europe fund said that the start of the fed's interest rate cut cycle will help open up my country's monetary policy space. at present, the probability of the central bank's subsequent reserve requirement cuts and interest rate cuts is relatively high, which will form a marginal positive for the domestic bond market. however, due to factors such as deposit diversion and bank net interest margins, the domestic interest rate cut space is still constrained. for the equity market, the fed's interest rate cuts and the return of us stocks to soft landing transactions are expected to accelerate the rebalancing between industries and drive the rise of sectors with risk premiums below the mean level. however, the current expectations for economic fundamentals have hardly changed, and the impact of fundamental factors on rebalancing transactions is weak, and the market will be more dominated by the capital side. in the medium and long term, against the background of a flat economy and no total stimulus policy, the domestic equity market is expected to continue to reflect a structural market.

in the short term, li zhan said that the previous increase in gold prices under the "preventive" interest rate cut has a certain "overdraft". in particular, the current gold price and the actual yield of us bonds have been "diverging" for a long time, indicating that the gold price has "overdrawn" the benefits of the interest rate cut to a certain extent, so in the short term, the gold price may not rise rapidly again due to the interest rate cut.

in the long run, li zhan said that the fed's entry into a rate cut cycle will become a catalyst for the "long bull" of the gold market. the real interest rate of us treasury bonds dominates the changes in gold prices, and the weakening of the us dollar also contributes. reviewing the nine major cycles of gold since 1970, it can be found that the gold market has occurred more often during the fed's rate cuts. the weakening of the us economy has led to a decline in real interest rates, and the weakening of the us dollar is the dominant factor in the gold price market. after the catalysis of the interest rate cut, the key support for the medium- and long-term rise in gold prices lies in the weakening of real interest rates driven by the slowdown in the us economy.

liu tingyu, fund manager of yongying csi shanghai-shenzhen-hong kong gold industry stock etf, also believes that as the fed continues to cut interest rates, gold etf investors and other trading platforms may continue to bring in capital inflows, and are expected to push gold into a new round of major uptrends together with global central banks. the subsequent increase in the us deficit rate and the intensification of global geopolitical risks are expected to push up the central price of gold. therefore, if the gold price falls back after the first interest rate cut, the investment cost-effectiveness of gold may be further highlighted.

"the downward trend of u.s. treasuries is the most certain, and investors can give priority to investment opportunities in u.s. treasuries. among them, the downward range of short-term bond interest rates may be greater than that of medium- and long-term bond interest rates, so short-term bonds can be relatively overweighted." li zhan suggested that conservative investors can consider combining gold with defensive industries, and then gradually increase the allocation of interest rate-sensitive assets; while aggressive investors can consider gold as a base position while paying attention to active growth directions and cyclical products.

li zhan further said that growth includes electronics, communications, new quality productivity and national defense and military industry; and after the fed cut interest rates, precious metals benefited, while industrial metals benefited from the rising demand for commodities. in addition, growth sectors such as "innovative drugs" that are sensitive to u.s. bond interest rates may benefit from the start of the interest rate cut cycle.

source: the paper