The Federal Reserve has initiated a 50 basis point rate cut as expected, officially starting the rate cut cycle, and global liquidity will enter a new easing phase; as a result, global stock markets have collectively risen, the S&P 500 and Dow Jones continue to reach historical highs, and the Asia-Pacific stock markets have performed impressively; the crypto market enjoys the benefits of the rate cut, with Bitcoin prices breaking through $66,000, indicating that a new round of rising trends may be brewing.
Before this month's FOMC meeting, the U.S. released the latest non-farm and inflation data: the latest non-farm employment number increased by 142,000, which was below expectations; the August CPI rose 2.5% year-on-year, marking a decline for five consecutive months. At this juncture of interest rate cuts, the worse-than-expected non-farm data may actually be a positive, increasing market expectations for a rate cut.
Subsequently, under market scrutiny, the U.S. Federal Reserve announced on the 18th local time that it would lower the federal funds rate target range 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 easing phase, allowing investors to take a breather.
After the rate cut in 2024, the main changes in various major assets are as follows:
1. U.S. Treasuries: Typically rise before a rate cut, with the market reflecting rate cut expectations in advance. After a rate cut, short-term volatility may increase, but over time, the interest rate trends will diverge under different economic recovery scenarios. 2. Gold: Often performs well before a rate cut due to increased safe-haven demand. After a rate cut, gold may continue to be favored, but specific circumstances depend on whether the economy experiences a 'soft landing' and other market factors. 3. Nasdaq: In a recession-like rate cut, the performance of the Nasdaq depends on the recovery of fundamentals. After a preemptive rate cut, the stock market often rises due to the positive economic effects brought by the rate cut. 4. BTC: Compared to the 2019 rate cut cycle, BTC's adjustment comes earlier under the expected rate cut impact in 2024. Although BTC may experience volatility or adjustment in the short term, it remains bullish in the long term, with the expected degree and duration of adjustment being less than those in 2019.
After the rate cut, the flow of gold ETFs and stock ETFs can reflect market preferences for different assets. The Federal Reserve's adjustments to GDP growth, unemployment rates, and inflation forecasts will influence the market's view of the economic outlook, thereby affecting asset prices. Although the rate cut may boost market sentiment and increase demand for risk assets, the gap between market expectations and actual economic data may also trigger emotional fluctuations, and these changes are influenced by various factors, including economic data, market expectations, and policy directions.
The magnitude of this rate cut slightly exceeded Wall Street's expectations, as historically, the Federal Reserve only acts aggressively with a 50 basis point cut in scenarios of economic recession.
However, in Powell's speech, the U.S. economy remains under controllable operation, with no significant recession concerns. We mentioned in our last monthly report that the Federal Reserve's current rate cut is a 'preemptive rate cut,' and the initiation of 50 basis points reflects the Federal Reserve's attitude toward combating recession risks. An aggressive start does not imply sustained aggressiveness. The Federal Reserve has revised down its GDP growth forecast (from 2.1% to 2.0%) and raised its unemployment forecast (from 4.0% significantly up to 4.4%), cautiously maintaining the development path of an economic soft landing.
Historically, unless it is an emergency interest rate cut after a recession, previous preemptive rate cuts have prompted bull markets in global assets, while an increase in the supply of dollars has led to the depreciation of the dollar. This rate cut is a typical preemptive rate cut, and we have reason to believe that it will further drive asset prices to reflect historical trends.
There were significant market divergences before and after the rate cut. On the 3rd and 6th of this month, U.S. stocks experienced two days of sharp declines; after the rate cut, U.S. stocks gapped up and rallied, with the S&P 500 again reaching a historical high.
As analyzed in the previous chapter, in the case of preemptive rate cuts, asset prices often trend upward. Although a 50 basis point cut inevitably raises concerns about recession, leading to a continuous rise in gold prices, we still believe that U.S. stocks present opportunities—liquidity easing and declining borrowing costs will counteract hidden recession concerns in the market.
Generally speaking, rate cuts first benefit small-cap stocks, as changes in market risk appetite will first lead to funds flowing into high-volatility varieties. Looking at 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' main brokerage weekly report as of September 20, hedge funds bought U.S. tech stocks, media stocks, and telecom stocks at the fastest pace in four months last week, continuing the theme of AI-related investments.
On the day after the Federal Reserve's interest rate decision, the Nasdaq 100 index recorded its largest intraday gain since early August. However, from a weekly perspective, the Russell 2000 index outperformed the tech-heavy Nasdaq 100 index. On the surface, gold, small-cap, and large-cap stocks are all rising, but behind the scenes, some are betting on recession, some are trading on interest rate cuts, and others continue to embrace AI. The market does not have a unified expectation, but overall, there is a logical trend where all are benefiting from the dividends of liquidity easing.
From a global market perspective, the rate cut has indeed brought a very positive response from the market. 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 reached historical highs, with the Asia-Pacific markets performing exceptionally 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 traditional financial markets but has also spread into the crypto space. Although spot ETF data does not directly determine price trends, it can reflect U.S. investor sentiment. Previously, investor sentiment was low, with weak purchasing power, 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.
Bitcoin prices experienced several large bearish candles at the beginning of the month, followed by a rebound from a low of less than $53,000 to above $66,000, completing a significant turnaround. As a risk asset, Bitcoin will inevitably benefit from sufficient rate cut dividends. From the inflow data of Bitcoin ETFs, since the rate cut on the 18th, U.S. Bitcoin ETFs have shown a trend of net inflows.
From the inflow data of ETH, it is rare for ETH to show continuous inflows since its listing. We believe that the ETH/BTC exchange rate has fallen below 0.04, making it highly cost-effective. In the subsequent asset allocation, one can consider bottom-fishing with Ethereum ETFs.
During the rate cut cycle in 2019, Bitcoin (BTC) experienced a brief rise after the first rate cut but then entered a downward trend, falling from its peak after a 175-day adjustment period, with prices dropping by about 50%. Unlike 2019, this year the adjustment for BTC has come earlier due to the continuously changing market expectations for rate cuts. Since reaching an annual peak in March, BTC has undergone a 189-day volatility adjustment period, with a maximum drop of 33%. Historical data shows that although BTC may continue to fluctuate or adjust in the short term, the magnitude and duration of the adjustment are expected to be less than those in the 2019 cycle. In the long term, BTC remains bullish.
This month, BlackRock's latest report on Bitcoin research—(Bitcoin: A Unique Risk Diversification Tool)—has garnered significant attention. The subtitle of this report states that Bitcoin's appeal to investors lies in its detachment from traditional risk and return drivers. The article is authored by Samara Cohen, Chief Investment Officer of BlackRock's ETF and Index Investment Department, Robert Mitchnick, Head of BlackRock's Digital Assets Department, and Russell Brownback, Head of BlackRock's Global Macro Fixed Income Positions.
The research report points out that Bitcoin's volatility is high, and viewed in isolation, it is clearly a 'high-risk' asset. However, most of the risks and potential return drivers Bitcoin faces are fundamentally different from traditional 'high-risk' assets, making it unsuitable for most traditional financial frameworks, including the 'risk on' and 'risk off' frameworks used by some macro commentators. Currently, 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 sought advice from BlackRock about increasing Bitcoin in their asset allocation, concerned about U.S. debt issues and trying to find investment products to hedge against dollar risk, with Bitcoin becoming their focus. This naturally decentralized asset can hedge against the inherent structural risks of centralized central banks.
Therefore, as the global investment community strives to cope with the escalating geopolitical tensions, concerns over U.S. debt and deficit situations, and increasing global political instability, Bitcoin may be perceived as an increasingly unique risk diversification tool that can shield investors from some financial, monetary, and geopolitical risks they 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 seeking risk hedges.
The liquidity easing cycle has arrived as expected, with the Federal Reserve's 50 basis point cut symbolizing its determination to combat economic recession. Global assets (whether risk assets or safe-haven assets) are all on the rise, each engaging in their own expectations. In an environment of U.S. dollar easing, there is no need to overly worry about uneven liquidity distribution leading to a 'rise of one at the expense of another' situation. Thus, embracing cryptocurrency may be a wise move to enjoy the 'Davis Double Play' of liquidity easing and hedging against U.S. debt issues.
Written by: Chief Researcher Amanda HU
