The Federal Reserve is finally set to begin lowering interest rates, and the market's focus has shifted from whether or not to cut rates to the extent of the rate cut in September. So, will the market rise or fall after the start of the rate cut? This series of articles will explore the impact on stock and futures markets, precious metals, non-ferrous metals, crude oil, and more. Today, we will mainly discuss the changes in the stock and futures markets. Want to get more futures T+0, long and short two-way learning materials? 【Message me in the background】 to receive benefits such as variety reviews, beginner courses, and hot spot live broadcasts, with limited spots available on a first-come, first-served basis!
The expectation of a Federal Reserve rate cut is almost a done deal!
According to the interest rate monitor, the current market expects a 25 basis point rate cut by the Federal Reserve at the September meeting with a probability of 60%, and a 50 basis point rate cut with a probability of 40%. The market's focus has transitioned from whether to cut rates or not to how much the rate cut will be in September.
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Why are there two voices of optimism and pessimism?
Faced with a rate cut, the market's intuitive feeling is that the end of rate hikes means the end of bad news, and the capital market is about to soar! However, we also hear another voice, that the market crashes when the Federal Reserve cuts rates! Why are there two voices? Let's look for answers in history.
U.S. stocks: Good performance before and after rate cuts!
After rate cuts, liquidity increases, and except for the 2001 U.S. stock market bubble burst, the panic caused by the 911 event, and the impact of the 2007 economic crisis, which led to a drop in U.S. stocks, the probability of rising during other rate cut cycles is relatively high.
How do A-shares and Hong Kong stocks perform after rate cuts?
When examining the dynamics of the domestic stock market, A-shares and Hong Kong stocks show a certain degree of synchronicity with U.S. stocks during the rate cut cycle. However, the A-share market has shown its unique trajectory, demonstrating relative independence. Upon further observation, the performance of developed economy stock markets is generally better than that of emerging markets. Interestingly, in the context of a preemptive rate cut, emerging markets have shown stronger resilience.
Through in-depth analysis of historical data, we have discovered an interesting phenomenon: in the first month after the Federal Reserve first takes preemptive rate cut measures, equity assets have limited gains, but one month later, the possibility of the market rising significantly increases. This phenomenon may be attributed to the lag effect of the rate cut policy, meaning its effects are not immediately apparent but require time and gradual adjustment of market sentiment, ultimately driving capital flows to lead the stock market upward.Particularly noteworthy is that in the Chinese stock market, the A-share index represented by the CSI 300, after the first interest rate cut, performed even better than the aforementioned general trend in the first month, with an increased win rate. This anomaly may reveal a unique response mechanism of the A-share market, or it may be due to optimistic expectations of the speed of the domestic economic fundamentals' recovery from the interest rate cut policy. As for why this time window is not fixed, the core may lie in whether the interest rate cut policy can quickly and effectively improve the macroeconomic fundamentals, which becomes a key factor affecting market trends.
How does the commodity performance fare after an interest rate cut?
Firstly, from the perspective of statistical data analysis, the performance of commodity prices during the implementation of interest rate cut policies is generally not satisfactory. Looking back at the four interest rate cut cycles since the 1980s, we can clearly observe that during these phases, commodity prices generally experienced a downward trend to varying degrees. What is more noteworthy is that the early stages of these interest rate cut cycles or shortly thereafter are often accompanied by the emergence of financial system crises, which further exacerbates the instability of the commodity market and downward pressure on prices. These historical data reveal the challenges and risks that commodity prices may face during the interest rate cut process.
Theoretically, an interest rate cut is indeed favorable for commodity prices, but this is a superficial impact. More specifically, we need to look at whether the economy is more likely to be in a recession or a recovery period. Many times, the background to an interest rate cut is a weakening economy, or even a recession, to the extent that the Federal Reserve has to cut interest rates. If this is the case, then after the interest rate cut, not only will commodity prices not rise, but they will fall instead.
This time, the international economic situation is still turbulent, and the U.S. election is about to determine the winner, which to some extent also means political turmoil, making the impact on commodity markets more complex.
What is the most likely scenario for the stock and futures markets after an interest rate cut?
By statistically analyzing the end of several previous interest rate hike cycles, the Dow Jones Index mostly rises, with a few being volatile, and there is no significant decline.
What about the commodity market? The two most recent economic crises occurred after interest rate hikes. Take copper as an example; after the interest rate hikes peaked in 2000, 2006, and 2018, there were significant declines. So, simply looking at the first interest rate cut after the peak of interest rate hikes is a short-term benefit, but the relatively high interest rates still have a lagged effect on the economy. Overall, the stock market is likely to be stronger than the futures market, with the stock market likely to enter a bull market, while the commodity market may not necessarily follow suit.