The long-awaited interest rate cut by the Federal Reserve has finally come to fruition.

On September 18th local time, the Fed announced a 50 basis point reduction in the target range for the federal funds rate, bringing it down to between 4.75% and 5.00%.

This is the first rate cut by the Fed since March 2020 and marks a shift from a tightening to an easing monetary policy.

How should we view this rate cut?

Historically, how have stocks, bonds, exchange rates, gold, U.S. Treasuries, and other types of assets performed during each of the Fed's rate cut cycles?

Which assets have more opportunities?

Preventive rate cuts, favorable for risk appetite repair.

According to the purpose, Fed rate cuts can be divided into two categories: one is preventive rate cuts, which are implemented when the economy shows signs of slowing down to prevent the risk of economic recession; the other is remedial rate cuts, which are taken when the economy falls into recession or encounters a major crisis to provide emergency remediation.

Advertisement

Regarding the magnitude of this rate cut, CITIC Securities Asset Management believes that the Fed's rate cut is slightly beyond market expectations, but looking at the macroeconomic data in the U.S., this rate cut is more likely to be preventive in nature and may also be a compensation for not cutting rates in July this year.

The rate cut not only helps to achieve a "soft landing" for the U.S. economy but also reflects the Fed's confidence in achieving a 2% inflation target.

Du Lei, the fund manager of Hua Shang Rui Feng Short-term Bond Fund, believes that the core purpose of the Fed's rate cut is to ensure a soft landing for the U.S. economy.

With the start of the Fed's rate cut cycle, the renminbi exchange rate has received marginal benefits, and it also constitutes a benefit for domestic equity and bond assets.

Jamie Dimon, CEO of JPMorgan Chase, said on Friday that he still has doubts about whether the U.S. economy can achieve a soft landing after the Fed's first rate cut in more than four years, and said he would not take this result lightly.

He pointed out, "I am more skeptical than others.

I think the possibility is lower.

I hope it is true, but I am also more skeptical that inflation will disappear so easily, not because it has not declined, but because it has declined and can decline further."

Dimon added that the rate cut has almost no impact on the U.S. presidential election.

This is the first rate cut by the Fed since March 2020 and also marks a shift from a tightening monetary policy cycle to an easing cycle, with the global financial market responding accordingly.

Some investment banks and securities firms believe that the rate cut reduces the attractiveness of U.S. dollar assets, prompting international investors to seek higher-yielding markets, and undervalued Hong Kong stocks have become a popular choice for capital inflows.

Sectors such as the internet, consumer electronics, biotechnology, innovative drugs, CRO, gold, and high dividend stocks are expected to benefit.

Following the Fed, the Hong Kong Monetary Authority also announced a 50 basis point reduction in the benchmark interest rate.

China Galaxy Securities believes that in the first half of 2024, the cumulative year-on-year growth of the Hang Seng Technology Index's operating income was 8.93%, continuing an improving trend; the cumulative year-on-year growth of net profit attributable to the parent company has passed the inflection point since 2022, showing signs of recovery, with a significant increase of 100.45% in the first half of 2024, and cost reduction and efficiency improvement have achieved remarkable results.

Compared with the overall Hong Kong stock market, the technology sector represented by the Hang Seng Technology Index has significantly outperformed in terms of performance.

In terms of valuation, the price-to-earnings ratio of the Hang Seng Technology Index is at a low level since 2020, and there is a large room for valuation increase in the future.

Looking back at the past six Fed rate cut cycles, this Fed rate cut is similar to the first one in 2019, with a strong statement issued simultaneously, but in September and October 2019, the rate cut continued for two consecutive months, and the market risk appetite fully recovered.

After this Fed rate cut, it has opened up a certain degree of space for further rate cuts in the country.

How have various assets performed after the rate cut?

The start of the Fed's rate cut cycle may have a significant impact on the performance of various global assets.

So, looking at several historical rate cut cycles, which assets have performed better?

Stock Market: Expected to be favorable for the A-share market.

During the preventive rate cut cycle, the rate cut stimulates the economy and drives up corporate profit expectations, with the risk-free yield falling.

Affected by various favorable factors, the rate cut significantly boosts the U.S. stock market.

However, during the remedial rate cut cycle, the economy experiences a substantial recession.

Although the rate cut provides incremental funds for the stock market, investor risk appetite declines, and the corporate profit fundamentals are damaged.

Even with the rate cut, it is difficult to prevent the overall valuation of the stock market from falling.

Therefore, the performance of the U.S. stock market is still determined by the fundamentals of the U.S. economy.

CITIC Securities Asset Management Equity Research Team believes that the Fed's rate cut may be favorable for A-shares.

On the one hand, the rate cut provides more flexibility for China's monetary policy, and the space for domestic rate cuts and reserve requirement ratio cuts is expected to be opened up; on the other hand, the Fed's rate cut may lead to the depreciation of the U.S. dollar, resulting in a decline in the yield on U.S. dollar assets, coupled with the increased valuation attractiveness of RMB assets, which is expected to attract global capital to flow back into the country, benefiting the improvement of liquidity and the repair of the medium and long-term fundamentals of A-shares.

However, statistics on the performance of the main global indices after the last three rate cuts (January 3, 2001 - June 25, 2003, September 18, 2007 - December 16, 2008, and August 1, 2019 - October 31, 2019, excluding the rapid rate cut in March 2020) found that the Fed's rate cut initially had a significant impact on boosting the stock market, but the market often performed poorly in the middle and late stages of the rate cut.

The CITIC Securities Asset Management Equity Research Team analyzed the main reason for this phenomenon to be that when the Fed's rate cut cycle started, the U.S. economy had not entered a recession, and the interest rate decline was beneficial to the U.S. stock market and global equity assets.

However, in the middle and late stages of the aforementioned three Fed rate cut cycles, the U.S. economy was hit by significant external events and fell into an economic recession, and the deterioration of the fundamentals led to poor performance in the capital market.

Bond Market: Short-term, low-risk U.S. Treasuries may have better opportunities.

Except for the significant rate cut in March 2020 due to the pandemic, in the remaining five rate cut cycles, U.S. Treasury yields have risen four times (in 1995, 2001, 2007, and 2019).

Looking at the term, short-term bonds are more significantly stimulated by rate cuts; looking at credit risk, the lower the credit risk of bonds, the greater the reduction in yields.

Overall, short-term, low-risk bonds are more significantly stimulated by rate cuts.

The yield on one-year U.S. Treasury bonds is highly correlated with the federal funds rate.

Data source: Wind, statistical period: January 3, 1995 - September 19, 2024.

The past performance of indices/markets does not represent the future, and the above display cannot be used as a guarantee of investment returns or as investment advice.

The examples provided in this material do not represent a forecast or guarantee of actual investment returns/data.

CITIC Securities Asset Management Fixed Income Research Team believes that when the global market interest rate level is lowered, the relative attractiveness of Chinese bonds increases, and foreign capital inflows are beneficial for driving down domestic bond yields; at the same time, the Fed's rate cut may reduce the pressure on the RMB exchange rate, providing the People's Bank of China with greater monetary policy operation space, and measures such as reserve requirement ratio cuts and rate cuts are also beneficial for driving up bond market prices.

Foreign Exchange: Increased depreciation pressure on the U.S. dollar.

The Fed's rate cut increases the depreciation pressure on the U.S. dollar.

However, the exchange rate is also affected by various factors such as the relative strength of domestic and foreign economic fundamentals, international trade situations, liquidity, and safe-haven sentiment.

Historically, during the Fed's rate cut cycles, the exchange rate trends of yen, RMB, and euro against the U.S. dollar have been relatively independent.

Gold: Long-term benefits may remain unchanged, but be alert to short-term adjustment risks.

According to CITIC Securities Asset Management, during the five rate cut cycles in the Fed's history (excluding the one in March 2020), gold prices have risen four times (in 1995, 2001, 2007, and 2019), and in the six months after the first rate cut in September 2007, the spot price of London gold rose by nearly 40% (data source: Wind, statistical period: September 18, 2007 - March 17, 2008).

Generally, gold prices are negatively correlated with real interest rates and positively correlated with inflation levels.

The Fed's rate cut, coupled with factors such as the over-issuance of U.S. dollars, geopolitical conflicts, and central banks increasing their holdings, provides long-term support for gold prices.

However, the "front-running" trend in gold is quite obvious, with significant gains in the year, and the current gold price may have already factored in the expectation of the Fed's rate cut.

There is a need to be alert to the risk of expectations being realized in the short term, but the logic for the upward trend in the medium and long term remains relatively strong.

Gold prices are negatively correlated with the yield on 10-year U.S. Treasury bonds.