The Federal Reserve unexpectedly decided to significantly cut interest rates by 50 basis points in September 2024, bringing the federal funds rate range down to 4.75% to 5.00%, and it will continue to reduce its holdings of securities. However, at the same time, Powell emphasized: "Monetary policy will be adjusted according to the evolution of the economy, with the goal of achieving maximum employment and price stability. If the economy remains robust and inflation persists, the Federal Reserve will more slowly relax policy constraints; if the job market is unexpectedly weak, or the inflation rate falls faster than expected, the Federal Reserve is also ready to respond, and policy adjustments will focus on how to balance the risks and uncertainties of the Federal Reserve fulfilling its dual mandate of maximum employment and maintaining price stability." His goal is to tell the market that a 50 basis point rate cut is not necessarily the norm, and it may slow down due to ineffectively curbed inflation.

As a result, U.S. stocks opened high and rose after the interest rate decision was announced, with the Dow Jones Industrial Average (DJI.US) and the S&P 500 Index both hitting record highs, then fluctuated significantly, and all three major indices closed lower. The Dow, S&P, and the Nasdaq Index (IXIC.US), which reflects the performance of technology stocks, closed down by 0.25%, 0.29%, and 0.31%, respectively.

Hong Kong Dollar and Hong Kong Stocks

Due to the linked exchange rate system between the Hong Kong dollar and the U.S. dollar, the Hong Kong Monetary Authority also announced that it would immediately adjust the base rate to 5.25%. According to the Monetary Authority's formula, the base rate is set to the lower limit of the current U.S. federal funds rate target range plus 50 basis points, that is, 5.25%, or the higher of the 5-day moving average of overnight and 1-month Hong Kong interbank offered rates. Since the current 5-day moving average of overnight and 1-month Hong Kong interbank offered rates is 3.21%, the Monetary Authority set the base rate at 5.25%, which is a synchronized 50 basis point reduction from the base rate of 5.75% adjusted by the Monetary Authority on July 27, 2023.

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Hong Kong stocks also rose significantly, with the Hang Seng Index rising for five consecutive trading days, closing up by 2.0%; the Hang Seng Technology Index, which reflects the performance of technology stocks, surged by 3.25%, outperforming the broader market, possibly due to rumors that the government may be drafting the first regulatory regulations on AI financial applications. This move may be more conducive to the standardized application of AI in the financial and cryptocurrency sectors, thus boosting the performance of technology stocks and local financial stocks. Among them, Tencent (00700.HK) rose by 2.32%, closing at $388.80; Alibaba (09988.HK) rose by 3.44%, closing at $85.70, and the Hong Kong Stock Exchange (00388.HK) surged by 5.77%.

The U.S. dollar index fell.

The Bank of England will also announce its interest rate decision, and the market widely expects the UK to keep interest rates unchanged.The Bank of England took the lead in initiating a rate-cutting cycle in August, lowering interest rates by 25 basis points to 5% on August 1st. If the Bank of England had maintained interest rates, the pound's interest rate level might have been higher than the short-term interest rates of the US dollar, causing a sharp increase in the pound's exchange rate before the announcement of the Bank of England's interest rate policy.

The euro also rose strongly against the US dollar, now approaching the level of 1.12 US dollars, while before the US rate cut, the euro was around 1.11 US dollars against the US dollar.

However, the Japanese yen weakened against the US dollar, with the exchange rate falling from below 140 yen per US dollar before the US announced its rate hike to the current 142 yen, once even reaching a low of 143 yen. This is due to widespread market expectations that the Bank of Japan, which is set to announce its latest interest rate policy on Friday, is very likely to keep the policy interest rate unchanged. However, it may hint at future rate hikes. The market generally expects the Bank of Japan to raise rates again only in December. Consequently, after the US made significant rate cuts, the yen's exchange rate did not rise but fell instead.

At the same time, the market is paying attention to Japan's latest weekly inflation data. Due to Japan's export growth being lower than expected and import growth being at its lowest in five months, there are concerns that the Japanese economy may not be very ideal, increasing the pressure to raise interest rates. This should be the main reason for the yen's pressure.

The weak yen, however, is beneficial for the Japanese stock market, with the Nikkei 225 index surging by 2.13%. Export stocks also rose significantly, with Toyota Motor (7203.T) jumping by 5.05%, Sony (6758.T) by 2.85%, and Fast Retailing (9983.T) by 2.41%.

Meanwhile, there are rumors that a potential turnaround could occur in the acquisition deal of Nippon Steel (5401.T) for US Steel (X.US), but everything may have to wait until after the general election in the second half of the year. However, this is enough to bring good news to both listed companies, with Nippon Steel rising by 2.42% and US Steel by 1.52%.

In addition, Japan's semiconductor supply chain stocks are also doing well, with Tokyo Electron (8035.T) rising by 2.47%. Caixin believes that at a time when there is a shortage of AI chips, a weaker yen against the US dollar is more conducive to the export of these manufacturers, who play an important role in the upstream.

Despite the yen's decline against the US dollar, the US dollar index continued to fall after a brief rise following the Federal Reserve's interest rate decision, now approaching the 100 level, as shown in the figure below, due to the euro's rise against the US dollar, which accounts for as much as 57.6% of the weight of the US dollar index.

Commodity Price Performance

The Federal Reserve has made a significant interest rate cut to stimulate economic activity and potentially increase demand for oil products.On the other hand, geopolitical tensions are highly likely to cause supply disruptions in some oil-producing countries, coupled with the downward trend of the US dollar exchange rate, both of which are favorable for oil prices.

WTI crude oil futures have rebounded, currently at $71.74 per barrel, $0.82 higher than earlier; Brent crude oil futures have risen by $0.91, currently at $74.56 per barrel.

The most dazzling performance belongs to gold, with the gold price reaching a new high, now exceeding $2,580 per ounce. The increased demand for safe-haven assets due to geopolitical issues, and the US dollar interest rate cuts further reducing the opportunity cost of holding gold, are the main reasons for the gold price surge.

Looking ahead,

The market will shift its focus back to the fundamentals of politics and economics, as well as corporate earnings. After all, the actual performance of the US economy determines the future interest rate path of the Federal Reserve and the global capital flow.

In addition, starting from the second half of the year, many European and American countries will hold elections, which may also influence their overall political and economic strategies, thereby affecting global capital flows, commodity cycles, and corporate performance.

After the Federal Reserve cut interest rates by 50 basis points, its long-term plan may be foreseeable, but the global situation and political and economic outlook seem to have become more uncertain.

The market generally believes that although the Federal Reserve has revised down its economic outlook expectations, it may indicate that future economic performance will not be very good, thus affecting the performance of US companies. However, the performance of US companies may still be better than other markets around the world, so capital can only flow to US stocks.

Is this really the case? We will have to wait and see.