LONDON, Sept 16 (Askume) – When the Federal Reserve cuts interest rates for the first time in four years on Wednesday , it will have wide-reaching implications beyond the United States.
The size of the first step and the overall easing are still a matter of debate, and the upcoming US election is another complicating factor for global investors and rate setters, who are looking to the Fed for guidance and pinning their hopes on a soft economy .
“We don’t know yet what type of cycle this will be — will it be like 1995, when rates were cut by only 75 basis points, or will it be like 2007-2008,” said Kenneth Blow, director of corporate research, foreign exchange and rates at Kenneth Broeks.
Let’s take a look at the hot topics in the world market:
1/ Follow the leader
When U.S. inflation steadied more than expected this spring, investors questioned whether the Fed would keep its policy accommodative and how much other central banks, such as the European Central Bank or the Bank of Canada , could maintain before the currency depreciated sharply this year. Price pressures.
The US cuts have finally started to provide relief to areas with weaker economies than the United States.
More recently, as expectations for a rate cut by the Federal Reserve have risen, traders have also bet on interest rate cuts by other central banks.
Still, he expects Europe to cut rates less than the Fed, and the European Central Bank and the Bank of England are cautious about remaining inflation risks .Be more cautious.
Confidence that the Fed will begin cutting interest rates is a boon for global bond markets, which typically move in tandem with US Treasuries.
U.S., German and British government bond yields are expected to fall in the first quarter of 2023 from the start of 2023, when the Fed is expected to move to tapering in late 2023.
2/ breathing space
Lower US interest rates could give emerging market central banks more room to ease their stance and support domestic growth.
Nearly half of the 18 emerging market samples tracked by Askume have started cutting interest rates this cycle, well ahead of the Federal Reserve, while the easing of policies is mainly concentrated in emerging markets in Latin America and Europe.
But the prospects have been clouded by instability and uncertainty over the US presidential election.
“The U.S. election will have a big impact on this because it complicates the rate-cutting cycle based on different fiscal policies,” said Trang Nguyen, global head of emerging market credit strategy at BNP Paribas. “It can make the rate cut cycle even more awkward.”
3/ Stronger dollar eases pressure?
Economies hoping that a cut in US interest rates would strengthen the dollar and boost the appreciation of their currencies may be disappointed.
The dollar strengthened after the Federal Reserve cut interest rates for the first time in three of the last four cycles, JPMorgan said.
The dollar’s outlook will depend largely on the level of US interest rates relative to other countries.
A Askume poll showed the safe-haven yen and Swiss franc’s discount to U.S. interest rates could almost halve by the end of 2025 , while sterling and the Australian dollar could rise only slightly against the U.S. dollar.
Unless US dollar yields really fall, it will remain attractive to non-US investors.
Meanwhile, Asian economies led the market, with the South Korean won, Thai baht and Malaysian ringgit gaining in July and August following US interest rate cuts. Chinese yuan to dollar exchange ratehas wiped out this year’s decline .
4/ The rally continues
If a cut in US interest rates boosts economic activity and a recession can be averted, the gains in global stock markets, which were halted recently due to growth concerns, could resume.
following weak US employment dataWorld stock markets fell more than 6% in three days in early August .
Emmanuel Cau, head of European equity strategy at Barclays, said: “The market is always volatile when interest rates are cut for the first time because the market wants to know why the central bank is cutting rates.”
“If you cut interest rates without a recession, which is the mid-cycle script, the market will generally rise,” Cao said, adding that the bank favors sectors that benefit from lower interest rates, such as real estate and utilities.
A soft landing in the United States will also have a positive impact on Asia, although the Nikkei is already down more than 10% from its July record high due to the appreciation of the yen and rising Japanese interest rates.
5/Shining Moment
In commodities, precious metals like copper and base metals will benefit from the Federal Reserve’s interest rate cut. The demand outlook and soft stance are the keys to a subsequent interest rate cut.
Low interest rates and a weak US dollar not only reduce the opportunity cost of holding metals, but also the opportunity cost of buying metals using other currencies, which could boost momentum.
Ehsan Khoman of Mitsubishi UFJ Financial Group (MUFG) said: “Rising interest rates are a key headwind for base metals, with falling inventories and pressure on capital-intensive final demand sectors dampening physical demand. Severe downside distortions are emerging.”
Precious metals may also rise. Gold usually has an inverse relationship with yields as most of the demand is for investment purposes and usually outperforms other metals during periods of interest rate cuts. John Reed of the World Gold Council said this is a record high but investors should remain cautious.
“Speculators in the COMEX gold futures market are in this position,” said market strategist Reed. “It may be a case of buying the rumor and selling the fact.”
