Is an interest rate cut good or bad for markets?
It’s important to understand the context of each policy move.
As with most things about the market, the answer is it depends. There are no hard and fast rules when it comes to the market, and that is why making money from the markets is not simple.
In general, lower interest rates are good because it becomes cheaper to borrow and invest. However, it depends on why the central bank is cutting interest rates. If the cut is because of an extreme shock to the system (Covid, terrorist attack), the effects of the shock will first be felt, and the market is likely to continue selling off before the interest rate cuts take effect.
If the central bank is cutting because of falling inflation and the economy remains healthy, it would likely lead to a market rally. So, it’s important to understand the context of each policy move.
At the start of the year, the market was pricing for more than 1.75% (more than 7 cuts of 0.25%) of interest rate cuts from the US Federal Reserve by the end of the year. Those expectations have been scaled back to cuts of less than 0.50% (less than 2 cuts of 0.25%) because of strong economic growth and higher than expected inflation numbers. However, the stock market remains within striking distance of all-time highs despite the conventional wisdom of “higher interest rates lead to lower stock markets”.
This is because the strong economic performance and AI boom is driving the market higher. As such, it’s always important to understand the environment we are in, and the reason for policy moves before we can predict the likely market moves.
Trading Tip
Make Decisions that you understand clearly
Investing should never be a murky endeavour. If you can't explain your investment idea with a simple crayon drawing, it might be too complex. To make wise trading decisions, ensure you thoroughly understand the fundamentals of your investment.
Break it down to its core elements, and if you can't visualise it clearly, take a step back. By embracing clarity and simplicity, you'll reduce the risk of making hasty or ill-informed choices.
Day Ahead
Advanced print for US GDP Growth Rate (expected: +2.5% in Q1’ 24, prev:+3.4% Q4’ 23)
Earnings: American Airlines (AAL), Mobileye Global (MBLY), Microsoft (MSFT), Alphabet (GOOGL), Intel (INTC), Snap (SNAP)
Trading Plan
1. Currencies:
Neutral
2. Commodities:
Uranium & Energy - Stay invested for now.
3. Stocks:
US Stock Index: The US stock market closed relatively unchanged from the previous day despite an active trading session yesterday. Nasdaq was up more than 1% intraday. The move higher was led by Tesla (+11.2%) which announced that it will soon be producing lower cost EVs. However, the rally fizzled out as the day progressed. It then saw a broad selloff following Meta’s earnings report after market hours.
(For more timely info on our Trading plan, click HERE)
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The situation in the Middle East remains uncertain. Escalation will weaken risk sentiment further.
What Happened Yesterday
The US Treasury Yield curve steepened with the inversion falling to 0.28% as the US 2-year bond yield fell -0.01% to 4.92% while the 10-year yield rose +0.03% to 4.64%.
The US stock futures rose through the early Asian session after Tesla announced the earlier production of more affordable EV models. The S&P 500 futures rose +0.26% to a peak of 5128.75. It then started to fall -0.23% from the highs to reach 5116.25 when the New York session began.
The US stock market opened higher from Tuesday (S&P 500: +0.28%, Dow Jones: +0.13%, Nasdaq: +0.81%). It lingered higher at the opening hours before selling off as the day progressed. The selloff was partly due to Israeli strikes on Southern Lebanon (headline 1) as geopolitical tensions remain high. The S&P 500 finished +0.02% on the day (high: +0.37%, low: -0.46%), the Dow Jones lost -0.11% (high: +0.13%, low: -0.50%) while the Nasdaq gained +0.32% (high: +1.04%, low: -0.21%) after rallying more than 1% earlier in the trading session.
[Earnings]
Meta Platforms, formerly known as Facebook, (NASDAQ: META, -15.13%) sold off in aftermarket trading despite beating earnings expectations as CEO Mark Zuckerberg spent much of the earnings call talking about Meta’s AI and metaverse - the ways in which the company is losing money. Meta’s Reality Labs posted a -$3.85 billion loss in Q1’ 24. Earnings: $4.71 vs $4.32 expected, Revenue: $36.46 billion vs $36.16 billion expected. Advertising revenue in the Asia-Pacific region increased 41% from a year earlier due to increased ad spending by Chinese retailers.
As a result, S&P 500 futures is down -0.61% while Nasdaq futures sold off -1.11% in after-market trading hours.
The crypto market sold off on a day of risk aversion.
Headlines & Market Impact
Israeli strikes hit southern Lebanon as cross-border fire escalates
Notable Snippet: The Israeli military said artillery and fighter jet strikes had hit around 40 targets in southern Lebanon on Wednesday as the intense fighting of recent days continued to escalate, with Hezbollah firing dozens of rockets at an Israeli border village.
The Iran-backed Hezbollah and Israel have been waging their worst hostilities in nearly two decades since war erupted in Gaza last October, stirring concern about the risk of a wider and more destructive conflict between the heavily armed foes.
The Israeli military said the strikes in the area of Ayta al-Shaab, about 3 km (1.6 miles) inside the Lebanese border, had hit infrastructure including storage facilities and weapons in an area it said was used extensively by Hezbollah forces.
"There is continuous offensive action by IDF forces in all of southern Lebanon as well as in other parts of Lebanon. The operational results are very impressive," Israeli Defence Minister Yoav Gallant said in a statement following an operational meeting at the military's Northern Command.
He said half of Hezbollah's commanders in southern Lebanon had been killed by Israeli forces.
What we think: The situation in the Middle East remains tense. An attack during the Jewish festival of Passover weighs on risk sentiment.
Microsoft's AI lead puts Amazon cloud dominance on watch
Notable Snippet: Upcoming quarterly reports from U.S. tech giants may show Microsoft (MSFT.O) is closing the gap on cloud-computing market leader Amazon.com as more businesses switch to its services, attracted by a clutch of generative AI features that are powered by OpenAI's technology.
The Redmond, Washington-based software giant has beaten rivals Amazon (AMZN.O) and Google-parent Alphabet (GOOGL.O) to the market with AI services including the Copilot, a set of genAI tools that work in Microsoft's business apps, that was rolled out in November for $30 a month.
Its earnings on Thursday will be an indicator of AI adoption and could influence the movement of technology stocks as a rally in the sector eases this month amid worries that interest rates in the U.S. could stay high for longer.
Wall Street analysts expect Microsoft - which overtook Apple as the world's most valuable firm earlier this year - to report that the billions of dollars it has invested in generative AI were attracting clients to its Azure cloud-computing service.
"Azure is benefiting from a halo effect around Microsoft's AI strategy," said RBC Capital Markets Rishi Jaluria, who expects Microsoft to take Amazon's market share.
Jaluria added that cloud providers should broadly benefit from signs of stabilisation in technology spending, which has been pressured by high-interest rates and economic uncertainty.
What we think: Microsoft is leading the AI race and is likely to continue dominating.
Biden signs Israel, Ukraine, TikTok bill into law
Notable Snippet: President Joe Biden on Wednesday signed into law measures to provide aid to Israel, Ukraine and Taiwan, as well as to compel Chinese TikTok parent company ByteDance to sell the social media platform or face a national ban.
Biden’s official approval ends a six-month saga of tense political battles on Capitol Hill that led to a deadlock on the issue of foreign aid.
TikTok has already vowed to fight the measure.
“This unconstitutional law is a TikTok ban, and we will challenge it in court,” the company wrote in a Wednesday statement on X following Biden’s signing.
“This ban would devastate seven million businesses and silence 170 million Americans,” the company added in its statement.
Despite Biden’s official support of the TikTok bill, his 2024 reelection campaign told NBC News Wednesday that it would continue using the social media platform to reach voters for at least the next year. Notably, the nine-month to one-year deadline for ByteDance allows it to maintain ownership of TikTok through the November election.
What we think: The signing of the Tiktok bill should boost the prices of US based social media companies as it should eventually cause US consumers to leave the platform.
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord