Fed Cuts by 50bps; A-Shares on the Brink of Reversal Amid Global Easing?

As the Federal Reserve cuts interest rates, the domino effect in the global asset market has already been triggered.

Whether it's the resilience of the A-share market or the valuation lowlands of the Hong Kong stock market, they provide investors with a rich space for imagination.

The Federal Reserve's interest rate cut has finally "landed".

In the early morning of September 19th, the Federal Reserve issued a September interest rate statement, lowering the target range of the federal funds rate by 50 basis points to 4.75%-5%, marking the first interest rate cut in four years.

In addition, according to the dot plot released by the Federal Reserve on the same day, the median expectation of the federal funds rate this year is 4.4%, reaching a target range of 4.25% to 4.5%, which implies that the Federal Reserve may cut interest rates by another 50 basis points before the end of the year.

Advertisement

Due to the strong position of the US dollar, the trend of US dollar interest rates has always been a key anchor for global asset allocation, with a significant impact coefficient on global asset pricing.

Therefore, when the Federal Reserve lowers the federal funds rate, global assets will face a revaluation.

For the Chinese stock market, after the US dollar interest rate changes, it will affect A-shares through two aspects.

On the one hand, it indirectly affects domestic monetary policy through the US-China interest rate spread, thereby promoting the central bank to cut interest rates, thus affecting the liquidity of A-shares.

On the other hand, the interest rate cut allows the US dollar that flows back to the US mainland to re-enter China, thereby affecting the liquidity of A-shares.

On the first day of the interest rate cut, the A-share market opened high and fell low, then quickly rebounded.

By the close of trading, the Shanghai Composite Index rose by 0.69%, the Shenzhen Component Index rose by 1.19%, the ChiNext Index rose by 0.85%, the North Index rose by 1.24%, and the turnover of the three markets in Shanghai and Shenzhen was 629.4 billion yuan, an increase of 147.7 billion yuan from the previous day, with nearly 4,800 stocks in the two markets rising.

It is worth mentioning that under the linked exchange rate system, Hong Kong's interest rate trend is closely related to the pace of the Federal Reserve.

Therefore, when the Federal Reserve begins to cut interest rates, the Hong Kong dollar interest rate will also follow suit and fall, coupled with the "low valuation" attribute, the Hong Kong stock market may attract more capital allocation.

From the market perspective, the Hong Kong stock market closed, the Hang Seng Index rose by 2.00%, and the Hang Seng Technology Index rose by 3.25%, higher than the A-share market.

The "expected game" of US dollar assets has gone from raising interest rates to cutting interest rates, and the US economy seems to have gone through a complete cycle.

The year before last, the Federal Reserve launched an unprecedentedly aggressive round of interest rate hikes, raising interest rates 11 times in a row from March 2022 to July 2023, with a cumulative increase of 525 basis points, maintaining the target range of the federal funds rate at 5.25% to 5.5% to date.

Affected by this, US inflation has been alleviated.

As Powell pointed out, the personal consumption expenditure price index has dropped from a high of about 7% to 2.2% in August, indicating that inflation has been "significantly alleviated".

However, the other side of the decline in inflation is weak employment.

The average monthly employment growth in the past three months is 116,000, significantly lower than the level earlier this year, and the Federal Reserve predicts that the unemployment rate this year will rise to 4.4%, a significant increase.

Amid market concerns about an economic "recession", on August 23, Powell said in his speech at the Jackson Hole Economic Symposium, "It is time to adjust the policy.

The direction forward is clear, and the timing and speed of the interest rate cut will depend on future data, the changing outlook, and the balance of risks."

The market believes that Powell's speech is a "foreshadowing" that the Federal Reserve will switch to a monetary policy and start an interest rate cut cycle.

Affected by this, before the official announcement of the interest rate cut, US dollar assets began to rise, the S&P 300 rose by 1.15%, the Dow Jones Index rose by 2.19%, the New York gold rose by 2.55%, and US bonds continued to rise.

Following the expectation of the Federal Reserve's interest rate cut is also the price of gold.

On September 13, COMEX futures gold broke through $2617.4 per ounce, setting a new historical high.

In addition, on September 17, Bitcoin also set a record for the largest increase in more than a month.

In the early morning of September 19th, the Federal Reserve cut interest rates as expected, lowering the target range of the federal funds rate by 50 basis points, to a level between 4.75% and 5.00%.

However, this 50 basis point interest rate cut is not a consensus among everyone.

Among the 12 voting officials, 11 voted in favor, and Governor Bowman voted against, she is more inclined to cut interest rates by 25 basis points.

This is also the first time since 2005 that a Federal Reserve governor has voted against.

In addition, according to incomplete statistics, four hours before the interest rate decision, most institutions including Morgan Stanley, Goldman Sachs, Bank of America, Citigroup, Wells Fargo, HSBC, and UBS Group believe that the Federal Reserve will cut interest rates by 25 basis points, and only a few institutions such as JPMorgan Chase believe that the Federal Reserve will cut interest rates by 50 basis points.

Historically, the Federal Reserve's interest rate cuts are divided into two situations, one is the relief type of interest rate cut, and the other is the preventive type of interest rate cut.

The relief type of interest rate cut has a large range and will cause the market to worry about the economic situation.

Therefore, the 50 basis point reduction in the federal funds rate also makes the market extremely entangled.

From the market perspective, the US dollar index quickly plunged after the decision was announced, falling to around 100.20, but soon reversed and returned to above 101.

US stocks also rose first and then fell, and by the close of trading, the Dow fell by 0.25%, the Nasdaq fell by 0.31%, and the S&P 500 Index fell by 0.29%.

The international gold price also experienced violent fluctuations, and after the Federal Reserve announced the interest rate cut, it rose sharply to set a new historical high, the COMEX gold futures price rose to a maximum of $2627.2 per ounce, and the spot gold price also broke through the $2600 mark, but then both turned to fall.

In addition to the market's concerns about a recession, Powell's "hawkish" remarks also attracted market attention.

At the press conference, Powell said that the Federal Reserve is only "moderately adjusting the policy stance", and there is no pre-set policy route, and it will continue to make decisions at each meeting based on economic data, and the speed of future interest rate cuts can be fast, slow, or even paused.

This undoubtedly weakened the enthusiasm of capital betting on "unexpected" interest rate cuts.

Will A-shares face a revaluation?

Different from the "rise and fall" of US stocks, on the other side of the ocean, the Japanese stock market and the Chinese stock market have achieved certain gains.

By the close of trading, the Nikkei 225 Index rose by 2.15%.

The A-share market opened high and fell low, then quickly rebounded.

By the close of trading, the Shanghai Composite Index rose by 0.69%, the Shenzhen Component Index rose by 1.19%, the ChiNext Index rose by 0.85%, the North Index rose by 1.24%, and the turnover of the three markets in Shanghai and Shenzhen was 629.4 billion yuan, an increase of 147.7 billion yuan from the previous day, with nearly 4,800 stocks in the two markets rising.

Specifically, the impact of the Federal Reserve's interest rate cut on A-shares mainly has two channels.

On the one hand, it indirectly affects domestic monetary policy through the US-China interest rate spread, thereby promoting the central bank to cut interest rates.

On the other hand, the interest rate cut allows the US dollar that flows back to the US mainland to re-enter China and affect the liquidity of A-shares.

Therefore, the market believes that the Federal Reserve's interest rate cut is expected to improve the domestic monetary policy space and may have a certain positive impact on the A-share market.

Among them, Haitong Securities stated that the Federal Reserve's preventive interest rate cut may help improve the liquidity of A-shares, and in the medium and long term, pay attention to the verification of the repair of the basic situation.

From the perspective of liquidity, the Federal Reserve's interest rate cut may improve the macro and micro liquidity of A-shares in the medium and short term, and help A-shares rise.

In addition, Yang Delong, the chief economist of Qianhai Open Source Fund, also said that the Federal Reserve's interest rate cut is beneficial for capital to flow back to emerging markets including China.

From the perspective of the global capital market valuation comparison, the current US stock valuation is at a historical high, while A-shares and Hong Kong stocks are in the valuation lowlands of the global capital market.

Once the appreciation expectation of the renminbi appears, foreign capital is expected to flow back and drive the valuation of renminbi assets to rise.

Stephen Jen, the founder of the "US dollar smile theory", also recently made a forecast that the Federal Reserve's interest rate cut may prompt Chinese companies to sell up to $1 trillion worth of US dollar-denominated assets, thereby promoting the appreciation of the renminbi by up to 10%.

However, from historical experience, after 2000, there were not many cases where A-shares benefited immediately from the Federal Reserve's interest rate cuts, and there is a lag in the transmission of A-shares in the long term, and there is uncertainty in intermediate variables.

Therefore, the stimulus of the interest rate cut for A-shares still needs to be observed.

In 2001, due to the collapse of the internet bubble and other issues, the Federal Reserve continued to cut interest rates from January 2001 to June 2003, adjusting the federal funds rate from 6.5% to 1.75% at the end of the year, and during this period, the Shanghai Composite Index fell by about 29%.

From September 2007 to December 2008, affected by the collapse of the real estate market, the Federal Reserve reduced the federal funds rate to zero and began to implement a quantitative easing policy for the US dollar.

During this period, the Shanghai Composite Index fell by about 63%.

After that, it was not until July to October 2019 that the Federal Reserve began to cut interest rates, reducing the federal funds rate by 75 basis points, from 2.25%-2.5% to 1.5%-1.75%.

During this period, the Shanghai Composite Index fell by about 3%.

The most recent interest rate cut was in March 2020, to deal with the new crown, and it was significantly reduced twice in an emergency meeting outside the plan.

The federal funds rate was reduced from 1.5%-1.75% to 0-0.25%.

During this period, the Shanghai Composite Index fell by about 9%.

In addition, many securities analysts also said that although the Federal Reserve's interest rate cut leads to loose liquidity, the logic that foreign capital is expected to flow back is still valid, but it is expected that the style of the A-share market before and after the interest rate cut is still dominated by domestic fundamentals.

The Hong Kong stock market may usher in a new opportunity for allocation.

The Federal Reserve's interest rate cut may support the Hong Kong stock market to bottom out and rebound.

Under the linked exchange rate system, Hong Kong's interest rate trend is closely related to the pace of the Federal Reserve's interest rate hikes.

Therefore, the Hong Kong dollar has a certain "US dollar attribute", and when the Federal Reserve raises interest rates, the Hong Kong dollar interest rate will also be passively pushed up.

In 2023, the Hong Kong Monetary Authority raised the benchmark interest rate from 0.5% to 5.75%.

So when the Federal Reserve begins to cut interest rates, the Hong Kong dollar interest rate will also follow suit and fall.Additionally, unlike the continuous rise of U.S. stocks, the Hong Kong stock market remains in the "undervalued area," hence, the stock prices in Hong Kong are more sensitive to interest rate cuts by the Federal Reserve.

Looking at the market data, as of today's close of the Hong Kong stock market, the Hang Seng Index rose by 2.00%, and the Hang Seng Tech Index rose by 3.25%.

Midea Group and Vanke Enterprises increased by more than 8%, while Haidilao, Haier Smart Home, and JD.com increased by more than 7%, with gains higher than those of A-shares.

Apart from the factor of the Federal Reserve's interest rate cut, according to a research report by CITIC Securities, the Hong Kong stock market has begun to disclose the latest quarterly or semi-annual financial reports, and the expected profit growth rate of Hong Kong stocks has been revised upwards.

Against this backdrop, the Hong Kong stock market will attract more capital allocation.

In particular, insurance companies are showing a preference for H-shares.

In addition to Rui Zhong Ren Shou Life Insurance's stake in Longyuan Power and China Duty Free H-shares, on July 31, Great Wall Life Insurance announced the purchase of 1 million shares of Green Power Environmental Protection H-shares, holding a total of 70.15 million shares after the increase, accounting for 5.03% of the total share capital of the listed company, triggering a stake.

Almost in sync with Great Wall Life Insurance, Taikang Life Insurance purchased shares of Huadian International and Huaneng International through the Hong Kong Stock Connect on July 30.

Taikang Life Insurance and related parties and persons acting in concert participating in this stake hold a shareholding ratio of 5% in both companies.

In addition to Great Wall Life Insurance's stake in Qinhuangdao Port H-shares in May, as of now, insurance capital has staked in 6 Hong Kong-listed companies.

At the same time, as of the end of the second quarter of this year, excluding QDII, there are a total of 3,594 mainland public funds that can invest in Hong Kong stocks, holding a market value of 375.7 billion yuan in Hong Kong stocks, an increase of 23.0% from 305.5 billion yuan in the first quarter, with the proportion of Hong Kong stock holdings at 24.1%, higher than the first quarter's 19.0%.

Among them, the proportion of actively biased stock funds increased from 17.1% in the first quarter to 21.7%, the highest since the end of 2021.

In terms of capital, in 2023, the net inflow of northbound and southbound funds was 44.4 and 314.6 billion yuan, respectively.

In 2024, the divergence between southbound and northbound funds became more severe.

As of June 30, the cumulative net inflow of northbound funds was 38.5 billion yuan, and the net inflow of southbound funds was 371.4 billion yuan.