Daily Digest: Wednesday 18th September


USA
Heading into this week, the focus of traders globally was the US Federal Reserves headline interest rate decision which would mark the conclusion of the FOMC's September meet. The US Federal Reserve was the last of the major central banks to maintain an unchanged, higher-for-longer approach to interest rate policy, aiming to slowdown US economic activity and cool inflation, which was last measured at 2.5% per annum during August. Analyst expectations for Wednesday’s decision were split between a minority expecting 0-25 basis points of rate cuts, against a majority expecting a larger 50 basis point move. In terms of asset activity, at the open, US equities were trading within tight price ranges while global equity activity was relatively muted as traders cautiously managed market exposure.

The Federal Reserve voted on a 50 basis point interest rate cut, marking the start of the US rate cutting cycle targeting an economic ‘soft landing’. The position to cut rates was unanimous amongst all FOMC members, however, the extent to which rates should be cut was disputed by a lone dissenting voter in Fed Governor Bowman, who favoured a more cautious 25 basis point move. The cut marks a key policy pivot and the first US rate cut since the Covid-19 pandemic in 2020, as the FED policy approach aligns with that of the ECB, BOE, and SNB, all of which initiated the rate cutting cycle during 2024. In terms of forward looking, there remain questions over both the direction and magnitude of future monetary policy action, with policymakers adopting neutral to moderately hawkish attitudes.

By the close, US equities had started to move lower, with both the Nasdaq 100 ($NDX) and S&P 500 ($SPX) falling 87.90 points (0.45%) and 16.32 points (0.29%) respectively. Heading into Thursday, the Nasdaq is trading at 19,344.49, and the S&P 500 will open at 5,618.26. The Dow ($INDU) also experienced declines into the close, falling 103.08 (0.25%) to 41,503.10, despite the index testing new 52 week highs earlier in the session.

So, what does a rate cut mean for markets?
In terms of ‘risk assets’, namely equities, rate cuts are typically positive performance catalysts. In business, debt financing is naturally cheaper than raising equity finance, so when an economy’s interest rate decreases the cost of borrowing is reduced. This provides opportunities for firms across high growth and high leverage business sectors. A reduction in borrowing costs allows the firm to increase debt exposure, using additional capital to pursue value enhancing positive NPV investment projects. This is commonly found amongst start-ups and high growth, high competition industries, such as technology.

Interest rate cuts also benefit traders with exposure to ‘safe haven’ and ‘store of value’ assets, such as the commodity gold. In the case of such assets, the interest rate represents the opportunity cost incurred by the investor when holding that specific asset, rather than placing their capital in a bank account. When interest rates are cut, this opportunity cost incurred when holding the asset rather than cash is reduced. This reduction in the opportunity cost can cause asset values to appreciate as investors stand to lose less holding the asset i.e., gold, rather than holding cash in savings or purchasing fixed-income securities as yields fall.


Europe
The UK’s YoY and monthly CPI data prints for August was the headline economic data print out of Europe this morning. Year-on-year figures indicate that UK inflation remains unchanged at 2.2%, in line with analyst expectations. Month-on-month data also fell in line with expectations at 0.3%, up from -0.2% in July. Although inflation remains 0.2 percentage points above the bank of England’s 2% target, inflationary pressures appear softer with no immediate fears of a rebound higher.

The BOE’s monetary policy committee is set to vote today on tomorrow’s interest rate decision, with inflation data easing concerns of an aggressive policy shift. While the figures support the argument for holding rates unchanged at the 5% level, there remains room for a potential 25bps cut which would benefit medium and long-term equity performances. If the BOE does move toward easing monetary policy, market participants could expect an increase in property market activity alongside consumer spending, as lower borrowing costs and seasonal spending trends heighten demand for goods and services.

By 10am, a snapshot of UK equity markets showed the FTSE 100 (FTSE) had fallen some 30 points to 8,278, suggesting that markets were beginning to price out the likelihood of a September cut. The focus now shifts to the outcome of today’s monetary policy vote released tomorrow.

In terms of mainland European equity activity, by the close, the Pan-European STOXX 600 (€SXXP) had fallen 2.6 points (0.5%) to 514.59, while the French CAC (€FCHI) had fallen 42.52 points (0.57%), and the German DAX (€GDAXI) had fallen 14.59 points (0.078%) to 18.711.49.


Rest of the World
Once again, East Asian markets lacked any key macroeconomic stimulus, with the session fairly quiet in terms of any significant fundamental changes. Chinese traders returned to their desks on Wednesday morning as the Mid-Autumn national holiday celebrations concluded. During its first trading session since Friday 13th, the Shanghai Stock Exchange Composite Index (¥SSE) rose 13.19 points (0.49%) to 2,717.28 as traders attempt to stem declines, pushing the index away from its 52 week lows. The Chinese economy remains a fragile target for foreign investment, as traders highlight continued uncertainty surrounding a slowdown in GDP growth, current economic policy, and the performance of key business sectors.

Japanese equities managed to buck the week’s downward trend, though uncertainty around the Fed’s rate cut decision held asset prices within tight ranges. The benchmark index, the Nikkei 225 (¥N225) rose 176.95 points (0.49%) to 36,380.17, erasing just under half of Tuesday’s declines. The Indian Nifty 50 (₹NSEI) index experienced a small pullback closing lower for the first time this trading week, the index fell 41 points (0.16%) to 25,377.55, after prices were rejected at the 24,475 level earlier in the session.


What to watch Tomorrow

BOE Monetary Policy Meet
UK Interest Rate Decision
BOE Monetary Policy Statement
US Unemployment Claims


US Earnings:
FedEx - $FDX


Sources:
https://uk.finance.yahoo.com/world-indices/
https://uk.finance.yahoo.com/commodities
https://www.londonstockexchange.com/indices/ftse-100
https://www.binance.com/en-GB/price/bitcoin
https://www.binance.com/en-GB/price/ethereum
https://qontigo.com/index/sxxp/
Stock Market Activity Today & Latest Stock Market Trends | Nasdaq
https://coinmarketcap.com/charts/#market-cap
https://www.forexfactory.com


Definitions:
YoY - Year on Year, or, Year over Year
MoM - Month on Month, or, Month over Month
QoQ - Quarter on Quarter, or, Quarter over Quarter
ECB - European Central Bank
BOJ - Bank of Japan
Fed - Federal Reserve
BOE - Bank of England
SNB - Swiss National Bank
DOJ - Department of Justice

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Daily Digest: Thursday 19th September

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Daily Digest: Tuesday 17th September