The postponement of the Fed's interest rate cut could hardly stop the global stock market from soaring, and the A-share market approached 3,000 points for seven consecutive days

The minutes of the Federal Reserve meeting were released in the early morning of Thursday (22nd) Beijing time, reaffirming that a rate cut in March was not necessary. The minutes mentioned that there are still upside risks to inflation and therefore there is no rush to cut interest rates, which shows that in the eyes of the Fed, the potential hidden danger of "cutting interest rates earlier" is greater than "continuing to maintain high interest rates", and the unexpected inflation data and retail sales data in the United States in January have also provided evidence.

Despite this, global equity markets have not been weighed on by this, and the market has already retraced aggressive interest rate cut expectations since February. The three major U.S. stock indexes were mixed overnight, with Nvidia's better-than-expected earnings report pushing the S&P 500 above 5,000 points in the after-hours trading session, Goldman Sachs recently raised its full-year target to 5,200 points, and the Japanese stock market broke through the all-time high of 38,957.44 points set in December 1989 to close at 39,098.68 points. In addition, U.S. bonds continued to fall, and gold prices still bucked the trend and walked out of the five-day streak.

Since the opening of the Year of the Dragon, China's A-shares have achieved seven consecutive positives under the favorable conditions of regulatory restrictions on shorting, policy stimulus, and Spring Festival consumption data exceeding expectations, and the Shanghai Composite Index closed at 2988.36 points on the 22nd, just one step away from recovering the 3000-point mark. International institutions interviewed by Yicai generally expect the Fed to start cutting interest rates in the second quarter, which is conducive to the return of capital to emerging markets, including Chinese stocks, against the backdrop of a modest slowdown in the US economy rather than a recession.

Fed rate cuts in the first half of the year are expected to fade

Betting on the Fed to cut interest rates has cooled significantly. It is expected that the interest rate will only be cut by about 80bp (basis points) for the whole year, which is well below the 160bp forecast in January. The first rate cut is expected to occur in June, rather than March, as earlier expected.

It is worth noting that due to the recent strong US economic data (GDP, non-farm, inflation, etc.), there is even talk of "continuing to raise interest rates" in the market.

After the minutes, the yield on the 10-year Treasury note rose above 4.3%, and the yield on the 2-year Treasury note, which is more sensitive to interest rates, rose to a three-month high of 4.67%. The U.S. dollar index is trading near its year-to-date highs. The three major U.S. stock indexes were mixed overnight, with energy stocks leading the gainers in the S&P 500 index, and only the technology sector recorded declines, breaking through the 5,000-point mark on the verge of breaking through.

Earlier, the US January CPI and PPI were both higher than expected, but consumer confidence climbed for the third month in a row to the highest level since July 2021, a combination that weighed on market expectations for a rate cut. Jerry Chen, a senior analyst at Forex.com Group, told reporters that Fed official Waller's speech on Friday morning, Beijing time, was particularly noteworthy, and the hawk's dovish turn last year once stimulated a surge in U.S. stocks.

UBS Wealth Management's Chief Investment Officer (CIO) told reporters: "Considering the recent U.S. employment data and inflation levels higher than expected, we have lowered our expectations for the Fed to cut interest rates, and we expect the first round of interest rate cuts to start in June, and the expected rate cuts for the whole year are lowered from the previous 100BP to 75BP." Consumption resilience has become the focus of the US stock market's fourth-quarter 2023 earnings report. For example, the management of Home Depot said that although consumer spending has decreased compared to last year, the higher home prices have boosted home equity, thereby boosting consumer confidence and consumption resilience, and Walmart management also said that consumers have responded positively to lower prices, although inflation has not fallen as expected.

Global equities are on the upswing and demand for gold remains

Generally speaking, interest rate cuts are interpreted by the market as positive for equities, as a shift in accommodative financing conditions will be conducive to valuation expansion. But in fact, historical data shows that U.S. stocks generally perform best during the period when interest rate cut expectations are rising, and the market often begins to fall after interest rate cuts land, because the resilience of the economy is closely related to corporate earnings, which is also another leg that supports the stock market. For now, as the U.S. economy remains resilient, institutions remain bullish on U.S. stocks even if interest rate cut expectations are pushed back.

Since last year, U.S. stocks have been driven by the "Big Seven", and the AI boom has detonated market trading enthusiasm. Huang Senwei, senior market strategist of AllianceBernstein Fund, previously told reporters that he is still optimistic about U.S. stocks. From a historical perspective, based on the average age of about 64 months and about 5 years in the U.S. business cycle, the first recession may not wait until 2025. At the same time, the structure of the U.S. stock industry has undergone major changes, and listed companies are increasingly less affected by the business cycle. In 1998, the S&P 500 accounted for 58% cyclical, 6% pan-tech, and 36% defensive, and by 2023, the cyclical sector accounted for 35%, pan-tech 37%, and defensive 29%. Even if the U.S. economy slows this year, it doesn't necessarily mean that corporate earnings will also slow down. In contrast, the structure of the MSCI Europe Index is still dominated by cyclical sectors, which are more affected by the economic slowdown.

The market is currently optimistic about the technology and AI sectors, and also pays attention to investment opportunities in the pharmaceutical industry. Just after the close of trading on February 22, Nvidia reported strong earnings and optimistic guidance, and the company's fourth-quarter revenue reached $22.1 billion, up 265% year-over-year. Revenue is expected to reach $24 billion in the first quarter of this year, and gross margin is expected to further rise to 77%. The explosion was mainly due to the growth of the data center segment, which provides customers with artificial intelligence processors. At present, Goldman Sachs has raised its price target for Nvidia to $800.

In addition to U.S. stocks, Japanese stocks are not to be outdone. At the close of trading on the 22nd, the Nikkei 225 index hit another record high. Jerry Chen said that since the fall of 2023, the Nikkei/TOPIX (Topix stock price index) has been expanding its rate of gain, and the Nikkei index has outperformed TOPIX by about 3 percentage points year-to-date. This mainly reflects the significant performance of large stocks in the context of foreign investor inflows and the contribution of high-priced technology stocks such as semiconductors.

In addition to short-term market momentum, longer-term structural forces are also driving market performance. For example, the Tokyo Stock Exchange has announced a series of measures to improve shareholder returns and eliminate listed companies with price-to-book ratios of less than 1x, which has further strengthened foreign investors' interest in Japanese companies, especially since most large overseas institutions have previously underweighted Japanese stocks, and capital will continue to flow back to Japan. The total share buybacks of Japanese companies last year reached about $1.8 trillion, a record high together with the annual dividend.

Under the interest rate cut cycle, institutions are also optimistic about the investment opportunities of U.S. bonds and gold, which have been consolidating since the beginning of this year. According to AllianceBernstein, history shows that since 1995, US Treasuries have risen by an average of 9.5% in the year following the Fed stops raising interest rates, while investment-grade and high-yield corporate bonds have risen by 10% and 11%.

The international gold price once broke through an all-time high of $2,185 per ounce in 2023 and consolidated near $2,000 this year. The postponement of interest rate cut expectations has supported the recent strength of the US dollar, which has also led to continued outflows from gold-backed ETFs.

However, UBS maintained its bullish view on gold prices, continuing to forecast $2,050/oz at the end of June, $2,250/oz at the end of 2024, and $2,250/oz at the end of March 2025. Gold can be used as a hedge against various risk events in a portfolio, so investors may consider allocating about 5% of gold to a diversified and balanced US dollar portfolio. Institutions are also bullish on related gold mining companies, as their valuations are more attractive than gold.

The continued rebound in A-shares is expected to stabilize

With the end of the Fed's interest rate hikes, the current environment is more favorable for emerging market equities, including A-shares. Since February 6, the A-share market has continued to rebound, after the Shanghai Composite Index fell into the 2,600-point range, and after rising for seven consecutive trading days, it is now approaching the 3,000-point mark.

Restrictions on short-selling and the entry of Huijin into the market to buy ETFs are the main driving factors. The larger-than-expected rate cut also stimulated market sentiment. On February 20, the central bank lowered the LPR (loan prime rate) of more than 5 years by 25bp to 3.95%, keeping the 1-year LPR unchanged at 3.45%. This is the first time since June 2023 that the LPR of more than 5 years has been cut, which will help push mortgage rates further downward.

Lu Ting, chief economist at Nomura China, told reporters: "The real impact of the rate cut will be reflected in the 38 trillion yuan of outstanding loans that refer to the LPR with a maturity of more than 5 years as the benchmark interest rate." These loans will not be repriced until January 1, 2025, and the 25bp rate cut will reduce bank profits by about $95 billion per year from 2025. We expect that China may need to take more measures to stabilize the real estate market, and it is not ruled out that the central bank may cut the LPR by another 10~20BP in the second half of the year, but banks may also cut the deposit rate accordingly. ”

Compared with previous years, the consumption data of this year's Spring Festival is also more impressive. According to the Ministry of Culture and Tourism, the number of tourists reached 474 million during the eight-day Spring Festival holiday, up 34% year-on-year and 19% from pre-pandemic levels in 2019. However, Goldman Sachs and Nomura mentioned that the per capita tourism consumption during the Spring Festival holiday in 2024 will be 91% of the 2019 level, which still needs to get closer to the pre-epidemic level.

In this context, institutions generally believe that A-shares are expected to stabilize. This round of market decline is a structural "stock crash" caused by quantitative products (including snowball, leveraged DMA, flat neutral, index enhancement, etc.) caused by the concentrated sell-off of small and medium-sized market capitalization stocks, and the current "quantitative stock crash" has come to an end, from the overall downward trend of A-shares, the weak downward trend of the index since August last year has basically ended, that is, the large-cap stocks with the SSE 50 and the CSI 300 index as the main body have bottomed out. Among them, the best performance of "China Special Valuation" related stocks (on February 22, PetroChina soared, the stock price approached 9 yuan), as the improvement of state-owned enterprise governance is valued, will continue to be favored by funds, leading the market rebound.

(Intern Yang Di also contributed to this article)