Powell rate cut could spur equities relief rally

Top News | Bloomberg and Tereza Cai 12 Jul 2019

Nothing seems likely to stop US Federal Reserve chairman Jerome Powell from cutting interest rates this month.

Now traders are asking: if Powell is so worried about the outlook for economic growth, could he cut rates even more than the quarter-point the market has priced in?

"If the economy is really slowing down, and you are hit by shocks that could tip you over," a quarter-point cut is not a defensible move, said Seth Carpenter, chief US economist at UBS Securities in New York. "They are shifting from data dependence to risk management."

Powell said the US economy is facing risks from flagging sentiment, a global slowdown in manufacturing, and an inflation rate that has remained persistently low.

Traders expect a cut of at least a quarter-point at the end of the month. They dialed up bets on a bigger one after Powell's comments and further easing by the end of the year.

Short-dated Treasury rates have fallen sharply, taking the two-year yield to as low as 1.82 percent, while US stocks have touched record highs.

The US dollar has fallen against a basket of other currencies and uncertainty about its outlook has prompted some investors to unwind short positions against some heavily shorted currencies including the Australian dollar.

If the Fed cuts rates this month, a limited relief rally in equities may bee seen as long with a steepening in the yield curve, said David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco.

Yesterday, the Hang Seng Index rose 227 points to 28,431, and Asian stocks climbed along with US equity futures. Gold rose for a third day, and is trading above US$1,400 (HK$10,920) an ounce.

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