Hello everyone, welcome to today’s “Financial Special”. Today, our program first focuses on the major event of the Fed rate cut.
Finally, on Wednesday afternoon, Fed Chairman Powell announced a 50 basis point rate cut. So, what market reactions will the rate cut trigger next? Will it lead to a significant change? These questions are uncertain even to economists, so I won’t speculate. But I can share with you some potential scenarios that experts estimate.
Today’s focus: Fed’s unexpected 50 basis point rate cut may trigger a major economic change! Bangladesh’s small island becomes a battleground between the US and China! High-end mooncakes are left unsold in the autumn wind! Peculiar: Gold prices rise during presidential elections! What’s going on? Huang Renxun cashes out $600 million!
First, countries hoping for a weaker US dollar after the rate cut to boost their own currencies may be disappointed. According to analysis by JPMorgan, in three out of four previous financial cycles, after the Fed’s initial rate cut, the US dollar not only did not weaken but actually strengthened. The dollar’s outlook largely depends on US interest rates relative to other currencies, and unless the dollar becomes a truly low-yielding currency, it will continue to attract investors outside the US. As long as investors from other economies continue to invest in dollars, the dollar will not weaken in the short term.
Secondly, after the rate cut, will other countries have more breathing space? The decline in US interest rates may provide more room for maneuver for central banks in emerging markets, allowing them to implement loose monetary policies to sustain economic growth.
However, there is an unexpected factor that may overshadow the global economic outlook, which is the upcoming US presidential election in over a month.
Trang Nguyen, Global Head of Credit Strategy at BNP Paribas Bank in Paris, said: “The outcome of the US election does make the rate cut cycle more complicated. Against this backdrop, we may see central banks in various countries take more special measures.”
Emmanuel Cau, Managing Director of European Stock Strategy at Barclays, said: “The market is always unstable before and after the first rate cut because the market wants to know the real reason behind the central bank’s rate cut.”
We can soon see how countries’ economies react to the rate cut, so we must wait and see.
Next, which central banks will follow suit in cutting rates? Due to higher-than-expected US inflation, if the Fed does not cut rates, the European Central Bank or the Bank of Canada may face a situation of significant devaluation of their currencies, further intensifying the pressure on domestic commodity prices. However, due to the European Central Bank’s more cautious stance on inflation risks, despite cutting rates in June, they are likely to follow in the footsteps of the Fed and continue to cut rates.
Furthermore, as most major countries in the world adopt currency policies linked to the US dollar, they will generally follow along with US rate cuts. Moreover, global bond markets usually move in sync with US Treasuries, so the Fed rate cut is also highly beneficial for the global bond market. Hong Kong announced a simultaneous rate cut today.
However, it is a different story in the foreign exchange market. The yen and the dollar are the main currencies for speculation, so Japan is unlikely to cut rates along with the Fed. Indeed, the Bank of Japan released a signal today that they are preparing to increase rates.
Now, let’s turn our attention to the news about NVIDIA, the giant in AI chips. NVIDIA’s stock price has been falling recently. As of yesterday’s close, NVIDIA’s stock price was $102.83, down by 4.09%. With this closing price, the company’s market value stands at $252.24 billion.
In the current weak economic environment, investors are increasingly questioning capital expenditures in the tech industry, whether they will continue, and whether the AI bubble has already peaked.
The current drop in NVIDIA’s stock price started with the release of what seemed like impressive but unsatisfactory earnings in early September. Prior to that, NVIDIA’s market value was $309.8 billion. In less than ten days, NVIDIA’s market value has evaporated by $56.74 billion. That’s equivalent to several Fortune 500 companies disappearing!
Although NVIDIA’s stock price continues to fall, it does not deter NVIDIA’s founder and CEO, Huang Renxun, from reducing his stake. Since June this year, Huang Renxun has cashed out over $633 million worth of shares. It is unclear whether this move is due to Huang needing cash, lack of confidence in the company’s future, or some other reason.
However, analysts generally believe that NVIDIA, the core chip manufacturer in the AI boom, has provided revenue forecasts below some of the most optimistic estimates, sparking concerns about the pace of its explosive growth weakening.
Gold prices broke through $2500 per ounce in August this year, hitting a historic high. These days, gold prices have reached $2578. Citibank says gold prices are expected to surpass the $3000 mark this year.
Gold has always been seen as a safe haven asset in times of instability. According to Visual Capitalist’s research data, since 1989, in the most recent four US presidential elections, gold prices surge during election years. As the saying goes: “Antiques in a prosperous era, gold in a chaotic era.” From this phenomenon, it can be seen that in the eyes of the American people, the recent four elections have been perceived as turbulent times, especially this year, another election year.
From this chart, it can be seen that gold prices were declining during the terms of Presidents Bush and Clinton, but starting from President Bush, gold prices have been continuously soaring under four successive presidents. Pay attention, during President Trump’s tenure, gold prices rose by over 50%, and under President Biden, they increased by 37%, but compared to President Bush’s tenure, it was a marginal increase. During his tenure, gold saw its largest surge since 1989, reaching a whopping 215%. Why? It’s all because of 9/11 and the subsequent Iraq war.
It is noteworthy that gold prices surged significantly after Trump’s election, mainly due to the escalating political divisions in the US, the increasing political polarization between the two parties, and the deepening societal divisions, which increased uncertainty about the future, thereby driving up gold prices, a trend that has continued into Biden’s term.
As this year’s election approaches, analysts predict that regardless of whether Trump or Harris wins, gold prices will surpass $3000 by the end of the year.
According to the Financial Times on September 18th, the EU is preparing to impose a huge fine on Meta, Facebook’s parent company, on suspicion of abusing its dominant position in the online classified advertising market.
If Meta loses, the estimated fine could amount to 10% of its global annual revenue. Meta, while also refusing to comment, referred to a previous statement that stated: the EU’s accusations are baseless. We will continue to cooperate with regulatory authorities to prove that our products benefit consumers.
According to insiders, the EU could make a ruling as early as next month.
This antitrust investigation began in 2019 when competitors accused Facebook of abusing its dominant market position, providing free bundled services, while profiting from user data collected from the platform.
In December 2022, the EU Commission put forth preliminary investigation results, concluding that Meta caused the online classified advertising market to lose fair competition opportunities and sold ads to users using data obtained free from businesses.
On Wednesday afternoon, the Fed finally launched the long-awaited rate cut action, and it was a half-point cut. Although there has been much debate about the expected rate cut size, a significant 50 basis point cut still exceeded many people’s expectations.
Fed Chairman Powell: “Today, the Federal Open Market Committee decided to lower the policy rate by half a percentage point to reduce policy constraints. This decision reflects our increasing confidence that by adjusting the policy stance appropriately, we can maintain strong momentum in the labor market under moderate growth and inflation, and sustainably lower the inflation rate to 2%.”
The Fed’s rate cut this time brought the target range of the federal funds rate down to 4.75% to 5%. for 23 years, the federal funds rate has hovered between 5.25% and 5.5%, the highest level in 23 years. In addition to the rate cut, the Fed will continue to retain its quantitative easing policy.
In recent decades, a rate cut of half a percentage point has been quite rare, usually only occurring in emergency situations, such as the outbreak of the COVID-19 pandemic in March 2020 and the global financial crisis in 2008.
Philip Straehl, Chief Investment Officer for the Americas at Morningstar Wealth: “Compared to other loose periods, the US economy is still relatively strong, with a 4.2% unemployment rate still at a historical low. The labor market maintains a full level of employment. Against this backdrop, the size of the rate cut by the Fed may seem excessive. However, it also indicates that the Fed is convinced that the downward trend of inflation is sustainable and has shifted its focus from controlling inflation to achieving a soft landing for the economy.”
Fed Chairman Powell: “We know that reducing policy restrictions too quickly may impede the downward trend of inflation, but at the same time, reducing restrictions too slowly may inappropriately weaken economic activity and employment. As for the next adjustment to the federal funds rate, the committee will carefully evaluate future economic data, changing prospects, and risk balance.”
According to the dot plot, the Fed expects the 2024 rate range to adjust to 4.25% to 4.75%, meaning there will be another half-point rate cut before the end of the year. Over the remaining months of this year, the Fed will hold two more monetary policy meetings on November 6-7 and December 17-18.
To curb inflation, in March 2022 after the pandemic, the Fed announced the first rate hike, sparking several painful years for many consumers who faced rising prices, higher borrowing costs, and increased mortgage and car loan payments.
Fed Chairman Powell: “Although higher rates, slower economic growth, and a weaker job market can reduce inflation, they can also bring some pain to households and businesses.”
After two and a half years, Americans have finally experienced a rate cut day, hoping that the pressure on consumer spending will ease, especially in mortgage rates, car loans, and credit card rates, which are expected to decrease. But everything has two sides.
Michael Bailey, Research Director at FBB Capital Partners: “Historically, lowering interest rates is closely related to mortgage rates. Therefore, theoretically, as rates fall, house prices should become more affordable, which could help some facets of the economy. However, on the other hand, we have already experienced a wave of significant inflation in everyday consumer goods, which was one reason the Fed raised rates, seeking to alleviate inflation. Nonetheless, for many goods, the price hikes have already occurred and are unlikely to roll back.”
Apart from the general public not seeing a decrease in everyday consumer goods prices, savers in banks will also see their savings rate gradually decrease with the Fed’s rate cut.
Derek Horstmeyer, Finance Professor at George Mason University: “Lower interest rates are good news for borrowers, but they may not be for savers.”
Moreover, even if the rate cut causes mortgage rates to drop, experts still recommend that individuals looking to buy a house—wait.
Preston Caldwell, Senior US Economist at Morningstar: “I expect mortgage rates to further decrease, and this could be the reason for holding off on action.”
Derek Horstmeyer, Finance Professor at George Mason University: “It’s best to wait a year or even two until rates drop to 3% or lower.”
The dual-edged nature of the rate cut is also reflected in its impact on the stock market. Goldman Sachs analyzed the historical performance of the S&P 500 index in the year following a Fed rate cut.
George Cipolloni, Portfolio Manager at Penn Mutual Asset Management: “If the economy is not in a recession, the market tends to rise by about 10% to 12%, 10% to 15%. But if we’re in a recession, the market often falls by about 10% to 15%, so when considering the possible reactions in the stock market, there are two different binary outcomes.”
Just before the Fed’s rate cut announcement, the US Commerce Department released data showing a slight increase in retail sales of goods in August, indicating that the US economy is still resilient. This data slightly alleviates concerns about the US economy potentially sliding into recession.
The market reaction after the Fed’s rate cut may take some time to manifest. However, natural disaster losses are impending. On the 16th of this month, Shanghai in China experienced the strongest typhoon “Beibujia” in 75 years. As a result, another typhoon, “Pulasan,” hit the southeast coast of China, leaving tens of millions of people in extreme suffering.
In the Atlantic region, from mid-August to mid-October each year is a particularly active period for hurricanes. Just last week, a category 2 hurricane, Francine, made landfall in Louisiana, causing significant property damage. But a survey revealed that 26% of US homeowners are not financially prepared for natural disasters.
Most surveyed homeowners have purchased home insurance, but many don’t fully understand what their insurance covers and what conditions need to be met.
Shannon Martin, Insurance Analyst at Bankrate: “What repairs and updates are needed for homes to meet insurance standards? Do you need to invest in upgrading the roof? If you live in a wildfire-prone area, it’s simple, just ensure there is no debris around your home, and no flammable trees and shrubs.”
If unsure about the type of home insurance needed, experts suggest homeowners can use climate prediction websites to assess their home’s exposure to extreme weather threats.
Shannon Martin, Insurance Analyst at Bankrate: “Find what repairs and updates are needed for homes to meet insurance standards? Do I need to upgrade the roof? If you live in a wildfire-prone area, it’s simple, just ensure there is no debris around your home, and no flammable trees and shrubs.”
Assuming those living in disaster-prone areas take immediate action to protect their personal property after watching today’s show, the situation will likely improve. Now let’s take a look at the news in the US real estate market. Recent data shows a significant rebound in the construction of single-family homes in August, while the data for July has also been revised upward.
According to the US Census Bureau, single-family home construction soared by 15.8% in August, with a seasonally adjusted annual rate of 992,000 units. Additionally, the data for July has been revised, going from the initial 851,000 units to 857,000 units.
A survey by the National Association of Home Builders on Tuesday also showed that after four consecutive months of decline, homebuilders’ confidence had slightly improved in September. However, due to the long-term high rates suppressing home sales, along with an increase in existing home inventory, creating an oversupply of new homes. Economists expect that the supply of new homes will not significantly increase in the future.
In July this year, a nationwide anti-government protest broke out in Bangladesh, overturning Prime Minister Sheikh Hasina, who had long been pro-Communist and led to the country’s declining livelihoods, fleeing the scene.
There have been many reports analyzing the disputes behind this coup. Today, I want to share a different story with you, showing that this turmoil is likely due to a small island: Saint Martin Island in Bangladesh.
Saint Martin Island is located in the northeastern part of the Bay of Bengal, covering only 8 square kilometers. The island is characterized by flat terrain, home to about ten thousand residents who mainly make a living by fishing, growing rice, and coconut trees, leading a simple and pure life. In tourism-lacking Bangladesh, Saint Martin Island is a tourist attraction, open to visitors from October to March every year. Here, there are no cars, and the only modes of transportation are rickshaws or electric cars. Plus, it has no power supply due to the 1991 hurricane that destroyed the island’s sole transmission pipeline. Consequently, the island relies solely on solar power generation. Therefore, most hotel generators on the island are not allowed to operate after 11 pm.
Although the island falls under the jurisdiction of Bangladesh, it is closer to Myanmar, so both countries have long disputed over maritime boundaries and fishing rights in surrounding waters, often leading to conflicts. At severe times, these conflicts can lead the small island into a food shortage crisis.
This small island is indispensable to Bangladesh for several reasons. On the one hand, Bangladesh can monitor international ships coming and going through the island, preventing illegal fishing and smuggling activities. On the other hand, controlling the resources in this region helps safeguard Bangladesh’s economic interests in tourism, fisheries, potential underwater resource development, and the island’s untapped natural gas and oil resources, which are critical for the country’s energy security.
The Sheikh family, which has held power in Bangladesh for many years, is infamous for corruption, and the people have grown tired of them. So, when Sheikh Hasina resorted to despicable tactics to secure her re-election, and the people, fed up with her, staged a massive protest, along with the military’s growing anti-Sheikh family sentiment, Sheikh Hasina was ousted.
Shortly before Sheikh Hasina’s participation in the election, she suddenly revealed to the media that someone had offered her an easy way to win re-election—just by allowing a certain country to build an air force base on Saint Martin Island in Bangladesh. Yet, she didn’t specify which country, claiming it was a mystery “white person.” Later, two pro-Sheikh members of parliament pretended to be indignant, stating that in fact, it was the Americans trying to seize control of Saint Martin Island. Regardless of the real reason behind Sheikh Hasina’s fall, it was only after her downfall that people realized the true strategic value of Saint Martin Island.
Saint Martin Island is not just a geographical concept but also a microcosm of international political struggles. Bangladesh, the US, and China have initiated an unspoken war over this small island. Bangladesh has just transitioned, and the temporary government’s foreign policy is currently unclear. Additionally, with the upcoming US elections, the next government’s adjustment to the Indo-Pacific strategy will also affect US deployments in the region. The question of who will ultimately take control of Saint Martin Island will be an interesting one.
Thinking of it all, I recall a term: the butterfly effect. Here, every action can trigger chain reactions, influencing regional and even global political landscapes. Where will the butterfly effect start as the butterflies flutter their wings on the island?
That’s all for today’s program. Thank you very much for watching. Remember to subscribe to New Tang Dynasty Television’s YouTube channel and tune in often to hear me talk about stories in finance and business. Thank you again for watching, and see you next time on “Financial Special.”