How could Fed rate cuts transform global markets?

Federal Reserve Rate Cut: As the Federal Reserve prepares for its first rate cut in four years, all eyes are on how the rate cut will affect global markets. Global investors are waiting to see what will happen in practice and how it will affect the economies in question.

Emerging markets gain breathing room

The US Federal Reserve’s rate cut should give emerging market central banks more room to manoeuvre to support their economies. Many of those markets, particularly those in Latin America and emerging markets in Europe, have already started to ease their rates ahead of the Fed meeting. However, the ongoing US presidential election introduces a new element of uncertainty that could muddy the waters surrounding global monetary policy. “The US election will significantly shape the rate-cutting cycle, and it is very likely that the actions taken by central banks will start to diverge,” said Trang Nguyen of BNP Paribas.

Global ripple effects

With inflation in the United States rising, investors around the world have been wondering whether the European Central Bank (ECB) and the Bank of Canada can actually lower their rates without causing the currencies of those countries to devalue. Now that the Federal Reserve has taken official steps to cut rates, markets in slightly weaker economies are breathing a sigh of relief. Traders have begun to revise expectations and now expect cuts from other central banks, although the European Central Bank and the Bank of England remain cautious on inflation. This is expected to be reflected in global bond markets, as government bond yields in the United States, Germany and Britain are expected to fall for the first time in a quarter since late 2023.

Dollar Dynamic

Far from suffocating the dollar, US rate cuts are unlikely to bring it down abruptly. To date, the dollar has risen after the initial salvo of Fed rate cuts in three of the four recent cycles. The greenback’s outlook will largely be conditioned by relative performance against other currencies. Having seen Asian currencies gain ground of late in the form of the South Korean won and Thailand’s baht, the dollar is more likely to remain attractive unless it too becomes a low-yielding asset.

Stock market rally

A US rate cut may spur a global stock market rally if it triggers economic activity without triggering a recession. A Fed rate cut, which may be confirmed by recent declines linked to growth concerns, could rejuvenate market sentiment. “Markets typically react with uncertainty to initial cuts, but if the Fed action leads to a mid-cycle recovery, stocks could rebound,” said Emmanuel Cau of Barclays. A soft landing in the US would also benefit Asian markets, although the Nikkei has struggled recently due to the rise of the yen.

Commodity Outlook

But in the commodities sector, lower US rates are likely to be a boon for both precious and base metals. Lower interest rates and a weak dollar can boost demand for metals, so base metal catalysts such as copper may gain further momentum with improved demand prospects, while precious metals such as gold may continue to rise as their patterns often rise with falling yields. Speculative trading in gold markets remains a position that can create volatile trading.

As the Federal Reserve prepares to announce a rate cut, the global financial community has been holding its breath waiting to see the impact on monetary trends and market behavior around the world.

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