Dear Reader,

The US Fed kicked off its rate cutting cycle this week with a hefty 50 basis point cut. The way the Fed tried to manage expectations was extraordinary. After noticing that the markets were all set for a 25 basis point cut, it cleverly leaked to a well-known Wall Street reporter, who is known to be close to the Fed, that a 50 basis point chop may also be on the cards. Accordingly, by the time of the FOMC meeting, the odds of a 50 basis point rate cut were 50:50.
That is probably why the US markets didn’t react much to the Fed announcement initially. But by Thursday, they seemed to have suddenly realised that the combination of an economy that seems to be doing all right at present -- US weekly jobless claims on Thursday were at a four-month low -- and an outsized rate cut was a great outcome for risk assets, and they hastily moved up. What’s more, the Fed Funds futures are now pricing in an 84 percent probability that the Fed Funds rate will at least be another 125 basis points lower by March 2025 i.e. down to 3.5-3.75 percent from the current 4.75-5 percent. In spite of Fed chair Powell emphasising at his press conference that the 50 bps cut was a one-off and it does not set the pace for future rate cuts, the market believes it will have the best of both worlds—a soft landing together with rapid rate cuts.

The bond market didn’t react much to the Fed. But that’s because it had already priced in the cut, as the fall in bond yields over the last month will testify. The dollar weakened a bit, but not by much.

Clues about the future trend in stocks can be gleaned from investor positioning, as seen in Bank of America’s latest survey of global fund managers. While 80 percent of them think the US economy will have a soft landing, the survey also points out that a net 11 percent of fund managers were overweight equities, which is 0.5 standard deviations below the long-term average and the lowest since January 2024. The implication—there’s plenty of room for more allocation to stocks.

The BofA survey also finds that allocation to emerging market equities is a net 1 percent overweight, down 2 percentage points month-on-month, and the current allocation is 0.8 standard deviations below its long-term average. Yes, much of that underperformance is down to China, but then China’s allocations are going to other countries and there’s more than enough room for a higher allocation to this asset class, particularly as risk appetite will increase with rate cuts. We had pointed out that flows to emerging markets had already increased, in anticipation of Fed rate cuts. And we also wrote about a recent BIS study on the drivers of fund flows to emerging markets.

On India, BofA’s Asia Fund manager survey shows that while India is still the second favourite market behind Japan, the net overweight position of fund managers fell from 39 percent in August to 25 percent in September. High valuations could be taking a toll, but then again, the Fed rate cuts should lead to another gush of funds, adding to the domestic liquidity already sloshing around in the Indian markets. My colleague Anubhav Sahu pointed out that as the liquidity mix might change in favour of institutions, large caps should outperform.

Naturally, the Fed rate cut has sparked off speculation on whether the RBI will follow suit and we wrote about the impact on the Indian bond markets and on banks. However, a rate cut by the RBI is unlikely in October, writes Neha Dave, who also points out that since the real policy rate is around 2 percent, there’s an opportunity only for a shallow rate cut of about 50 basis points. Our columnist Ananya Roy says, among other things, that the uncertainty over the US election may be a dampener in the short run. And this FT story, free to read for Moneycontrol Pro subscribers, reminds us that Trump had warned the Fed not to lower interest rates before the election and if he becomes President that might “escalate the antagonistic approach to the Fed’’.

Of course, the Fed Funds rate still has a long way to go to normalise, if by normalisation we mean the pre-pandemic 1.5-1.75 percent it was at after October 2019 till the unprecedented slashing of the rate in March 2020 as a result of COVID-19. But here’s the thing-- while US GDP growth for 2024 is lower than in 2019 and unemployment is higher, the S&P 500 is currently 91 percent higher than it was back in September 2019. The series of hikes in the Fed’s policy rate not only did not dampen the stock markets -- they seem to have gleefully ignored them.

Perhaps what propelled the equity markets up was the huge fiscal boost during the pandemic. Sure, monetary policy may have been restrictive, but US fiscal policy, as well as fiscal policy in most countries, was far from it. And now, both the US presidential candidates are likely to loosen fiscal policy even further—which could provide another tailwind for overvalued US equities.

The series of rate cuts that have been kickstarted by central banks too may be for the worthy purpose of nipping a slowdown in the bud, but they could well bring MDMA, also known as ecstasy, to the already raging party in the stock markets. This song by Little Sis Nora tells you more about it.
Nothing, it seems, can keep a good market down, especially when given the right drugs.

Cheers,

Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

edible oil imports, Arkade Developers IPO, Northern Arc IPO, Nazara Technologies, Bajaj Housing Finance’s stellar debut could trigger a sector re-rating, Why this mid-sized private bank merits a look, Sharda Cropchem, Investing lessons from Bajaj Housing’s dream debut, Tarsons Products, Is the premium valuation of IDBI Bank pricing in the impending deal? Bharat Electronics, JK Cement, Max Healthcare,

Markets

QIP pipeline worth Rs 1.39 lakh crore set to hit the market soon

What does a sharp rise in margin trading mean for the market?

Will bullion stick to the US presidential cycle price trend in 2024?

Are SME IPO returns showing signs of fatigue?

Govt mulls key change in rules to give brokers more flexibility to use own funds

Merchant bankers charge much more to manage IPOs of digital firms; here's why

August proves to be a mixed bag for PMS schemes even as markets stayed flat

Financial Times

Why Foxconn’s next bid for growth is a room on wheels

Emerging markets has become a redundant term

Interview: Tata’s N Chandrasekaran on ‘painful transitions’

How Netflix won the streaming wars

Private equity is doing badly — however you measure it

Fed rate cut: Vibes on the big day

Companies and sectors

Weak order visibility deepens potholes for road construction companies

How a slow-mover NTPC built a renewable energy powerhouse

Bajaj Auto

Will the regulator have a re-think on the P2P lending industry?

Easing fuel prices to lift earnings of airlines

Awaiting the high tide in shipbuilding

Is RBI’s close scrutiny of NBFC books linked to fast growing unsecured personal loans?

ULI adds new dimension to a credit market that's in flux

The year banks reclaimed their dominance as the financier for India Inc

Economy & Policy

Monsoon Watch

Will higher duties cut edible oil imports?

Strengthening of group audits should benefit investors

How the late payment surcharge scheme came to the rescue of renewable energy project developers

Indian exporters grapple with soaring freight costs

WPI inflation

Pro Economic Tracker

Geopolitics & Geoeconomics

It’s time to assess India’s gains from Quad membership

How a rising dependency ratio has forced China to increase its retirement age

Geopolitical rivalries are changing global natural gas industry dynamics

Tech and Startups

Open AI previews o1

How to up stakes in the GCC gamble

How are successful startup hubs created

Enterprises choosing multi-cloud is sign of industry maturing: Oracle’s Pradeep Vincent

Chennai tops GCC headcount growth in FY24; Hyderabad, Bengaluru follow

Yatra in growing-up phase, focus is now growth as well as profitability, says CEO Dhruv Shringi

Others

GuruSpeak

Why the strike at Samsung’s Chennai plant is not just Stalin’s headache