"The rate cut trade" and "Trump trade" continue to dominate: small-cap stocks, Bitcoin, and gold shine

Since the cooling of the US CPI last Thursday, rate cut trades have become prevalent, and the style of the US stock market has started to shift. Even investors' preferences have changed after Trump's attack, with assets such as Bitcoin and gold also rising.

Some analysts point out that this is the result of the combined impact of the "Trump trade" and the "rate cut trade".

On Tuesday, the small-cap Russell 2000 index continued to soar by 3.5%, while the Nasdaq index only rose by 0.2%. The recent shift in the style of the US stock market is very obvious: a preference for small-cap stocks rather than large-cap stocks.

Moreover, Bitcoin also maintained its upward trend and returned above $65,000.

Even gold hit a historical high on Tuesday, with spot gold closing at $2,468 per ounce, representing a year-to-date increase of 19.68%.

Why are small-cap stocks, Bitcoin, and gold rising?

Haitong Securities indicated that when the "Trump trade" and the "rate cut trade" both strengthen, showing a "strong resonance" situation, assets such as small-cap stocks, Bitcoin, and gold may be favored, and the US bond yield curve may become steeper.

The Zhang Jiqiang team of Haitong Securities pointed out that the US June CPI inflation data fell more than expected, coupled with Powell's dovish remarks, boosting expectations for the Fed's first rate cut of the year in September, and after the first round of presidential debates and shooting incidents, Trump's lead in the polls expanded, ushering in the "Trump 2.0" era in the US. With the alternating dominance of the "rate cut trade" and the "Trump trade", the US stock market rebounded in volatility, the US bond yield curve steepened, the US dollar trend weakened, and gold and Bitcoin found support, while emerging market currencies saw a turning point.

According to the relationship between US bond yields and rate cut expectations, CICC also predicts that US bond yields may fluctuate in the range of 4.2% to 4.7% in the short term, corresponding to expectations of 3 rate cuts within the year and no rate cuts within the year. After the rate cuts are implemented, rates may fall below 4% due to trading factors, and then gradually rebound due to positive growth expectations, gradually shifting towards inflation-benefiting assets such as copper, oil, and other bulk commodities, as well as US cyclical sectorsSimilar to US Treasuries, gold is also the same. CICC pointed out that assuming real interest rates are 1-1.5%, the US dollar is at 102-106, gold is expected to break through the $2500/ounce mark within the year.

Two factors that will trigger a strong rebound in small-cap stocks: short covering and improving profit prospects for small-cap stocks.

Since the beginning of this year, traders have set a record for net short positions in small-cap stocks since 2023.

According to data from S3 Partners, the $68 billion iShares Russell 2000 ETF has approximately 25% short interest, while the $564 billion SPDR S&P 500 ETF Trust has a short interest of 9.9%, and the $302 billion Invesco QQQ Trust Series 1 has a short interest of 7.6%.

Cole Wilcox, CEO of Longboard Asset Management, stated: "Hedge funds and traders held record short positions in small-cap stocks before the CPI report was released last week, and they were caught off guard by lower-than-expected inflation rates, triggering a strong rebound in small-cap stocks."

Furthermore, the profit prospects of small-cap stocks have also started to improve, attracting more investors. According to analysis by RBC Capital Markets, revenue and net profit growth forecasts for the Russell 2000 index indicate a strong rebound by the end of 2024, approaching the S&P 500 index. Strategists led by Lori Calvasina found that the upward revision rate of earnings expectations for the Russell 2000 index is also starting to align with the S&P index.

Eric Sterner, Chief Investment Officer of Apollon Wealth Management, also pointed out: "More attractive valuations may help trigger a strong rebound in small-cap stocks, while the Fed is also expected to cut interest rates."