Guosheng Finance: How to view "rate cut trades" and "Trump trades"?

According to the latest report released by Guosheng Securities on the Zhitong Finance APP, the market's expectations for a rate cut by the Federal Reserve are already high. The actual pace of rate cuts is unlikely to significantly exceed expectations, indicating that the impact of "rate cut trades" on the market may weaken. With over 3 months until the U.S. presidential election, there are still significant variables ahead. The "Trump trade" may continue for a longer period, but with potential fluctuations in pace. Although the warming rate cut expectations may benefit the U.S. stock market, the current expectations are already high, limiting further room for escalation, and the benefits have mostly been priced in. Additionally, based on historical experience, gold often experiences a significant pullback shortly after the election, presenting a window for portfolio adjustments.

Guosheng Securities' viewpoints are as follows:

Expectations for the Federal Reserve rate cut and the latest developments in the U.S. presidential election.

Latest rate cut expectations: Since early July, due to the weakening U.S. June non-farm payroll and CPI data, market expectations for a Fed rate cut have rapidly increased. As of July 19th, interest rate futures data indicate a 100% probability of the Fed cutting rates for the first time in September and twice within the year, with around a 50% chance of three rate cuts within the year. Prior to the end of June, the market only expected 1-2 rate cuts within the year.

Latest election developments: Biden announced his withdrawal from the race on July 21st, endorsing current Vice President Kamala Harris as his replacement. As of July 22nd, RCP's aggregation of various polls shows that in a final election between Trump and Biden, the support rates are 47.7% vs. 44.7%, and in a Trump vs. Harris scenario, the rates are 48.5% vs. 46.6%, with Trump maintaining a significant lead. However, as Biden has just withdrawn, there is limited polling data on Harris currently, requiring further observation. On the other hand, from July 15th to 18th, the Republican National Convention nominated Trump as the presidential candidate and selected Ohio Senator J.D. Vance as the vice presidential candidate, unveiling the party's campaign platform. The content continues Trump's policy stances, including tax cuts, tariffs, support for traditional energy and manufacturing, border security and deportation of illegal immigrants, and opposition to new energy vehicles.

Review of major asset performance during past Federal Reserve rate cut cycles.

Historical review: Since 1984, the Federal Reserve has undergone 6 rate cut cycles. Among them, the rate cuts in 1984 and 1995 did not lead to an economic downturn, considered as "preventive rate cuts," while the other 4 rate cuts resulted in recessions sooner or later, as shown in Chart 6. We have summarized the main asset performances during the start of each rate cut cycle as follows:

1. U.S. Stocks: In the 2 months before rate cuts, U.S. stocks mostly rose, except for a decline in 2001. After the rate cuts, U.S. stocks mostly continued to rise, except for declines in 2007 and 2001, as both instances were followed by economic recessions shortly after the rate cuts.

2. U.S. Treasuries: Throughout all 6 rate cut cycles, whether before or after rate cuts, and in the short or medium term, the 10-year U.S. Treasury yield consistently declined

3. USD: In the recent 4 interest rate cut cycles, the USD index showed a fluctuating downward trend in the 2 months before the rate cut; in 1989 and 1984, the USD index showed a continuous upward trend in the 2 months before the rate cut. After the rate cut, there is no clear pattern in the short-term or medium to long-term trend of the USD index.

4. Gold: In the 2 months before the rate cut, gold mostly showed a fluctuating upward trend, with only a decline in 1989; after the rate cut, the short-term trend of gold shows no clear pattern, while the medium to long-term trend mostly shows an upward trend.

5. Crude Oil: In the 2 months before the rate cut, crude oil mostly showed a fluctuating downward trend; after the rate cut, crude oil mostly continues to be weak in the short term, with no clear pattern in the medium to long-term trend.

6. Copper: In the 2 months before the rate cut, copper mostly showed a fluctuating downward trend; after the rate cut, copper mostly continues to be weak in the short term, with no clear pattern in the medium to long-term trend.

Review of major asset performances during Trump's victory in 2016 and defeat in 2020.

2016 Review: The voting day for the 2016 US election was on November 8th, with the results announced the next day, showing Trump's victory. Before the election, Trump's poll support rate was consistently behind Hillary's, and professionals generally did not expect Trump to win; however, starting from late October that year, due to the "email scandal," negative public opinion surrounded Hillary, increasing the possibility of Trump's victory. Looking at market performance, in the month before the election, US stocks and crude oil declined, while the USD index, US bond yields, gold, and copper rose; after the election, US stocks, US bond yields, and the USD index surged significantly, gold experienced a rapid short-term decline but a medium to long-term rise, while crude oil and copper rebounded rapidly in the short term but with limited upside, and then fluctuated downward in the medium to long term.

2020 Review: The voting day for the 2020 US election was on November 3rd, but due to counting issues, the final result was only determined a week later, during which Trump's vote rate shifted from leading to falling behind, resulting in his defeat. Looking at market performance, in the month before the election, US stocks and crude oil declined, while US bond yields, gold, and copper rose, and the USD index fluctuated; after the election, US stocks, crude oil, and copper continued to rise, the USD index and gold experienced a prolonged decline, US bond yields saw a short-term retreat but continued to rise in the medium to long term.

The underlying logic and future prospects of "rate cut trading" and "Trump trading".

Logic of "rate cut trading": A rate cut by the Federal Reserve implies loose liquidity, but also signals economic and inflation downturns, even a possible recession, leading to different asset trading focuses. For US bonds, these factors undoubtedly favor price increases and yield declines. For US stocks, in the pre-recession stage, the favorable liquidity dominates; after a recession, profit deterioration takes the lead. For commodities, gold's financial attributes dominate, while crude oil and copper are more influenced by economic and inflation downturns. For the USD index, its core influencing factors are the relative performance of the US and other countries' economies and monetary policies, leading to greater uncertainty in its trend.

Logic of "Trump trading": Based on the review of asset performances during two election periods, it is often observed that US stocks decline and gold rises before the election, with a reversal after the election, mainly reflecting the impact of risk aversion, which may not be significantly related to whether Trump is elected A more obvious point is that if Trump is elected, the US dollar index and US bond yields are more likely to rise, while the prices of crude oil and copper will be highly restricted. This is consistent with Trump's policy proposals mentioned earlier: on the one hand, stimulating the economy through measures such as tax cuts, and on the other hand, suppressing commodity prices through expanding energy development and easing geopolitical conflicts.

Future Outlook: Currently, the market's expectations for a Fed rate cut are already high, and the actual pace of rate cuts is unlikely to significantly exceed expectations. This means that the impact of "rate cut trades" on the market may weaken. With over 3 months until the US presidential election, there are still significant potential variables ahead. The "Trump trade" may continue for a longer period, but the pace may fluctuate. In terms of the performance of major assets, we maintain the following views:

1. US Stocks: Currently, the likelihood of a recession in the US economy within the year is low, so US stocks do not have a strong basis for sustained significant declines. However, current US stock valuations are high, historically, US stocks tend to experience seasonal adjustments in the third quarter, and US stocks also tend to perform poorly before elections. Although the warming expectations of rate cuts will be positive for US stocks, the market's rate cut expectations are already high, with limited room for further escalation, and the positive impact has largely been priced in. Therefore, we maintain the view that there will be downward pressure on US stocks before the election, but they are expected to rise again after the election.

2. US Dollar & US Bonds: We expect the weakening of US economic and inflation data, coupled with the warming expectations of rate cuts, to drive the US dollar index and US bond yields lower. An increase in the probability of Trump's victory will drive the US dollar index and US bond yields higher, to some extent offsetting each other. In addition, considering the limited room for further escalation of rate cut expectations by the Fed, and the continued weak performance of the European economy, we still maintain the view that the US dollar and US bond yields will fluctuate downward in the second half of the year, with limited significant declines.

3. Gold: In the short term, factors such as the difficulty of further significant escalation in rate cut expectations, global central banks slowing gold purchases, and crowded long positions in futures and options, will put pressure on gold for adjustments. However, in the medium to long term, gold still has great potential for upside, and there is still strong value in allocation after a pullback. Historically, gold often experiences a significant pullback shortly after the end of an election, which will be a window for allocation.

4. Crude Oil: In the second half of the year, global economic recovery momentum remains weak, coupled with the potential increase in oil supply if Trump comes to power, limiting the rise in oil prices. However, due to the peak summer demand season and OPEC+ maintaining production cuts, the supply and demand balance for crude oil in the third quarter is relatively tight, making it difficult for oil prices to sustain a decline, with a high probability of remaining at high levels or experiencing further slight increases. In the fourth quarter, if OPEC+ resumes production as planned and the peak demand period has passed, the downward pressure on oil prices will gradually increase.

For the domestic market, Trump's election would mean further tightening of US-China relations, and trade frictions may escalate, putting pressure on China's export chain and the RMB exchange rate.

Risk Warning: Unexpected events such as the US economy and inflation, Fed monetary policy, and geopolitical conflicts exceeding expectations, as well as black swan events during the US presidential election