CICC Securities: Focus on the two waves of trading rhythm of gold if the first rate cut lands, increase allocation of gold + growth stocks

According to the financial news app Zhitong Finance, Changjiang Securities released a research report stating that the Federal Reserve interest rate cycle is an important clue for asset trading. The first rate cut is a significant signal of a turning point in interest rates, and under its strong pulse, asset representation often follows a pattern. In this special round, with interest rates fluctuating under the resilience of the United States, the market is hesitant to trade on the left side. From 22 to the present, two rate turning point trades have been refuted, increasing market caution in judging turning points and leaning towards increasing allocations on the right side. With the high probability of the first rate cut in September, attention should be paid to its signal significance and historical representation in the third quarter. Once implemented, right-side funds may strengthen rate cut trades. In terms of gold strategy, the main uptrend continues, focusing on certainty and two waves of trading rhythms; in terms of metal strategy, rotation is orderly, increasing allocations to gold + growth-like assets, and waiting for cyclical resources to consolidate.

The main points of Changjiang Securities are as follows:

Historical representation, the first rate cut is an important turning point for interest rate-sensitive assets

In the commodity market, gold and copper resonate in different directions. Behind this is weak economy and strong liquidity. Basic metals will face pressure tests in the accelerated phase of the U.S. recession, while precious metals will continue to rise under the downward trend of interest rates. In the equity market, there is easy switching between large and small caps, and growth-like assets may emerge from a weak position. Strong interest rates in the past two years have continuously suppressed the valuation of small-cap growth stocks. Once interest rate expectations loosen, there may be significant corrections. Of course, the extent of correction still depends on the intensity of the recession and the rate cut magnitude.

Trading rhythm: Three-stage deduction, expectation stage-first rate cut stage-rate cut stage sorting

In the past 90 years, there have been four rate cuts, with 2019 being the most referenceable. Around the first rate cut, the trading logic of the metal sector is often divided into three stages:

First stage/expectation stage, as the economy weakens, the Fed turns dovish, with copper leading the decline in bulk commodities, and the probability of a rate cut significantly increasing. From May to July, with core data such as non-farm payrolls and hourly wages weakening as signals, the economy unexpectedly began to decline, leading the Fed's interest rate meeting to first hint at a dovish stance and cut interest rates, causing U.S. bond rates to ease. On the commodity side, the demand refutation led to a rapid decline in bulk commodities led by copper, completing the previous peak season gains. Gold turned to upward interest rate clues.

Second stage/first rate cut stage, as the economy continues to weaken, the probability of a rate cut rises again, assets fully factor in the expectation of the first rate cut and oscillate while waiting for it to land. In August, with the landing of the first rate cut as the dividing point: before the first rate cut, as the probability of a rate cut rose to 120% and assets fully factored in the expectation, both gold and copper entered a phase of oscillation while waiting for the landing; after the landing, the market turned to overdraw future rate cut probabilities and frequencies, accelerating recession trades, with gold strength and copper weakness continuing.

Third stage/rate cut stage, as the rate cut progresses, the downward interest rate helps stabilize and rebound real estate enterprises, the economy slows down, and assets gradually transition from recession to recovery trades. From August to October, after three consecutive rate cuts, the economic slowdown led to a stabilization and reversal in interest rate-sensitive real estate and manufacturing sectors. Recession trades dulled, gold prices significantly retraced, and left-side funds gradually positioned themselves in cyclical assets such as copper.

Gold strategy: The main uptrend continues, focusing on certainty, and focusing on two waves of trading rhythms in gold stocks

The certainty of the uptrend in the first rate cut trade is strong, as it is an important turning point for interest rate-sensitive assets. As one of the few countercyclical products in the metal sector, it has both absolute and relative allocation value within its window. In terms of trend, the second stage of the "three-stage" gold bull market, the rate cut expectation trade, is the main uptrend stage, with profit valuation resonance and considerable elasticity In terms of rhythm, there may be two opportunities for gold stocks to rise: in the first 2-3 months before the first rate cut, as the probability of a rate cut increases; within 1 month after the first rate cut, as the market focuses on the probability and frequency of subsequent rate cuts. In terms of signals, a sharp drop in copper, leading the bulk commodities, often marks an important trading opportunity. A sharp drop in copper signifies market confirmation of a recession, and weakening inflation expectations will open up space for interest rate cuts. With the current situation, the sharp drop in copper leading the bulk commodities presents an important opportunity.

Metal Strategy: Orderly rotation, increase allocation to gold + growth-like assets, and wait for the consolidation of pro-cyclical resources

Before and after the first rate cut, there is a clear rotation pattern in the metal sector, from "rate cut expectations-rate cut implementation-rate cut progress," often following "gold-new materials/new energy-pro-cyclical resources": During the period of excess returns for gold, from rate cut expectations to implementation, at the turning point of interest rates; In the early stages of interest rate decline, growth-like assets will recover rapidly, and the sub-sectors of new materials and new energy may outperform the sector. Over the past two years, due to the double impact of industry fundamentals and U.S. bond rates/valuations, leading companies within the sector have bottomed out sufficiently, with strong profit and loss in allocation; In the mid-term of interest rate decline, with stabilization in real estate and manufacturing, copper leading pro-cyclical resources may start to rise with fundamental support. The probability of a soft landing this time is high, and opportunities on the right side of the pro-cyclical sector may not wait too long. Currently, it is suggested to increase allocation to gold + growth-like assets within the metal sector and wait for the consolidation of pro-cyclical resources.

Risk Warning: Significant changes in the Fed's attitude towards rate cuts; external disturbances from "black swan" events; geopolitical risks; historical experiences becoming ineffective