US stocks crashed, interest rate cut in September?

Author: Revc, Golden Finance

U.S. stocks crashed, and technology stocks were sold off by the market

Tesla (TSLA.US) shares plunged 12% on Wednesday as its second-quarter profit fell short of expectations, the biggest drop since September 2020. At the same time, weak YouTube advertising revenue at Google's parent company Alphabet Inc. caused the Nasdaq 100 to fall about 3.7%, the biggest single-day drop since October 2022. The S&P 500 also fell 4.2% from its historical closing high.

With the sharp sell-off in technology stocks, the S&P 500 experienced its worst single-day drop since December 2022, breaking the record of never having a single-day drop of more than 2% since the global financial crisis in 2007. Data showed that the benchmark U.S. stock index fell 2.3% on Wednesday. In the previous 356 trading days, the index had never fallen more than 2%, setting a record for the longest time in 17 years. Last week, the index once exceeded the 200-day moving average by 15%, a level that has historically foreshadowed a market sell-off. In addition, data showed that the S&P 500 has added $17 trillion in market value since hitting a low in October 2022, marking one of the best performances so far this century, second only to its performance in 2021. In the 141 trading days this year, the S&P 500 index has only risen or fallen by at least 1% on 25 trading days, showing a decrease in market volatility. The valuation of technology stocks has entered the most frothy stage in history.

On Thursday, Eastern Time, the three major U.S. stock indexes closed mixed, the market fluctuated sharply throughout the day, and the market fell sharply at the end of the trading day, indicating that investors' panic has not subsided and more turbulence may occur in the future. After suffering the most violent sell-off since 2022, large technology stocks continued to fall sharply at the opening on Thursday, and then rose rapidly, but ultimately failed to regain lost ground. Among the seven giants, only Tesla closed higher. Investors are still struggling to digest a series of disappointing financial reports, as well as political and economic uncertainties.

However, the latest data shows that the U.S. economy is still resilient, which partially eased the market's decline. Data released by the Bureau of Economic Analysis of the U.S. Department of Commerce showed that the annualized quarterly rate of U.S. GDP in the second quarter grew by 2.8%, far higher than the expected 2%. Also announced was the initial value of the annualized quarterly rate of the core PCE price index in the second quarter, which was 2.9%. Although it was higher than the 2.7% expected beforehand, it was significantly lower than the data in the first quarter and the same period last year.

Market attention to the Fed's decision has reached a peak

According to the CME Group's 30-day federal funds futures prices, the possibility of the Fed cutting interest rates by 50 basis points in September has increased significantly. Earlier, Bill Dudley, former president of the Federal Reserve Bank of New York, said that due to the possibility of a recession, it is recommended that the Fed should cut interest rates as early as next week, which is different from his long-standing view of "keeping high interest rates for longer."

Data show that at the Fed's meeting on September 18, 2024, the probability of a 50 basis point drop in the target interest rate to 4.75-5.00% has risen to 22.3%, a significant increase from 10.7% the previous day, and much higher than last week's 3%.

On the other hand, the probability of a 25 basis point rate cut to 5.00-5.25% fell to 76.2%, a significant decrease from 89.1% the previous day and a significant decrease from 95% last week.

In addition, the probability of a 75 basis point rate cut is also increasing, with the probability of a cut to 4.50-4.75% rising to 1.5% from 0.3% the previous trading day, while the probability was zero last week.

These probability changes indicate that traders' sentiment is shifting, especially the increased probability of a rate cut to 4.75-5.00%, suggesting that market expectations for two rate cuts before the September meeting are strengthening. Although the Fed's final decision is still unknown, traders believe that a September rate cut is a foregone conclusion, just with a different magnitude.

GDP data supports the urgency of theFed to cut rates remains to be seen.

The data showed that the US GDP grew 2.8% year-on-year in the second quarter, higher than the 2.0% forecast by economists and stronger than the 1.4% in the first quarter. In addition, the data also showed that inflationary pressures have eased, providing room for the Fed to cut interest rates this year as widely expected by the market.

Traders are now waiting for the release of US personal consumption expenditures (PCE) data on Friday, which is the Fed's preferred inflation indicator. The market expects PCE to grow 2.4% year-on-year in June and 0.1% month-on-month; core PCE to grow 2.5% year-on-year and 0.1% month-on-month.

As the Fed's preferred inflation indicator, PCE was flat in May and increased 2.6% year-on-year. Excluding food and energy, which are more volatile, core PCE increased by 0.1% month-on-month and 2.6% year-on-year.

Strategy level

Specifically at the strategy level, the volatility of crypto assets is greater than their directionality, and swing trading is a better choice. Taking SOL as an example, the best swing price for SOL in the near future is between 130-140, not 170-180. (Does not constitute investment advice)

There are countless Schrödinger's cats in the crypto market. You don't know whether it is alive until the box is opened. Just as the trend of most cottage tokens is very random, especially MEME, so as mentioned above, the volatility of crypto assets is greater than their directionality, and the strategic level should formulate trading strategies based on the characteristics of the assets. In addition, do not exaggerate the role of K-line analysis. In most of the crypto market, the validity period of K-line analysis does not exceed 12 hours, especially in the crypto market under the support of multiple factors such as halving, ETF, election year, and interest rate cuts.

Summary

As of July 26, before the opening of the U.S. stock market, the panic index fell nearly 5% from the previous trading day, and the US30 and US500 also rose in a restorative manner.

Since the probability of CME interest rate adjustment is based on the 30-day federal funds futures pricing data, the possibility of the Federal Reserve's interest rate changes and the adjustment of U.S. monetary policy is analyzed using futures pricing data. In other words, the judgment on interest rate adjustments may mainly come from interest rate traders. Due to the correlation of interests, the judgment of interest rate traders is overly optimistic. Therefore, the possibility of a rate cut in September still needs to be further observed in economic and inflation data. For the crypto industry, it is still necessary to pay attention to the impact of volatility on strategies to avoid passive situations caused by excessive positions.