[Altos Weekly Traders Edge] Rate Cuts and the Markets...Details Inside

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By reducing rates by 50 basis points, rather than the expected 25, the central bank signaled that it's prioritizing labor market concerns over inflation. This marks the official start of the Fed's long-awaited pivot toward easier monetary policy. Key points from the meeting: - 50 basis points cut in interest rates. - Two more cuts anticipated before the end of 2024. - A slight dissent from Fed governor Miki Bowman, who advocated for a smaller 25 basis points cut. - Disinflationary trend continues, as the Fed shows confidence in inflation nearing 2%. This shift in focus from inflation to unemployment highlights the Fed’s concern for the slowing job market. The central bank seems to be taking a “risk management” approach, aiming to preempt further economic slowdown by taking a more aggressive stance. Why 50 basis points instead of 25? - Inflation risk is currently seen as lower than the risks to employment and consumption. - The most persistent inflationary pressure is in housing. Lower mortgage rates, driven by significant rate cuts, could ease the burden on the housing market. - U.S. sovereign bond maturities are concentrated at the short end, so cutting short-term rates aggressively helps alleviate the interest burden. Bond Market Signals More Rate Cuts to Come Despite the Fed’s 50 basis points cut, the bond market is still signaling more rate reductions. The gap between short-term rates and 2-year Treasury yields is the widest it has been in over 30 years. This implies that the market anticipates additional cuts, possibly sooner and deeper than the Fed's current projections. Traders are betting that the Fed may have to ease further to counter slowing economic growth and tame market volatility, keeping the bond market in a state of anticipation. The Second Inflation Wave Risk Looms The risk of a second inflationary wave is top of mind for economists. History has shown that premature or excessive rate cuts can reignite inflationary pressures. Both the 1940s and 1970s saw inflation rebound after central banks loosened monetary policy too early. Historical data across developed economies suggests that a second wave of inflation hits nearly 87% of the time after aggressive rate cuts. Nasdaq 100: A Highly Concentrated Bet on Big Tech The tech-heavy Nasdaq 100 remains as concentrated as ever, with just a few mega-cap stocks driving much of the index's performance. Here's a breakdown of where your money goes when you invest in the Nasdaq 100 (QQQ) ETF: - $90 in Apple (AAPL) - $83 in Microsoft (MSFT) - $77 in Nvidia (NVDA) - $52 in Broadcom (AVGO) - $51 in Amazon (AMZN) - $48 in Meta (META) - $47 in Google (GOOGL) - $29 in Tesla (TSLA) The remaining $523 is spread across the other 92 stocks. This concentration means that any change in these tech giants’ stock prices could significantly impact the index. Gold Set to Shine as Rates Fall Historically, gold has been a safe haven when interest rates drop. As real yields on U.S. Treasury bonds decline (nominal rates minus inflation), the opportunity cost of holding non-performing assets like gold decreases. Investors tend to turn to gold as a hedge against both inflation and economic uncertainty during periods of monetary easing. Summing it Up The Fed's risk management approach through a 50-basis-point rate cut has triggered a cascade of effects in the market. While the bond market anticipates further cuts and gold stands to benefit, the risk of a second inflationary wave remains a concern. - The Team at Altos Trading In the next article, while the Fed's rate cuts offer immediate relief to businesses, the resulting weaker dollar sets the stage for a complex global currency dance, with implications for U.S. stocks hanging in the balance. Sponsor It’s the most incredible pattern we’ve found yet A pro trader from Florida has cracked a unique candlestick pattern linked to Wall Street’s algorithms. With 17 wins out of 20 trades, it’s helped him grow his model portfolio by 85% annually since 2020. [Watch and learn this pattern now!]( By clicking the link above you agree to periodic updates from The TradingPub and its partners ([privacy policy]( The Dollar Could Threaten Stocks: Why Global Rate Cuts Matter Now More Than Ever The Federal Reserve’s aggressive interest rate cut last week sent ripples through the financial markets. While it provided immediate benefits to companies by lowering borrowing costs, it also triggered a more subtle but equally impactful effect — a weakening U.S. dollar. This shift in the dollar's value could become a critical factor for stock market investors in the coming months, especially as central banks across the globe continue easing their monetary policies. Why the Weaker Dollar Matters for U.S. Companies A weaker dollar might not sound like headline news, but its effects are far-reaching, particularly for U.S. companies that rely heavily on international markets. When the dollar declines in value, U.S. goods become cheaper for foreign buyers, boosting exports and driving sales abroad. This increased competitiveness in international markets can be a key driver of revenue growth for multinational companies, especially in sectors like manufacturing and technology, which have a significant portion of their earnings tied to foreign markets. Beyond helping U.S. exports, a weaker dollar also makes the stock market more attractive to foreign investors. With a softer dollar, overseas buyers get more for their money when investing in American assets, which can help boost stock prices further. The Role of Global Rate Cuts in Currency Movements Central banks around the world are now joining the Federal Reserve in cutting interest rates, a strategy that is closely tied to currency movements. Typically, higher interest rates make a currency more attractive because they offer better returns on investments. Conversely, when central banks slash rates, their currencies tend to weaken. This dynamic has significant implications for global trade and stock markets. As central banks ease monetary policy to support their economies, they're also paying close attention to their currencies' value. A rising currency can hurt exports by making goods more expensive for foreign buyers, so many countries are taking active steps to ensure their currencies don't strengthen too much. The U.S. dollar has already weakened notably since the middle of the year when markets began to anticipate the Federal Reserve's cuts. The dollar index, which measures the greenback against a basket of other major currencies, has dropped from nearly 106 in July to just above 100 in recent days. Global Central Banks Respond This shift in the dollar’s value hasn’t gone unnoticed. Other central banks are following suit, adjusting their monetary policies to prevent their currencies from appreciating and hurting their export-driven economies. Sweden, for example, slashed its benchmark interest rate for the third time this year just last week. On Thursday, Switzerland is expected to announce a similar move, and may even explicitly discuss interventions in the currency markets to keep the franc from rising too much. Over in Asia, Japan is treading cautiously when it comes to rate hikes. The yen has seen volatility in recent months, particularly during the market turbulence in August, and Japanese policymakers are wary of any actions that could cause the yen to appreciate too quickly. Meanwhile, China, in an unexpected move, delivered a surprise rate cut earlier this week. By keeping the renminbi trading within a band, China hopes to limit extreme currency swings that could disrupt its economy. What Does This Mean for U.S. Stocks? For now, as long as central banks worldwide lower rates in predictable ways, currency fluctuations should remain relatively stable. However, with multiple central banks acting simultaneously, there is always the potential for surprises. If any country deviates from the expected script, currency markets could see fresh volatility — and this, in turn, could ripple through to U.S. stocks. Investors would be wise to keep an eye on the dollar's exchange rate in the coming months. As central banks around the world embark on their rate-cutting campaigns, the value of the dollar — and its impact on U.S. stocks — will be a crucial factor to watch. Whether you're trading blue-chip stocks or tech giants with global exposure, the currency markets may hold the key to the next big move in the market. Sponsor [New Customers earn 5.25% APY* (variable)]( Store your money with Cash Reserve, a high-yield account built for peace of mind. New customers earn 5.25% variable APY*—that’s 13x higher than the national savings rate. ** Plus, your money’s FDIC-insured up to $2M†at our program banks and no limits on withdrawals and transfers. **The national average savings account interest rate is reported by the FDIC (as of 5/15/23) as the average annual percentage yield (APY) for savings accounts with deposits under $100,000. [Sign Up Now!]( Disclaimer: The Altos Trading Alert Newsletter is published as an information service for subscribers, and it includes opinions as to buying, selling and holding various stocks and other securities. 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Altos Trading, including its owner, does not participate in any trades issued through the alert services. Subscribers to Altos Trading or any other persons who buy, sell or hold securities should do so with caution and consult with a broker or investment adviser before doing so. Trading securities and options involves risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade securities and options, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Performance figures are based on actual recommendations. Due to the time critical nature of trading, brokerage fees, and the activity of other subscribers, there is no guarantee that subscribers will mirror the performance of the service. Performance numbers shown are based on trades subscribers could enter based on the trade alerts. 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