Source: Shenwan Hongyuan Strategy

Recently, there have been frequent liquidity risks in small and medium-sized banks in the US, and the Federal Reserve's previous firm goal of raising interest rates to fight inflation has been blocked, especially considering that financial risks have a potential impact on real credit demand.At the latest interest rate meeting in March 2023, the Federal Reserve raised interest rates by 25 bp to the level of 4.75% to 5% as scheduled, emphasizing that inflationary pressure still exists while maintaining close attention to financial risks, and removed the phrase “continuous interest rate hike.” Judging from the bitmap, there may be the last rate hike within the year, and 2024 may enter the interest rate cut channel (note that the current bitmap does not indicate the final pace of interest rate hikes).This means that the current round of interest rate hikes by the Federal Reserve may have come to an end.

Historically, what are the characteristics of global asset prices from the late stage of the Fed's interest rate hike to the interest rate cut stage? Risk appetite was repeated when the pace of interest rate hikes slowed, and risk appetite increased significantly after the rate hike ended. The rotation order of advantageous assets is: copper, oil → bonds → gold → stocks. There is no definite pattern in the trend of the US dollar.

Specifically: 1) End of interest rate hikes 1 (the last three stages of the Federal Reserve's rate hikes):Market risk appetite has not been clearly fixed; the stock market has had mixed ups and downs; US bond yields have fluctuated at high levels; gold has yet to break out of an upward trend; copper and oil have some resilience.

2) The end of interest rate hikes 2 (the Federal Reserve stopped the interest rate hike phase):Market risk appetite has clearly been restored, the stock market has rebounded, and emerging markets are better than developed markets; US bond yields have declined sharply, and the win rate of gold has begun to increase; copper and oil are rushing back; copper and oil are rushing back;

3) The stage of the Federal Reserve's interest rate cut:US bond yields continued to decline; US stocks gradually strengthened under precautionary interest rate cuts and moderate recession; however, under the deep recession, US stocks still declined significantly (such as 2000 and 2008); commodities such as copper and oil continued to weaken; and gold's upward margin increased markedly under a substantial recession.

US bond interest rate:With the exception of the end of the two rate hikes in early 1980, when interest rates on long-term US bonds continued to rise, interest rates on stage 2 long-term US bonds in the other interest rate hike cycles all fluctuated downward; with the exception of 2000, interest rates on long-term US bonds in the rest of the interest rate hike cycle phase 1 went up. After entering the interest rate cut stage, interest rates on US bonds declined trending downward.

Stock market:With the exception of 1980, the end stage 2 of interest rate hikes generally performed better than stage 1. A-shares and Hong Kong stocks outperformed US stocks in stage 1 and outperformed US stocks in stage 2. The interest rate cut stage is divided according to the active division of the Federal Reserve's response. After the preventive interest rate cut, the US stock index rose overall and achieved positive returns. During recessionary interest rate cuts, the probability that US stocks will receive negative returns in the first six months is still high, while the market rose six months later due to valuation support and improved expectations.

Commodities:From the end of the interest rate hike, gold gradually diverged from other commodity trends. Gold's historical win rate in stage 1 at the end of the Fed's interest rate hike was 0; while phase 2 was highly differentiated. Gold fell sharply in the first two rounds of interest rate hikes in 1980, while gold recorded sharp increases in 2006 and 2018. After entering the interest rate cut stage, especially during the recession-style interest rate cut phase, gold's upward elasticity is often greater. Crude oil is more likely to fall in phase 1 at the end of interest rate hikes, while phase 2 shows a more peak and fall. Crude oil often falls sharply after interest rate cuts begin. Under the influence of the post-interest rate hike cycle, the slowdown in demand for copper caused copper to show a higher decline trend.

Risk warning: US inflation exceeds expectations; global recession exceeds expectations

Editor/Somer