Zhongtong Securities has released a research report stating that the market's expectation for a rate cut by the US Federal Reserve is already high, and the actual pace of the rate cut is likely to be less than expected. This means that the impact of the "rate cut trade" on the market may weaken. The US presidential election is still more than three months away, and there are still many potential variables. The "Trump trade" may continue for a long time, but the pace may be volatile. Although the rise in rate cut expectations may be bullish for US stocks, the market's expectations for rate cuts are already high, and there is limited room for further increases, meaning that the bullish market sentiment has been exhausted. Additionally, based on historical experience, gold often experiences a significant pullback shortly after the election ends, creating a window of opportunity for adjustment.

The perspective of Zhongtong Securities is as follows:

Expectations for a rate cut by the US Federal Reserve and changes in the latest US presidential election.

Latest rate cut expectations: since early July, due to weak non-farm payrolls and CPI data for June in the United States, expectations for the US Federal Reserve to cut interest rates have quickly heated up. As of July 19th, interest rate futures data showed that the probability of the Federal Reserve's first rate cut and two rate cuts within the year have both reached 100%, and there is about a 50% probability of three rate cuts within the year, whereas the market only expected one to two rate cuts within the year before the end of June.

Latest developments in the US presidential election: Biden announced his withdrawal from the presidential race on July 21st and expressed his support for current Vice President Kamala Harris to replace him in the campaign. As of July 22nd, the summary of the institutional polls by RealClearPolitics shows that if the final election is between Trump and Biden, they will receive 47.7% and 44.7% respectively; if it is between Trump and Harris, they will receive 48.5% and 46.6% respectively, with Trump still maintaining a significant lead. However, since Biden just announced his withdrawal, there are currently fewer poll data for Harris, and more observations are needed in the future. On the other hand, from July 15th to 18th, the Republican National Convention formally nominated Trump as their presidential candidate and announced Ohio Senator J.D. Vance as their running mate, as well as their campaign platform. In terms of content, it still continues Trump's consistent policy positions, which mainly include tax cuts, increased tariffs, support for traditional energy and manufacturing, border closures and expulsion of illegal immigrants, opposition to new energy vehicles, and more.

When the US Federal Reserve began its interest rate cutting cycles, major asset classes performed accordingly.

Historical review: since 1984, the US Federal Reserve has experienced six interest rate cutting cycles. Among them, the interest rate cuts of 1984 and 1995 did not result in an economic recession, and were considered as "preventative rate cuts." However, after the other four interest rate cuts, a recession occurred sooner or later. We have reviewed the performances of major assets during each cycle, as follows:

1) US stock: in the two months before the rate cut, US stocks mostly rose, except for a decline in 2001. After the rate cut was implemented, US stocks mostly continued to rise, but began a continuous decline in 2007 and 2001, as a recession occurred shortly after the rate cut in those two years.

2) US bonds: in all six interest rate cutting cycles, whether before or after the rate cut, and in the short-term or long-term, the 10-year US Treasury bond yield continued to decline.

3) US dollar: in the last four interest rate cutting cycles, the US dollar index tended to decline in the two months before the rate cut, and in 1989 and 1984, the US dollar index rose consistently in the two months before the rate cut. After the rate cut was implemented, there was no clear trend in the short-term or long-term movement of the US dollar index.

4) Gold: in the two months before the rate cut, gold mostly fluctuated upward, except for a continuous decline in 1989. After the rate cut was implemented, there was no clear trend in the short-term movement of gold, but it mostly rose in the long-term.

5) Crude oil: in the two months before the rate cut, crude oil mostly fluctuated downward; after the rate cut was implemented, crude oil mostly remained weak in the short-term and had no clear trend in the long-term.

6) Copper: in the two months before the rate cut, copper mostly fluctuated downward; after the rate cut was implemented, copper mostly remained weak in the short-term and had no clear trend in the long-term.

Revisiting the performance of major assets during Trump’s 2016 victory and 2020 defeat.

Reviewing 2016: The US presidential election was held on November 8th, 2016, with the vote count completed the next day, and Trump winning the race. Before the election, Trump's poll support remained lower than Clinton's, and professionals generally did not expect Trump to win. But since late October of that year, due to the "email gate" incident, Clinton fell into negative public opinion, and the possibility of Trump's victory gradually increased. In terms of market performance, in the month before the election, US stocks and crude oil declined while the US dollar index, US Treasury bond yields, gold, and copper rose. After the election, US stocks, US Treasury bond yields, and the US dollar index increased significantly, while gold rapidly declined in the short-term but rose in the medium to long-term; crude oil and copper quickly rebounded in the short-term, but the rebound was highly limited and medium to long-term performance was apprehensive.

2020 review: The voting day of the US presidential election in 2020 was November 3, but due to counting issues, the final result was not determined until a week later. During this period, Trump's vote rate went from leading to falling behind and eventually lost the election. From the market performance perspective, one month before the election, US stocks and crude oil fell while US bond yields, gold, and copper rose, and the US dollar index fluctuated. After the election, US stocks, crude oil, and copper continued to rise, and the US dollar index and gold experienced a long period of decline, while US bond yields fell in the short term and continued to rise in the medium and long term.

The underlying logic and future prospects of 'cutting interest rate trading' and 'Trump trading'.

The logic of 'cutting interest rate trading': The Fed's interest rate cut means loose liquidity, but it also means economic and inflation downturn, and even possible recession. Therefore, the focus of different asset trading is different. For US bonds, these factors are undoubtedly bullish for prices and bearish for yields. For US stocks, in the stage where the recession has not yet occurred, loose liquidity is the dominant positive factor. After the recession occurs, deteriorating profitability will become the dominant factor. For commodities, the financial attribute of gold is dominant, while the industrial attributes of crude oil and copper are dominant. Therefore, gold is more traded for loose liquidity, while crude oil and copper are more traded for economic and inflation downturn. For the US dollar index, its core influencing factors are the relative performance of the US and other countries in terms of economy and monetary policy, so the uncertainty of its trend is greater.

The logic of 'Trump trading': According to the review of asset performance during the two elections, US stocks often fell and gold rose before the election, and then a reversal occurred after the election, mainly reflecting the impact of risk aversion, which may not be related to whether Trump was elected. Relatively obvious, 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, which is consistent with Trump's policy advocacy: on the one hand, stimulating the economy through tax cuts, and on the other hand, suppressing commodity prices through expanding energy development, easing geopolitical conflicts, and other means.

Future prospects: The market's expectations for the Fed's interest rate cut are already high, and the actual pace of interest rate cuts may be difficult to significantly exceed expectations, which means that the impact of the 'interest rate cut trading' on the market may trend towards weakening. There are still more than three months before the US presidential election, and there are still major potential variables afterwards. 'Trump trading' may continue for a long time, but the rhythm may fluctuate. As for the performance of major assets, we still maintain the previous views:

1) US stocks: At present, the possibility of a US economic recession this year is relatively low, so US stocks do not have the basis for sustained large-scale decline. However, the current valuation of US stocks is too high. Historical records show that US stocks are prone to seasonal adjustments in the third quarter, and US stocks also tend to perform poorly before the election. Although the warming of rate cut expectations will be bullish for US stocks, the current market's rate cut expectations have already been priced in, and there is limited room for further escalation. Therefore, we maintain the judgment that US stocks will face pressure to adjust before the election and are expected to rise again after the election.

2) US dollar & US bonds: We expect that the weakness in US economic and inflation data and the warming of expectations for interest rate cuts will drive down the US dollar index and US bond yields. The probability of Trump's election will drive up the US dollar index and US bond yields, and the two will be offset to some extent. In addition, considering that there is limited room for further escalation of market expectations for Fed interest rate cuts and the European economy still performs weakly, we still maintain the judgment that the US dollar and US bond yields will shake downward in the second half of the year and will be difficult to experience a significant decline.

3) Gold: In the short term, due to factors such as difficult further escalation of expectations for interest rate cuts, global central banks slowing down gold purchases, and crowded long positions in futures and options, gold faces downward pressure in adjustment. However, in the medium and long term, gold still has great potential for upward movement and still has strong configuration value after the callback. From historical experience, gold often experiences a significant correction shortly after the end of the election, which will usher in a window period for configuration.

4) Crude oil: In the second half of the year, the momentum of global economic recovery is still weak, and if Trump takes office, it will increase the supply of crude oil, so the price of oil will be highly restricted. However, due to the strong demand in summer peak season and OPEC+ maintaining production cuts, the supply and demand of crude oil are relatively tight in the third quarter, and the price of oil is difficult to sustainably decline. It is highly likely to maintain high-level shocks or further minor gains. After the fourth quarter, if OPEC+ resumes production as planned and the peak season for demand has passed, the downward pressure on oil prices will gradually increase.

For the domestic market, Trump taking office means that the US-China relationship will further tighten, and trade frictions may escalate, which will put pressure on the domestic export chain and RMB exchange rate.

Risk warning: US economic and inflation data, Fed monetary policy, geopolitical conflicts, etc. continue to exceed expectations, and black swan events occur during the US election.