Mumbai: A key event for global equity and bond market investors is the upcoming US Federal Reserve meeting on 30-31 July. For now, the US Fed is expected to oblige the global market with a 25 basis points (bps) interest rate cut. One basis point is one hundredth of a percentage point. It should be noted that if the US Fed does move on rates, it is will be its first since the global financial crisis of 2008. According to market analysts, although the US Fed Chair Jerome Powell has opened the door to rate cuts pre-empting downside risks emanating from trade tensions and subdued global growth, fundamentals of the US economy do not justify the Fed easing.
Nonetheless, according to Singapore-based DBS Bank a look at two past instances from the 1990s (95/96 and 98/99) provide guidance on how things would play out if Fed were to adopt a similar strategy by adopting for slew of rate cuts to boost the US economy. In these both cases, the US Fed had cut by a cumulative 75 bps within a short span of time.
“Given widespread perception of the “Powell Put," we think the US stock market will determine the magnitude of rate cuts. Tightening financial conditions (from falling stock prices) would prompt the Fed to react with more urgency. Stock prices have been remarkably resilient thus far, suggesting that the easing cycle may be shallow," DBS Bank analyst Eugene Leow said in a report on 22 July.
On the rates side, Leow said that longer-term US Treasury yields start to bottom as the Fed starts to cut. “In 1995/96, the trough in 10-year yields formed when the Fed cut for the third time. In 1998/99, the low was hit after the first cut," added the report. As for US treasuries, he feels with the market already factoring in four cuts over the coming few quarters, it does not make sense to chase yields lower. Leow find emerging market yields much more attractive. As for Indian bonds, he foresees room for a further rally as the rate cut cycles is not done.
Central banks globally are moving towards monetary easing. The European Central Bank and Bank of Japan are slated to meet this week. In recent months, central banks of China, India, Malaysia, and the Philippines have opted for accommodating measures with South Korea and Indonesia being the latest.