On July 31, the US Federal Reserve lowered the interest rate by 25 basis points for the first time in 10 years, from 2.5% to 2.25%.
This was the most anticipated event of the year in the financial markets, since the beginning of lowering interest rates in 2007, as it became known later, was aimed at softening the blow from the upcoming crisis. Is the new cycle of interest rate cuts another, stronger, signal of the approaching crisis? Let’s look at how the Fed’s decision will affect key assets: the stock market, gold and cryptocurrencies.
At that time, the financiers had a very popular expression: “If Benya lowers, then Benya knows something.” We are talking about the head of the Fed Ben Bernanke, who held this post from 2006 to 2014. In the period from 2007 to 2009, the Federal Reserve lowered the rate from 5.25% to 0.25%, which eventually remained at this level until the end of 2015. Stimulating the economy with “cheap money” it helped to get rid of the catastrophic consequences of the mortgage lending market crisis in a short time and avoid a complete collapse of the American economy.
In what way? The huge amount of money “thrown out” on the domestic market with the help of cheap loans contributed to the development of business, the reduction of unemployment and the recovery of stock markets. The events of “2007-2009” will forever form the basis of textbooks on economics, and the reduction of the US Federal Reserve interest rate for many years will be an alarming signal before the beginning of cataclysms in the global financial system. Why?
A strong dollar contributes to the growth of the attractiveness of the American market, the flow of investment from emerging markets in favor of the United States. The general rule works: the stronger the dollar, the lower the prices of raw materials, which are traditionally traded for dollars. The same applies to the prices of gold, ferrous and non-ferrous metals. That is why in 2015 it was decided to “turn off the printing press” and change the QE program to strengthen the dollar, that is, to raise the rate.
By that time, the stock markets, due to cheap money, had grown by leaps and bounds by 3 times compared to 2009 and by 1.5 times compared to the pre-crisis period. The increase in rates led to a flow of investment capital from emerging markets to the United States. The market began to overheat. At the moment, the unemployment rate is at the lowest values in the last 20 years, stock markets are inflated and ready to literally explode. This is evidenced by the colossal size and record-breaking buy back since 2007. In fact, the companies themselves save the stock market from a collapse by buying their own shares. The US economy has reached such heights that it simply cannot develop further. There is a period of stagnation, downtime. To avoid an uncontrolled catastrophe, it is necessary to take measures that will help relieve tension. To do this, it is necessary to push the economy to the next stage of the economic cycle, following the peak – to decline, launching an artificial crisis. A short-term crisis will help to reset the economy, release the pressure and head to new heights in a few years. To do this, it is necessary to lower the interest rate, weaken the dollar, thereby “scaring” investment capital towards government bonds or other markets.
The current US president understands this perfectly well Donald Trump, just as it is understood in the Fed, including the current head Jerome Powell. The market was ready for a rate cut of at least 25 basis points and the beginning of monetary policy easing, which means that the dollar will weaken. However, the events that occurred on July 31 and August 1, led to confusion for many traders.
July 31, 2019
After the publication of the Fed’s decision to cut the rate by 25 points, instead of the expected decline in the dollar, traders observed its strengthening. As it turned out a little later, the market expected not only a rate cut, but also signals that the decline would continue in the near future. Since there will be 3 more Fed meetings in 2019, investors expected hints of another downgrade by the end of the year.
Jerome Powell had his own views on this. Citing the stability of the economy and a strong labor market, the head of the Federal Reserve refused to more aggressive monetary policy easing and hinted that there may not be any more rate cuts in 2019. Moreover, two members of the FOMC completely opposed the rate cut on July 31 and in the future. These decisions and comments disappointed investors, and the dollar, instead of the expected weakening, sharply strengthened.
August 1, 2019
President of the United States Donald Trump, of course, was dissatisfied with the Fed’s decision. His reaction was not long in coming. It was announced the introduction of additional duties of 10% on Chinese goods, totaling $300 billion a year. The head of state made a very sharp statement that he was not afraid of a stock market collapse, making it clear to the Federal Reserve that if they did not plan to make tougher decisions, he would do it himself, through an escalation of the trade war with China. This was followed by the collapse of the dollar against other national currencies and gold, and the stock markets also sank decently. Trump has achieved his goal, albeit in the short term, but still made it clear that he intends to act decisively.
Safe-haven assets-gold, bonds, the Japanese yen and others, soared up, beating off the fall caused by the Fed’s decision on July 31.
The next key targets for gold are the level of 1460 and above, $ 1,500 per troy ounce. While the situation between the US and China is deteriorating, and the US Federal Reserve is thinking about when to make the next reduction, there is still very tense uncertainty in the market, which means that safe-haven assets will gradually grow.
Bitcoin and other cryptocurrencies
Against the background of incredible cataclysms, investors, hiding money in safe-haven assets, decided to grab some cryptocurrencies along the way. The growth of the gold exchange rate also pulled bitcoin, which overcame an important resistance level around the 10150 mark. The next goal and the tipping point that will send Bitcoin to new peaks is 12000.
Other cryptocurrencies from the TOP 5 grew less actively, but still, mostly, remained in the “green zone”. LTC and BCH performed best, adding 4.5% each. ETH and XRP remained almost at their own, +1.4% and -0.7%, respectively.
I would like to note an interesting observation – full-fledged cryptocurrencies, such as BTC, LTC, BCH and others, showed stronger growth than platforms such as Ethereum, Ripple, Tron, EOS and others.
What does this mean? It is difficult to make categorical conclusions yet, but there may be a certain parallel between precious metals (safe haven assets) and full-fledged cryptocurrencies (BTC, LTC, BCH, etc.), as well as between technology companies (stocks, risky assets) and crypto platforms and tokens on them (Ethereum, Tron, EOS and others). Accordingly, in the future, at such moments in the markets, cryptocurrencies may grow as safe haven assets, and cryptocurrency platforms, as risky assets and businesses, may fall.
Trading solutions for traders
What should traders, especially those who trade cryptocurrencies, do at such moments when market volatility is brutal? Pay attention to the dynamics of the VIX (Volatility Index) over the past couple of days.
Diversify your trading portfolios with a variety of financial instruments. Divide assets into classes and distribute trading capital evenly among them, in accordance with the current market situation.
For example, now it will be relevant to open long positions on safe-haven assets (gold, yen, franc and bitcoin) and short positions on risky assets (indices, stocks) and the US dollar.
The more diverse your trading portfolio is, the less potential risks you bear. That is why it is important to choose a suitable platform for trading. The PrimeXBT trading platform can offer traders a wide range of financial instruments, including leading cryptocurrencies, Forex trading pairs, CFDs for oil and natural gas, leading world indices, as well as spot contracts for gold and silver. Such a variety of financial instruments is perfect for trading in the current market conditions, and narrow spreads and low trading commissions make it possible to get more profit.
For those who are not yet ready to trade on their own, the joint investment module from the Covesting cryptocurrency exchange will soon appear on the platform. The module will allow you to transfer funds to the management of funds with high ROI indicators created by professional and successful traders. Before transferring funds to the fund management, a trader can get acquainted with the information about the fund, its trading strategy and statistics. If you are already an experienced trader and would like to earn even more, the Covesting module is also suitable for you. You can create your own fund and raise funds for management.
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