On July 31, the US Federal Reserve reduced interest rates 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 mitigating the blow from the upcoming crisis. Is the new cycle of lowering interest rates another, stronger, signal of an 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.” This is 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 ultimately remained at this level until the end of 2015. Stimulating the economy with “cheap money” helped to get rid of the catastrophic consequences of the mortgage market crisis in a short time and to avoid the complete collapse of the American economy.
How? A huge amount of money “thrown” into the domestic market with the help of cheap loans contributed to the development of business, lower unemployment and the restoration of stock markets. The events of 2007-2009 will forever form the basis of textbooks on economics, and a decrease in the interest rate of the US Federal Reserve for many years will be an alarming signal before the onset of disasters in the global financial system. Why?
A strong dollar contributes to the growth of attractiveness of the American market, the flow of investment from emerging markets (emerging markets) in favor of the United States. The general rule works: the stronger the dollar, the lower the price of raw materials, which are traditionally traded for dollars. The same goes for 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 a stronger dollar, that is, to increase the rate.
By that time, the stock markets, due to cheap money, grew leaps and bounds 3 times compared with 2009 and 1.5 times compared with the pre-crisis period. Rising rates led to the overflow of investment capital from emerging markets in the United States. The market began to overheat. To date, the unemployment rate is at its lowest levels in the last 20 years, stock markets are bloated and are ready to literally explode. This is evidenced by a huge buy back record since 2007. In fact, the companies themselves save the stock market from collapse by buying back their own shares. The US economy has reached such heights that it simply cannot develop further. There comes a period of stagnation, downtime. To avoid an uncontrolled catastrophe, it is necessary to take measures that will help relieve tension. For this, it is necessary to push the economy to the next stage of the economic cycle following the peak – to decline, triggering an artificial crisis. A short-term crisis will help restart the economy, release pressure and head to new heights in a few years. This requires lowering the interest rate, weakening the dollar, thereby “frightening off” investment capital towards government bonds or other markets.
This is perfectly understood by the current president of the United States, Donald Trump, in the same way as the Fed understands, including incumbent head Jerome Powell. The market was ready to lower rates by at least 25 basis points and begin easing monetary policy, which means a weakening dollar. Nevertheless, the events that occurred on July 31 and August 1, led to the dismay of many traders.
July 31, 2019
After the publication of the Fed’s decision to reduce rates by 25 points, instead of the expected depreciation of the dollar, traders observed its strengthening. As it turned out a little later, the market expected not only a decrease in rates, but also signals that the decline would continue in the near future. Since there will be another 3 Fed meetings in 2019, investors were expecting hints of another drop by the end of the year.
Jerome Powell had his own views on this. Referring to the stability of the economy and a strong labor market, the head of the Fed refused a more aggressive easing of monetary policy and hinted that in 2019 there may not be more rate cuts. Moreover, two FOMC members even opposed the rate cut on July 31 and beyond. These decisions and comments disappointed investors, and the dollar, instead of the expected weakening, sharply strengthened.
August 1, 2019
US President Donald Trump, of course, was not satisfied with the Fed decision. His reaction was not long in coming. It announced the introduction of additional duties of 10% on Chinese goods, totaling $ 300 billion per year. The head of state made a very harsh statement that he was not afraid of the collapse of stock markets, making it clear to the Fed that if they did not plan to take tougher decisions, he would do it himself, through the escalation of the trade war with China. Then followed the collapse of the dollar against other national currencies and gold, and the stock markets also decently decayed. Trump achieved his goal, albeit in the short term, but nevertheless made it clear that he intends to act decisively.
Asylum assets – gold, bonds, the Japanese yen and others, soared up, repelling the fall caused by the Fed decision on July 31.
The next key gold targets are the level of 1460 and higher, $ 1,500 per troy ounce. While the situation between the United States and China is deteriorating, and the US Federal Reserve is thinking about when to make the next decline, the market is still very intense uncertainty, which means the safe haven assets will gradually grow.
Bitcoin and other cryptocurrencies
Against the backdrop of incredible disasters, investors, hiding money in safe-haven assets, decided to capture a few cryptocurrencies along the way. The growth of the gold rate was also pulled by Bitcoin, which overcame an important resistance level in the region of 10150. The next goal and the turning point that will send Bitcoin to new heights is 12000.
Other TOP-5 cryptocurrencies grew less actively, but still, basically, 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 can it talk about? It is still difficult to draw definitive conclusions, but there may be a 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 cryptocurrency markets may grow as safe havens, and cryptocurrency platforms as risky assets and businesses may fall.
Trading solutions for traders
What should traders, especially cryptocurrencies, do when market volatility is atrocious? 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 evenly distribute trading capital among them, in accordance with the current market situation.
For example, it will now be relevant to open long positions in safe haven assets (gold, yen, franc and bitcoin) and short positions in risky assets (indices, stocks) and the US dollar.
The more diverse your trading portfolio, the less potential risks you carry. That is why it is important to choose a suitable trading platform. 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 current market conditions, and narrow spreads and low trading commissions make it possible to get more profit.
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