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Winners and losers from US Federal Reserve's first rate cut in a decade

Publication Date: 02 Aug 2019 - By ReachX Team By ReachX Team
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Equity Fundamental Investment Strategies Macro FX & Rates Multi Asset USA Global

There are winners and losers from the US Federal Reserve’s first rate cut in a decade, and US and global investors now need to revise their portfolios, according to one of the world’s largest independent financial advisory organisations.

On Wednesday (31 July), America’s central bank cut interest rates by 25 basis points, which divided market opinion. 

Tom Elliott, International Investment Strategist at deVere Group, said: “U.S stocks had taken heart from a recent upturn in domestic economic data and from the prospect of the Fed and other central banks easing monetary policy over the coming months. This, it is argued, will help the current cycle of US and global economic growth.

“However, the US Treasury market, is indicating that a recession is around the corner. The inverted Treasury yield curve is cited as ‘exhibit number one’ for this thesis.”

Elliott said the decision by the Fed to cut rates suggests that while the policymakers believe the economy is looking in good shape, there are also some growth headwinds on the horizon and inflation is low, so a rate cut will act as a buffer.

Where does this leave for US and global investors?

“Investors can incorporate both opinions into a portfolio by owning growth-sensitive stocks and misery-loving government bonds. This multi-asset approach is standard amongst long-term investors,” Elliott added.

Specifically, the rate cut will put further downward pressure on the US dollar, with the yen, Swiss franc and euro likely to rise against the greenback.

“Emerging stock markets should gain the most from lower Fed rates and a weaker dollar, since the massive US dollar debt many emerging market companies took on in the early years of this decade becomes cheaper to service and repay in local currency terms.”

US exporters should also benefit, plus the battered British pound may get some near-term relief from a Fed rate cut, particularly as the Bank of England seems unlikely to be cutting its own benchmark rates any time soon.

“US and global investors now need to revise their portfolios to ensure that they are best-positioned to take advantage of  opportunities and mitigate the risks as we enter what is likely to be a new era of rate cutting for the Fed,” Elliott concluded.  

 

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