The Dow plunged a thousand points! Emergency rate cut is coming

• News
• 2024-10-25

As the new week begins, the global sell-off has returned to the United States after sweeping across the Eurasian continent. As of the time of writing, the three major European stock indices have generally fallen by more than 2.5%, setting a six-month low, with the Dow Jones Industrial Average (DJIA) dropping by over 1,000 points at the start of trading and the Nasdaq Composite Index falling by more than 6%. The market value of the "seven giants" has evaporated by $1.3 trillion. The Chicago Board Options Exchange Volatility Index (VIX), also known as the fear index, has surged by over 130% to 55 points, the highest level since 2020. Safe-haven currencies, the Japanese yen and Swiss franc, have skyrocketed as crowded carry trades collapse, with the market speculating that some investors are selling profitable assets, and liquidity panic has also led to a rise and fall in the precious metals market.

Technology stocks are in turmoil. Last week, disappointing quarterly results from Intel, Amazon, and Arm, as well as poor performance from Microsoft and Nvidia, sparked market concerns. These bearish factors have continued to make the technology sector the worst-performing industry since the second half of the year, with the Philadelphia Semiconductor Index plunging by 23% in the past month, reaching a four-month low.

However, the industry's bearish trend is still ongoing this week. On Monday, Bank of America announced that it has downgraded Microchip Technology's rating from "Buy" to "Neutral," with the target price reduced from $110 to $90.

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Nvidia, which fell into a bear market last week, also faces challenges, with the company's stock price falling by more than 14% at the start of trading. According to U.S. media reports, design flaws may cause a delay in mass production of the chip giant Nvidia's upcoming artificial intelligence chip, Blackwell, by three months or more. This setback could affect customers such as Meta, Google, which is part of Alphabet, and Microsoft, who have collectively ordered billions of dollars' worth of chip products. Nvidia launched the Blackwell chip series in March this year, replacing its previous flagship artificial intelligence chip, Grace Hopper, which was designed to accelerate the generation of artificial intelligence applications. The report, citing informed sources, said that Nvidia notified Microsoft and another major cloud service provider last week of the production delay of its Blackwell series of smart chips.

In addition, "Oracle of Omaha" Warren Buffett significantly reduced his stake in Apple, causing concern among investors, with Apple's stock price plunging by nearly 10% at the start of trading. Just two years ago, Buffett called the stock one of the four giants of his conglomerate's business, alongside Berkshire Hathaway's insurance, utilities, and BNSF railway operations. This gave investors the impression that Buffett might hold onto Apple indefinitely, much like his purchases of Coca-Cola and American Express stocks decades ago. Buffett has always praised Apple CEO Tim Cook, who attended Berkshire Hathaway's annual shareholder meeting in Omaha in May. After selling 116 million shares in the first quarter, the scale of sales disclosed on Saturday almost quadrupled.

Wedbush technology analyst Dan Ives said in a research report that Buffett is an Apple believer and does not see this as a smoke signal for bad news in the future. Apple remains the largest investment in Berkshire Hathaway's portfolio, more than twice that of Bank of America.

CFRA Research analyst Cathy Seifert said she is more inclined to view the sale of Apple as responsible portfolio management because the tech giant occupies such a large proportion of Berkshire's holdings. However, it seems that Buffett may also be preparing for an economic recession, which is a move to prepare for a weak economic environment.

Will the Federal Reserve cut interest rates earlier?

On Monday, before the U.S. stock market opened, Chicago Federal Reserve President Austan Goolsbee said in a media interview: "The Federal Reserve's job is very simple, that is, to maximize employment, stabilize prices, and maintain financial stability. That's what we are going to do."Goolsbee stated that the work of the Federal Reserve is forward-looking. Once the overall economic situation begins to change, or if any part deteriorates, we will "fix it." When asked whether the weakness in the labor market and manufacturing would prompt the Federal Reserve to react, Goolsbee did not commit to specific actions but indicated that it would be pointless to maintain a "restrictive" policy stance if the economy is weakening.

With the release of the U.S. July non-farm report, a closely watched recession indicator—Sam's Rule—has now been triggered.

The reporter noted that several former Federal Reserve officials have called for a shift in monetary policy. Former New York Fed Chairman Bill Dudley recently published a column titled "I've Changed My Mind. The Fed Needs to Cut Rates Now."

Former Federal Reserve Vice Chairman Alan Stuart Blinder published an article last week titled "The Fed Should Cut Rates This Time." In it, he stated that there is a tight money supply. With an inflation rate between 2.5% and 3%, and a federal funds rate of 5.25% to 5.5%, the real interest rate (interest rate adjusted for inflation) is approximately 2.5% to 3%. "Since last September, the 12-month personal consumption expenditure price index (PCE) has been flat or decreasing every month. In my view, this is a trend," he wrote.

At last week's press conference, after hinting at a possible rate cut in September, Federal Reserve Chairman Powell discussed policy stance considerations, saying, "The question is whether all the data, the evolving outlook, and the balance of risks are consistent with rising confidence in inflation and a stable labor market."

In addition to fluctuations in the job market, according to MSCI data, in the second quarter, the total value of foreclosed and mortgaged office buildings, apartments, and other commercial properties nationwide reached $20.5 billion. This is the highest level since 2015, a 13% increase from the first quarter. It is clear that the commercial real estate industry is under pressure, and Blackstone Group and other commercial real estate investors will face increasing scrutiny. Meanwhile, the U.S. Institute for Supply Management (ISM) manufacturing index fell sharply from 48.5 in June to 46.8 in July, with 11 out of 16 surveyed industries contracting in July. Two industries account for 1/4 of the U.S. economy.

Faced with the threat of recession, federal funds rate futures show that the probability of a rate cut in September has risen to 100%. However, due to the plunge in Treasury yields, the Federal Reserve should immediately lower the key interest rate by 50 basis points to align more closely with Treasury yields. Looking back at history, the last time the Federal Reserve made an emergency rate cut was in March 2020, when the U.S. stock market experienced multiple intraday circuit breakers, a situation that has not yet occurred.

It is worth mentioning that Goldman Sachs stated that in the week ending August 1, global hedge funds continued to increase their bearish stock bets in their portfolios, including financial, industrial, real estate, and energy sectors. At the same time, defensive healthcare stocks were sold at the fastest pace in about a year. However, the institution believes that the Federal Reserve has the ability to rekindle market optimism, estimating the likelihood of a U.S. economic recession at 25%.