The Daily Breakdown takes a closer look at what the Fed’s going to do with interest rates, as investors expect a cut in September.
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What’s Happening?
At 2 p.m. ET, the Fed is expected to announce its first interest rate cut since December, with markets expecting a 25 basis point cut. The Fed will also release its economic projections — which include the often talked about “dot plot,” which shows how many cuts the Fed expects this year and next year, among other estimates.
Chair Powell will then make a statement at 2:30 p.m., followed by his Q&A session.
Assets to Watch
Because the Fed telegraphed this rate cut ahead of time, we’ve already seen some big moves. The S&P 500, Nasdaq 100, and gold all hit record highs yesterday, while bonds have been rallying (as Treasury yields have dipped, bringing down borrowing costs). Small caps, housing stocks, and cryptocurrencies like Bitcoin and Ethereum have gained in recent weeks as well.
These assets — and more — will be in focus today as investors digest the latest Fed update.
The Risks
We’ve seen the rally into the event, which opens the possibility of a “sell the news” reaction after the event.
But be careful, because it doesn’t guarantee that we will see that type of reaction today or even this week. Vibes on Wall Street are different when investors are surprised with good news vs. when they’ve known about it for weeks and have already adjusted accordingly.
So it will come down to what Chair Powell has to say and what the Fed’s economic projections suggest. Markets are pricing in three rate cuts this year. If the Fed throws cold water on that, it could lead to disappointment. But if the Fed plans to further ease monetary policy, we could see the rally continue.
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The Setup — Small Caps
Small caps have been disappointing when compared to larger indices, like the S&P 500 or Nasdaq. However, the group has been on a tear lately, as seen in the IWM ETF, which has rallied almost 40% from the April low. Now though, it’s approaching a notable resistance area in the mid-$240s.
Bulls are really hoping for a breakout here, and if the IWM can clear $245, it will hit new record highs. But if we don’t see a breakout, that doesn’t mean all hope is lost. Small caps do best during economic expansion and in low-rate environments. If the US avoids a recession and interest rates move lower, the IWM could be a strong long-term performer.
Let’s see how it reacts to this week’s news, and if it dips, let’s see where support comes into play.
Options
On a dip, buying calls or call spreads may be one way to take advantage of a pullback. For call buyers, it may be advantageous to have adequate time until the option’s expiration.
For those that aren’t feeling so bullish or who are looking for a deeper pullback, puts or put spreads could be one way to take advantage.
To learn more about options, consider visiting the eToro Academy.
What Wall Street’s Watching
Shares of Opendoor Technologies remain volatile. After rallying almost 80% on Friday — yes, 80%! — the stock has continued to bounce between $8.50 and $10.50 over the past few days. Can shares maintain momentum or will a larger pullback come first? Check out the chart for OPEN.
Long-term China bulls have been waiting for Baidu to participate in the rally. A month ago, the stock was up just 6.5% on the year. Now it’s up almost 50%. That’s as Baidu rallied more than 7% yesterday and is up another 7% in pre-market trading today, with its monthly gains already near 30% as of Tuesday’s close. Dig into the fundamentals for BIDU as it hits 52-week highs.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.