Nasdaq surged, defensive stocks stagnated, long-term bonds fell, and the Federal Reserve ignited the U.S. market's "risk appetite"
Overnight U.S. Treasury bonds showed divergent trends, with the 2/10-year Treasury yield curve reaching its steepest level since June 2022. The reason is that the Federal Reserve significantly cut interest rates by 50 basis points, boosting inflation expectations, increasing the risk premium for long bonds, and causing prices to fall accordingly; while short-term bonds became more attractive due to their higher nominal yields
Overnight, the first interest rate cut by the Federal Reserve in four years boosted investor risk appetite, and European and American stock markets rose across the board.
The Dow Jones Industrial Average broke through 42,000 points for the first time, with the S&P closing above 5,700 points, both hitting new intraday and closing highs. The Nasdaq rose by 3% at one point, and small and medium-sized enterprises are expected to benefit from lower operating borrowing costs in a low-interest rate environment, with the Russell 2000 small-cap stock index rising by 2.1%.
In terms of sectors, technology stocks led the gains in all sectors, with the "Seven Sisters" of technology stocks soaring to historic highs.
Defensive sectors seen as bond alternatives performed poorly, with defensive stocks including real estate, utilities, and daily consumer goods all declining, with the most falling by 0.58%.
US bond yields fluctuated. Short-term Treasury yields, which are more sensitive to interest rate policies, fell by 2.53 basis points to 3.5918%, while the yield on the benchmark 10-year US Treasury rose by over 2 basis points to 3.7245%, reaching the highest level in two weeks at one point.
The 2/10-year US Treasury yield curve continued its steep bearish trend, now the steepest since June 2022.
Spot gold continued to hit historic highs.
The US dollar fluctuated significantly, rising to an intraday high before almost giving back all gains, ultimately closing up by 0.03%.
Bitcoin surged, hitting a one-month high of $64,000 per coin during trading.
Jonathan Cohn, head of the US interest rate department at Nomura Securities, said:
"Although Powell's remarks and dot plot have delayed the prospect of a further 50 basis point rate cut, this significant rate cut seems to increase the likelihood of a soft landing, supporting the sharp rise in risk assets."
Why the divergent trend of overnight US Treasuries?
The overnight US Treasury prices have shown a divergent trend, with long-term Treasury prices falling while short-term Treasury prices rising. What are the reasons behind this?
The changes in bond yields are related to economic growth expectations and Federal Reserve interest rate policies, with the main reason for the rise in long-term Treasury yields being the risk premium.
Considering the significant 50 basis point rate cut by the Federal Reserve, the financial environment is expected to become more accommodative, leading to a resurgence in inflation expectations. This means that the risk premium for investing in long-term bonds increases, resulting in reduced demand for medium to long-term Treasuries and a corresponding price decline.
On the other hand, for short-term Treasuries, the rate cut implies a decrease in the nominal yields of newly issued bonds, making existing bonds relatively more attractive and causing prices to rise.
Meanwhile, data released overnight by the US Department of Labor showed that initial jobless claims for the week ending September 14 fell to a four-month low, below market expectations, indicating a potential recovery in the labor market and an uptick in social demand.
Economist and long-time Federal Reserve observer Ed Yardeni commented on this:
"The bond market doesn't quite believe that future inflation will be lower, as the Federal Reserve is stepping on the gas pedal. Perhaps the current economy doesn't need as much stimulus."