All eyes are currently on the crucial two-day FOMC meeting slated to start today. Federal Reserve Chair Jerome Powell is highly anticipated to cut interest rates for the second time since the financial crisis by a quarter point. The move could send the S&P 500 and the Dow to new all-time highs (read: Fed Cuts Rate: Sector ETFs & Stocks Set to Soar).
The Fed slashed interest rates by 25 bps to 2-2.5% in July amid trade war, global slowdown threats and low inflation in the United States. It signaled future rate cuts citing that it will “act as appropriate to sustain the expansion,” but also said that the move is not the start of a lengthy series of rate cuts.
Since the last meeting, global economic conditions have deteriorated. Manufacturing activity shrank in the United States and European Union, trade war escalated with increased tit-for-tat tariff as well as GDP data and employment data were not too strong. Additionally, 2-year Treasury yields surpassed 10-year yields, indicating higher recession risks.
However, the trends seem to have changed dramatically with chances of rate cuts getting weaker. This is especially true as a rise in inflation, jump in oil prices, renewed trade hopes and better economic data, point to higher consumer and business confidence as well as retail sales, leading to a dovish Fed. Per the latest data from CME, traders in the fed funds futures market were pricing in a 34% chance that the Fed will stay put on rates, up from the probability of zero a month ago and just 5.4% a week ago (read: 5 ETFs to Ride on Highest Core U.S. Inflation Rate in a Year).
Given this, several ETF zones are in focus and could see outsized volume depending on the Fed decision. A few ETFs will continue to benefit if the Fed cuts rates while some will be severely impacted. Let’s have a look at them:
Gold has been on a tear in recent months and will continue to shine if Fed cuts rate further. This is because lower interest rates will increase the metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like SPDR Gold Trust ETF (GLD - Free Report) , iShares Gold Trust (IAU - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) will see smooth trading. Even if the Fed keeps rates steady, the bullion could move up on higher demand for safe haven avenues given the nagging trade woes (read: 5 Reasons to Buy Gold ETFs as Price May Touch $2000).
Dollar ETFs like Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) have shown strength lately on a spate of upbeat data as well as positive developments in the relationship between the United States and China. If Fed opts for rate cuts, the dollar strength might stall as lower interest rates will pull out more capital from the country and lead to depreciation of the U.S. dollar (read: Dollar Hits 2019 High: More Gains Ahead for ETFs?).
Emerging markets will be the biggest beneficiaries of Fed rate cuts as lower rates will push the U.S. dollar down, injecting more capital into the emerging markets. Additionally, monetary easing across the globe will add to the strength. While there are several options in the space, the ultra-popular Vanguard FTSE Emerging Markets ETF (VWO - Free Report) , iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) will get a boost.
The high-yield corner of the fixed income world is the most-watched area. High-yield bonds have gained immense traction given the sharp decline in yields. Another rate cut for this year will continue to push yields further lower, thereby maintaining the sole lure of the high-yield bond ETFs like iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report) .
With the recovering economic fundamentals lately, yields have moved up lately pushing the bank ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Invesco KBW Bank ETF (KBWB - Free Report) and SPDR S&P Bank ETF (KBE - Free Report) higher. If the Fed keeps the rates steady, solid momentum could continue in the space (read: Bank ETFs Benefit From Steepening Yield Curve, But How Long?).
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