Update Equities: A rate cut looms
It's September. The 'R' is back in the month again -- the 'R' of record levels and rate cuts. Many equity markets are close to their all-time highs or have set new record levels this week. Markets have become somewhat less turbulent and uncertainty is fading. The rhetoric around tariffs has subsided, corporate earnings are generally positive, and investors seem to be preparing for a rate cut in the US.
After recent weak US labour data, a Federal Reserve rate cut next week seems a certainty. This is especially true because inflation seems to be well under control. The Fed has a dual mandate in which it must ensure price stability or keep inflation contained, on the one hand; and, on the other hand, it must ensure maximum employment. The latter is showing some cracks lately, which will require the Fed to take action.
Historically, an interest rate cut is positive for equity markets. Since 1980, the S&P 500 Index has managed to rise by an average of more than 14% in the first 12 months after a first rate cut. However, it’s up for discussion whether this will be the first rate cut or whether the rate cut of September last year should be seen as the first cut? The future will tell whether the historical statistics will come true. In any case, these will be interesting times, because a rate cut is also often accompanied by an increase in volatility. And this may be coming at the moment when we have historically entered the two most intense months of the year.
We already saw volatility affect a number of companies this week. In the US, software powerhouse Oracle's results were very strong and their outlook was significantly increased. This strengthened hopes that the global expansion of the infrastructure for artificial intelligence will gain new momentum. Investors reacted enthusiastically and sent the share price about 36% higher.
There were, however, also some surprisingly weak earnings at Synopsys, which provides design and simulation software for the chip industry. Synopsys said it was suffering from the export restrictions to China and from challenges at one of its largest customers. The integration of its Ansys acquisition will probably also cost more than initially assumed. Investors were very disappointed, and the share price dropped by as much as 36%. Finally, lithium producer Albemarle also suffered a significant drop in its share price, losing more than 10% after it was announced that Chinese miner CATL will resume its lithium production earlier than expected.
