Editor's note: The Federal Reserve announced a rate cut of 25 basis points last week, restarting the rate-cutting cycle after a year. What subsequent impacts will this rate cut decision bring?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The Federal Reserve announced a rate cut of 25 basis points last week, restarting the rate-cutting cycle after a year. What subsequent impacts will this rate cut decision bring? To discuss this topic, we have invited former Chief Economist of a brokerage, Li Daxiao, Vice Dean of the School of Public Policy at the Chinese University of Hong Kong, Shenzhen campus, Chairman of the Hong Kong International Finance Society, Xiao Geng, and Chairman of the Hong Kong Gold Exchange, Cheung Tak-Hei, to provide their insights and analysis.
The rate cut of 25 basis points aligns with mainstream market expectations. Mr. Xiao, what is your view on the outcome of this meeting?
【Xiao】The Federal Reserve's rate cut, after a year, is beneficial for the U.S. market, as well as for our market in Hong Kong and the global market. Rate cuts generally have a positive impact on asset prices. The Fed's rate cut is also helpful for China's macroeconomic policy. A key consideration in China's macroeconomic policy is to balance the inflow and outflow of funds. When U.S. interest rates decline, we need not worry too much about capital outflow. At this time, our domestic macroeconomic policy can be more accommodative, making it easier to implement further rate cuts.
【Anchor】OK, we also noted that Fed Chairman Powell emphasized in the press conference that this is merely "an insurance cut", meaning it does not indicate the beginning of a continuous rate cut cycle. What do you think about this? Is there still some uncertainty regarding the Fed's future rate cut path?
【Xiao】This rate cut by the Federal Reserve is actually a result of balancing internal political factors in the U.S. President Trump especially wants to use rate cuts to stimulate economic development, including employment and the stock market. However, the Fed Chairman is still concerned about inflation because the U.S. has raised rates after experiencing high inflation. Rate hikes have been very effective against inflation. Trump's trade war could lead to a resurgence of inflation, which is a concern for the Fed. However, these differing opinions, particularly from Trump, have put significant pressure on the Fed through the appointment of new officials and the desire to dismiss current members. This pressure has had some impact on the Fed's decisions.
【Anchor】Alright, Mr. Li, what are your thoughts?
【Li】The 25basis point cut aligns with expectations. The Federal Reserve is shifting its focus from preventing inflation to ensuring employment, which represents a significant change in the Fed's stance. There is a strong possibility of further rate cuts depending on employment conditions and various data points. This round of rate cuts may continue for a relatively long time.
【Anchor】Recently, there has been a sense of caution in the market ahead of the rate cut, with many investors waiting for the decision. With the outcome now announced, Mr. Li, how do you think market sentiment will change? Particularly regarding the Hong Kong stock market, which has been hitting new highs, what changes do you foresee following the realization of rate cut expectations?
【Li】Looking at the U.S. stock market, many people have already fully anticipated this rate cut. There may be some profit-taking as a result, especially since U.S. stock valuations are at extremely high levels. Historically, whether through horizontal or vertical comparisons, they have reached a significantly overvalued position. This situation may not see substantial valuation increases due to the rate cut; rather, there may be some valuation pressure. Importantly, the rate cut diminishes the favorable conditions of high interest rates set by the Fed, which could lead to a weaker U.S. dollar. This could result in the $17.5 trillion in capital that flowed into the U.S. stock market potentially returning to non-U.S. markets. This scenario has been a key reason for the Fed'sreluctance to cut rates. Therefore, the previous assumption that rate cuts would always lead to stock market gains may not hold in the same way this time. In the short term, I believe the impact of the rate decision on the Hong Kong stock market will be quite positive. The Hong Kong market may continue to outperform the U.S. market and may not necessarily experience a significant drop after the announcement. Historically, the performance of this policy window has differed from the past. Previously, the Hong Kong market would move in sync with, or lag behind, the U.S. market. This time, it may diverge and potentially outperform the U.S. market.
【Anchor】On the other hand, the rate cut also affects gold prices. Before the Fed's rate cut cycle began, spot gold prices briefly exceeded $3,700, reaching a historical high. Some believe that increasing risks to the Fed's independence may be a long-term benefit for safe-haven assets like gold. In this context, Chief Executive John Lee's recent policy address mentioned accelerating the establishment of an international gold trading market. Mr. Xiao, what are your thoughts on this?
【Xiao】This is part of China's acceleration in establishing an international trading market for commodities, specifically in the gold sector. I see it as a directional move to utilize Hong Kong's position, as our country is a significant buyer in the commodities market, with a very large spot market. However, our long-term influence on the futures market and international gold prices has not been substantial. I believe that Hong Kong, as an international financial center, is moving in this direction to support our country's real economy and to establish more pricing power and influence in the international financial market.
【Anchor】Mr. Cheung, what do you think are the implications behind Hong Kong's current "acceleration of establishing an international gold trading market"?
【Zhang】I think Hong Kong has been waiting for this opportunity for several decades. In the past, even without the support of the government and the Special Administrative Region's policies, our gold trading market was very prosperous and held a significant position internationally. However, many neighboring countries had government policies to support their markets, and over the past decade, they have captured a lot of our trading volume. Now, I am very pleased that Chief Executive John Lee has proposed in this policy address to start rebuilding Hong Kong as an international gold trading center in 2024. This has certainly encouraged the industry, and at this time, gold has become a hot topic in Hong Kong and globally. Many traditional investment products have shifted their focus towards the gold market.
【Anchor】Currently, what do you see as the main challenges Hong Kong faces in establishing the gold trading market?
【Zhang】The first challenge is definitely the establishment of a comprehensive and sufficiently large storage facility. Physical gold is a precious metal that requires high security and convenient transportation, so we need a storage facility with significant capacity. Back in 2000, when we were still known as the Hong Kong Gold and Silver Exchange, our board had already suggested to the then Financial Secretary to establish a gold storage facility. In 2005, the government approved the establishment of one at the airport, which became a storage facility under the Airport Authority. However, it was relatively conservative, with only a capacity of 150 tons, which is far from enough. The first step now is to establish a storage capacity of at least 1,000 to 2,000 tons to accommodate this asset. The second part is the urgent need for a centralized gold settlement center, led by the government. With this settlement center, many of the hundreds of billions of transactions that have taken place in the past were done over the counter. Having a settlement center will enhance the security of transactions for both parties. A government-led settlement center would increase confidence and contribute to our goal of making Hong Kong an international gold trading center. Therefore, these two aspects—storage and trading, along with the settlement center—combined with the government's policies, will be a significant step for us, leveraging our connection to the motherland while looking towards the international market.
【Anchor】Recently, gold prices have continuously reached new highs. What is your view on the short-term performance of gold prices?
【Zhang】I remain bullish on gold in the near term.. What I can share is that investment products are cyclical. Over the past decade or so, real estate, bonds, and securities have each gone through cycles of over ten years. Now, it seems to be the time for precious metals to rise. Geopolitical factors and the likelihood of interest rate cuts are contributing to the reasons for the continued rise in gold prices. I want to emphasize that the current gold price of 3,700 is still high, but it may not be the peak. This cyclical nature could just be only a beginning.
【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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