FED Rate Cut Decision & Its Impact

Today’s Market Update

As expected, the US Federal Reserve announced a rate cut of 25 basis points. The Fed made it clear that this cut was not the start of a long-term rate reduction cycle, but more of a risk management step, mainly to address the weakening labor market.

The market reaction in the US was mixed, with the Dow Jones doing better, while the Nasdaq and S&P 500 closed flat to slightly negative.

• Coming to the Indian markets, Nifty closed 0.37% higher today at 25,423.

• The Nifty Next 50 index ended 0.27% higher, while the Midcap index was up 0.31%. Small caps also showed strength, though they faced some pressure near the 17,500 level.

• The Bank Nifty was also up 0.42%, regaining its moving average.

• In commodities, gold has been making noise after a strong rally past the 11,000 mark. Today it gained another 0.8%. But with equity markets performing well, gold might face some selling pressure near these levels.

Other Market Triggers

• Zomato stood out with a 2.92% gain, while banks like HDFC Bank and Axis also added strength. Pharma stocks had a strong day with Sun Pharma leading the pack, and IT stocks like Infosys, HCL Tech, and Wipro also supported Nifty.

• On the weaker side, ONGC, Coal India, and Tata Motors faced some selling.

• Within the Nifty Next 50, Hyundai gained 2.64% and LTIM was up 1.87%. Some Adani group stocks also saw mild gains.

• The star mover of the day was Bajaj Consumer, which rallied 8.59% and hit a 52-week high, continuing a strong uptrend from the last few months.

What to watch next ?

• Encouragingly, all the Indian indices are now above their key moving averages, and if the momentum continues, new highs could be possible by Diwali.

• In the longer-term view, Indian markets remain strong compared to most global peers.

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What To Read This Week ?

🚀 Global Bond Markets: A Ticking Time Bomb?

A recent analysis by "Mr. Uppy" on X, citing Bloomberg, suggests that global bond markets, particularly in Western nations, are at a critical juncture. The core argument is that after decades of declining yields, this trend is reversing, leading to a potentially dangerous situation for the global financial system. The 30-year bond yields in the US, UK, Germany, France, and Italy are all on the rise.

This shift is attributed to a combination of factors, including mounting national debt and aging populations.

📈 The End of an Era: Rising Yields

For nearly 40 years, from the 1980s to the 2020s, Western countries enjoyed a period of persistently low bond yields. This provided governments and corporations with cheap borrowing costs, fueling economic growth and expansion. Now, that era seems to be over. Yields are "ripping higher" across major economies, with the notable exception of Switzerland.

The Swiss franc's strength and the nation's independent monetary policy have allowed it to maintain near-zero yields, an "aberration" in the current landscape.

📉 Divergence: Fed vs. Market

A particularly alarming sign is the divergence between the bond market's behavior and the US Federal Reserve's intended policy. Despite the strong possibility of impending rate cuts, US bond yields aren't dropping. This indicates that the market is no longer following the Fed's guidance. The market is signaling that it perceives a higher risk in government debt, and therefore demands a higher yield (return) to compensate for that risk.

This is a classic case of the market "refusing the guidance that government wants it to assume," a very dangerous sign that could lead to a systemic collapse if yields were to spike to levels like 10%.

⚠️ A Runaway Train

The insights characterizes the current situation as a "runaway train ready for some kind of crash and burn." One of the reasons for this is the global selling pressure on US Treasury bonds. Nations are selling, not buying, which drives bond prices down and, consequently, pushes yields up.

The traditional solution to this—for central banks to flood the market with buying to suppress yields—is not currently happening. This lack of demand for US paper exacerbates the problem, creating a vicious cycle of rising yields and falling bond prices.

🛡️ Protect Yourself

Given the potential for a global financial event, the advice is to protect yourself through sound asset allocation. While Indian bond yields may not be directly impacted, a major global crisis would undoubtedly have severe repercussions.

• Key Takeaways:

  • The era of ultra-low bond yields is ending. This has significant implications for borrowing costs and economic stability globally.

  • Markets are pushing back against central bank policy. The divergence between Fed guidance and rising yields is a dangerous sign of a "runaway train" in the bond market.

  • Global selling pressure on US bonds is accelerating the crisis. This lack of demand is a key factor driving yields higher and is a worrying trend for the global financial system.

  • Protect your portfolio. In a world of increasing financial risk, prudent asset allocation is essential for safeguarding your investments.

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