In the wake of Powell’s dovish turn and weak U.S. employment data, a September rate cut by the Federal Reserve seems almost certain. If the “shoe drops” and the Fed cuts rates, major global assets are bound to face a new round of reallocation.
This backdrop reminds many of last year’s “924” rally, where a surprise 50-basis point rate cut by the Fed, coupled with China’s domestic cuts, led to a 27% surge in the Shanghai Composite Index over just six trading days. The ChiNext and STAR 50 indices soared 66.6% and 59.2%, respectively. Recently, Ray Dalio, who predicted a U.S. debt crisis within the next three years, warned again: “If the Fed cuts rates, two assets are going to collapse.”
Will this year’s A-share market repeat last year’s “924” rally? And what are the two assets Dalio is referring to?
Will the Fed Lose?
Currently, the U.S. benchmark interest rate stands at 4.5%, putting significant pressure on the economy. With the growing national debt, the cost of servicing it has skyrocketed. Furthermore, high interest rates have made overall financing costs too expensive for other sectors.
This is why Trump repeatedly criticized Powell, calling him “Mr. Too Late,” and even threatened to fire him.
In August, the U.S. Labor Department released disappointing nonfarm data. The number of new jobs, excluding agriculture, was only 22,000—far below expectations. The unemployment rate rose 0.1 percentage points to 4.3%, the highest in nearly four years.
The market now expects the Fed to cut rates in September, with some anticipating it to happen soon. However, the Fed’s stance remains ambiguous. The real issue is that when the Fed hikes rates, global capital tends to flow back to the U.S., but if rates are cut, there could be a reversal, and capital may flow out, particularly to China. Last year’s “924” rally remains fresh in people’s minds, and even Trump, who desires rate cuts, would not want to see this outcome.
Therefore, even though a rate cut is widely anticipated, the Fed must maintain a level of ambiguity to shape global capital expectations, ensuring that it keeps control of the situation.
Can A-Shares Repeat Last Year’s Rally?
Looking back at the 2024 “924” rally, the Fed’s unexpected 50-basis point rate cut combined with domestic policy actions like interest rate cuts and RRR reductions drove a major rally. On September 24, the total turnover of the Shanghai and Shenzhen markets surged to 971.3 billion yuan, a 420.3 billion yuan increase from the previous day. Over 5,100 stocks rose that day, marking the beginning of a powerful rally.
However, this year, a 50-basis point rate cut is unlikely. The Fed’s independence is under scrutiny, and a sharp rate cut could further fuel doubts about the U.S. dollar’s long-term credibility and worsen capital outflows. Furthermore, such a move might signal a recession, which could amplify market anxieties and deter capital from staying in the U.S.
Moreover, the A-share market environment has significantly changed. The Shanghai Index has gained 44.6% since its low in August, indicating a shift from historical lows. Foreign capital, an important channel for the Fed’s policies to affect A-shares, has been net inflowing, with a total of 18.5 billion yuan in August, mainly focused on semiconductor and consumer electronics sectors. Meanwhile, domestic institutions have also been actively increasing positions, especially in the technology and healthcare sectors.
While A-shares may not repeat last year’s explosive rally, the market’s overall trend remains positive.
Dalio’s Warning: Two Assets Set to Collapse
Ray Dalio, founder of Bridgewater Associates, recently warned that a rate cut by the Fed will likely cause a significant collapse in the U.S. dollar and stock markets. This suggests that a Fed rate cut will likely be “icing on the cake,” not a “lifeline” for the economy.
If the A-share market is to see long-term growth, the focus should shift from short-term policy expectations to industrial upgrades and global competitiveness.
References:
- Federal Reserve Policy Statements
- Dalio’s predictions on the U.S. debt crisis and market impact
- A-share market trends and foreign capital inflows
