As the Federal Reserve cuts interest rates, the domino effect in the global asset market has already been set in motion.

Whether it's the resilience of the A-share market or the valuation lowlands of the Hong Kong stock market, they provide investors with a rich space for imagination.

The Federal Reserve's interest rate cut has finally "landed".

In the early morning of September 19th, the Federal Reserve released the September interest rate statement, lowering the target range of the federal funds rate by 50 basis points to 4.75%-5%, marking the first rate cut in four years.

In addition, according to the dot plot released by the Federal Reserve on the same day, the median expectation of the federal funds rate for this year is 4.4%, reaching a target range of 4.25% to 4.5%, which implies that the Federal Reserve may cut interest rates by another 50 basis points before the end of the year.

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Due to the strong position of the US dollar, the trend of US dollar interest rates has always been a key anchor for global asset allocation, with a significant impact coefficient on global asset pricing.

Therefore, when the Federal Reserve lowers the federal funds rate, global assets will be revalued.

For the Chinese stock market, when the US dollar interest rate changes, it will affect the A-shares through two aspects.

On one hand, it indirectly affects domestic monetary policy through the interest rate spread between China and the US, thereby promoting the central bank to cut interest rates, thus affecting the liquidity of A-shares.

On the other hand, the interest rate cut allows the US dollar to flow back into China from the US mainland, thereby affecting the liquidity of A-shares.

On the first day of the interest rate cut, the A-share market opened high and then quickly rebounded after falling.

As of the close, the Shanghai Composite Index rose by 0.69%, the Shenzhen Component Index rose by 1.19%, the ChiNext Index rose by 0.85%, the Beijing Stock Exchange 50 Index rose by 1.24%, and the turnover of the Shanghai and Shenzhen markets was 629.4 billion yuan, an increase of 147.7 billion yuan from the previous day, with nearly 4,800 stocks rising in both markets.

It is worth mentioning that under the linked exchange rate system, Hong Kong's interest rate trend is closely related to the pace of the Federal Reserve.

Therefore, when the Federal Reserve begins to cut interest rates, the Hong Kong dollar interest rate will also follow suit, and with the "low valuation" attribute, the Hong Kong stock market may attract more capital allocation.

From the market perspective, the Hong Kong stock market closed, with the Hang Seng Index rising by 2.00%, and the Hang Seng Technology Index rising by 3.25%, higher than the increase in A-shares.

The "expected game" of US dollar assets has gone from interest rate hikes to cuts, and the US economy seems to have gone through a complete cycle.

The year before last, the Federal Reserve launched an unprecedentedly aggressive interest rate hike, raising interest rates 11 times in a row from March 2022 to July 2023, with a cumulative increase of 525 basis points, maintaining the target range of the federal funds rate at 5.25% to 5.5% to this day.

Affected by this, US inflation has been alleviated.

As Powell pointed out, the personal consumption expenditure price index has dropped from a high of around 7% to 2.2% in August, indicating that inflation has been "significantly alleviated".

However, on the other side of the decline in inflation is the weakness of employment.

The average monthly employment growth in the past three months is 116,000, significantly lower than the level earlier this year.

The Federal Reserve predicts that this year's unemployment rate will rise to 4.4%, a significant increase.

Amid market concerns about an economic "recession", on August 23, Powell mentioned in his speech at the Jackson Hole Economic Symposium, "It's time to adjust policy.

The direction forward is clear, the timing and speed of the rate cut will depend on future data, the changing outlook, and the balance of risks."

The market believes that Powell's speech is a "prelude" to the Federal Reserve switching monetary policy and starting an interest rate cut cycle.

Affected by this, before the official announcement of the interest rate cut, US dollar assets began to rise, with the S&P 300 up by 1.15%, the Dow Jones Index up by 2.19%, and the New York gold up by 2.55%, and US bonds continued to rise.

Following the Federal Reserve's interest rate cut expectations is also the price of gold.

On September 13, COMEX futures gold broke through $2,617.4 per ounce, setting a new historical high.

In addition, on September 17, Bitcoin also set a record for the largest increase in more than a month.

In the early morning of September 19th, the Federal Reserve cut interest rates as expected, lowering the target range of the federal funds rate by 50 basis points, to a level between 4.75% and 5.00%.

However, this 50 basis point interest rate cut is not a consensus among everyone.

Among the 12 voting officials, 11 voted in favor, and Governor Bowman voted against, preferring a 25 basis point rate cut.

This is also the first time since 2005 that a Federal Reserve governor has voted against.

In addition, according to incomplete statistics, four hours before the interest rate decision, most institutions including Morgan Stanley, Goldman Sachs, Bank of America, Citigroup, Wells Fargo, HSBC, and UBS believed that the Federal Reserve would cut interest rates by 25 basis points, with only a few institutions such as JPMorgan Chase believing that the Federal Reserve would cut interest rates by 50 basis points.

Historically, the Federal Reserve's interest rate cuts fall into two categories, one is relief-style rate cuts, and the other is preventive rate cuts.

The relief-style rate cut has a larger range and will cause market concerns about the economic situation.

Therefore, the 50 basis point cut in the federal funds rate also makes the market very entangled.

From the market perspective, the US dollar index quickly plunged after the announcement of the decision, falling to around 100.20, but soon reversed and returned to above 101.

US stocks also rose first and then fell, with the Dow Jones falling by 0.25%, the Nasdaq falling by 0.31%, and the S&P 500 falling by 0.29%.

The international gold price also experienced violent fluctuations, rising sharply to a historical high after the Federal Reserve announced the rate cut, with the COMEX gold futures price rising to a maximum of $2,627.2 per ounce, and the spot gold price also breaking through the $2,600 mark, but then both turned to fall.

In addition to the market's concerns about a recession, Powell's "hawkish" remarks have also attracted market attention.

At the press conference, Powell said that the Federal Reserve is only "moderately calibrating the policy stance", there is no predetermined policy path, and it will continue to make decisions based on economic data at each meeting, and the speed of future rate cuts can be fast, slow, or even paused.

This undoubtedly weakened the enthusiasm of capital betting on "unexpected" rate cuts.

Will A-shares be revalued?

Unlike the "rise and fall" of US stocks, the Japanese stock market and the Chinese stock market have achieved certain gains across the ocean.

As of the close, the Nikkei 225 index rose by 2.15%.

The A-share market opened high and then quickly rebounded after falling.

As of the close, the Shanghai Composite Index rose by 0.69%, the Shenzhen Component Index rose by 1.19%, the ChiNext Index rose by 0.85%, the Beijing Stock Exchange 50 Index rose by 1.24%, and the turnover of the Shanghai and Shenzhen markets was 629.4 billion yuan, an increase of 147.7 billion yuan from the previous day, with nearly 4,800 stocks rising in both markets.

Specifically, the impact of the Federal Reserve's interest rate cut on A-shares mainly has two channels.

On one hand, it indirectly affects domestic monetary policy through the interest rate spread between China and the US, thereby promoting the central bank to cut interest rates.

On the other hand, the interest rate cut allows the US dollar to flow back into China from the US mainland and affect the liquidity of A-shares.

Therefore, the market believes that the Federal Reserve's interest rate cut is expected to improve the domestic monetary policy space and may have a certain positive impact on the A-share market.

Among them, Haitong Securities stated that the Federal Reserve's preventive interest rate cut may help improve the liquidity of A-shares, and the fundamentals need to be verified in the medium and long term.

From a liquidity perspective, the Federal Reserve's interest rate cut may improve the macro and micro liquidity of A-shares in the medium and short term, helping A-shares to rise.

In addition, Yang Delong, the chief economist of Qianhai Open Source Fund, also said that the Federal Reserve's interest rate cut is conducive to the capital flowing back to emerging markets including China.

From the perspective of global capital market valuation comparison, the current US stock valuation is at a historical high, while A-shares and Hong Kong stocks are at the lowlands of global capital market valuation.

Once there is an appreciation expectation for the renminbi, foreign capital is expected to flow back and drive the valuation of renminbi assets to rise.

Stephen Jen, the founder of the "US dollar smile theory", also recently predicted that the Federal Reserve's interest rate cut may prompt Chinese companies to sell up to $1 trillion in US dollar-denominated assets, thereby pushing the renminbi to appreciate by up to 10%.

However, from historical experience, after 2000, there were not many cases where A-shares benefited from the Federal Reserve's interest rate cuts in the near term, and the transmission of A-shares in the long term has lagged, and there is uncertainty in intermediate variables.

Therefore, the boost of the interest rate cut to A-shares still needs to be observed.

In 2001, due to the collapse of the internet bubble and other issues, the Federal Reserve continued to cut interest rates from January 2001 to June 2003, adjusting the federal funds rate from 6.5% to 1.75% at the end of the year, and during this period, the Shanghai Composite Index fell by about 29%.

From September 2007 to December 2008, affected by the collapse of the real estate market, the Federal Reserve reduced the federal funds rate to zero and began to implement dollar quantitative easing policy.

During this period, the Shanghai Composite Index fell by about 63%.

After that, until July to October 2019, the Federal Reserve began to cut interest rates, reducing the federal funds rate by 75 basis points, from 2.25%-2.5% to 1.5%-1.75%.

During this period, the Shanghai Composite Index fell by about 3%.

The most recent interest rate cut was in March 2020, to deal with the new crown, and cut interest rates twice in an unplanned emergency meeting.

The federal funds rate was reduced from 1.5%-1.75% to 0-0.25%.

During this period, the Shanghai Composite Index fell by about 9%.

In addition, many securities analysts also said that although the Federal Reserve's interest rate cut leads to loose liquidity and the logic of foreign capital flowing back is still valid, it is expected that the style of the A-share market before and after the interest rate cut is still dominated by domestic fundamentals.

Hong Kong stocks may usher in new opportunities for allocation.

The Federal Reserve's interest rate cut may support the bottoming out and rebound of Hong Kong stocks.

Under the linked exchange rate system, Hong Kong's interest rate trend is closely related to the pace of the Federal Reserve's interest rate hikes.

Therefore, the Hong Kong dollar has a certain "US dollar attribute", and when the Federal Reserve raises interest rates, the Hong Kong dollar interest rate will also be passively pushed up.

In 2023, the Hong Kong Monetary Authority raised the benchmark interest rate from 0.5% to 5.75%.

So when the Federal Reserve begins to cut interest rates, the Hong Kong dollar interest rate will also follow suit.Additionally, unlike the continuous rise of the U.S. stock market, the Hong Kong stock market is still in the "undervalued area," hence, the stock prices of Hong Kong stocks are more sensitive to the interest rate cuts by the Federal Reserve.

Looking at the market data, as of today's close of the Hong Kong stock market, the Hang Seng Index rose by 2.00%, and the Hang Seng Technology Index rose by 3.25%.

Midea Group and Vanke Enterprises increased by more than 8%, while Haidilao, Haier Smart Home, and JD.com increased by more than 7%, with gains higher than those of A-shares.

Apart from the Federal Reserve's interest rate cuts, according to a research report from CITIC Securities, Hong Kong stocks have begun to disclose the latest quarterly or semi-annual financial reports, and the expected profit growth rate of Hong Kong stocks has been revised upwards.

Against this backdrop, Hong Kong stocks will attract more capital allocation.

In particular, insurance companies are showing a preference for H-shares.

In addition to Rui Ren Life Insurance's stake in Longyuan Power and China Duty Free H-shares, on July 31, Great Wall Life Insurance announced the purchase of 1 million shares of Green Power Environmental H-shares, holding a total of 70.15 million shares after the increase, accounting for 5.03% of the total share capital of the listed company, triggering a stake.

Almost in sync with Great Wall Life Insurance, Taikang Life Insurance purchased shares of Huadian International and China Huaneng through the Hong Kong Stock Connect on July 30.

Taikang Life Insurance and the related parties and persons acting in concert participating in this stake hold a shareholding ratio of 5% in the two companies.

In addition to Great Wall Life Insurance's stake in Qinhuangdao Port H-shares in May, as of now, insurance capital has staked in 6 Hong Kong-listed companies.

At the same time, as of the end of the second quarter of this year, excluding QDII, there are a total of 3,594 mainland public funds that can invest in Hong Kong stocks, holding a market value of 375.7 billion yuan in Hong Kong stocks, an increase of 23.0% from 305.5 billion yuan in the first quarter.

The holding ratio of Hong Kong stocks is 24.1%, higher than the 19.0% in the first quarter.

Among them, actively managed equity funds increased their holding ratio from 17.1% in the first quarter to 21.7%, the highest since the end of 2021.

In terms of capital, in 2023, the northbound and southbound funds respectively saw net inflows of 44.4 billion and 314.6 billion yuan.

In 2024, the divergence between southbound and northbound funds has become more severe.

As of June 30, the northbound funds have seen a cumulative net inflow of 38.5 billion yuan, while the southbound funds have seen a net inflow of 371.4 billion yuan.