Jing Shun: The recent market correction may be due to overreaction. It is expected that the United States will only cut interest rates by 0.25% in September

According to Zhitong Finance APP, Kristina Hooper, Chief Global Market Strategist of Jingshun, stated that the recent market correction may be due to overreaction, and it is expected that the Federal Reserve's interest rate cut at the September meeting will not exceed 0.25%. She believes that the recent global market sell-off is due to overreaction, and the reasons why stocks may have stabilized include, firstly, the Bank of Japan's commitment to remain cautious about interest rate hikes. The Bank of Japan's interest rate hike two weeks ago triggered a sell-off in the international market. In order to calm market tension, the Bank of Japan stated that it will maintain a very cautious attitude towards further interest rate hikes in the near future.
The Bank of Japan's slightly unexpected interest rate hike disrupted the spread trading. Since the Federal Reserve began tightening policy in 2022, the interest rate differential between the US dollar and the Japanese yen has been quite large, which has increased the potential profit of borrowing Japanese yen to invest in US dollars. However, the recent hawkish stance of the Bank of Japan has reduced the possibility of this potential profit. But last week, the Deputy Governor of the Bank of Japan, Shinichi Uchida, stated that due to the volatile financial markets both domestically and internationally, they believe it is necessary to maintain the current loose level of monetary policy.
Secondly, the number of people applying for unemployment benefits in the United States is lower than expected. In addition, key technical indicators indicate that the stock market may be oversold, such as the Relative Strength Index (RSI), which is a momentum indicator used to measure the speed and magnitude of recent price changes in securities or indices, and to evaluate whether investors are overbought or oversold in related investments. RSI of 70 or above indicates overbought situation. RSI of 30 or below indicates oversold.
The RSI of the S&P 500 index rose above 81 on July 10th, indicating that the market is overbought. But the situation quickly reversed, and the RSI of the S&P 500 index subsequently fell to 30 on August 5th, indicating oversold in the market. Similarly, the MSCI Global Index rose above 80 on July 16th and then fell to 27 on August 5th, indicating oversold in the market. Afterwards, the RSI of the two indices returned to normal and currently remains around 44-45.
Meanwhile, bearish sentiment significantly intensified last week. The bearish sentiment refers to the market's expectation that stock prices will decline in the next six months, with this indicator soaring 12.3 percentage points to 37.5% last week. This is much higher than the historical average of 31.0% and at the highest level since 2024.
At present, the profit prospects of American companies are stable, with 91% of companies in the S&P 500 index reporting second quarter results, and 78% of companies exceeding expectations in profits. The profit outlook is quite optimistic. The profit growth of the S&P 500 index is expected to reach 10.8% year-on-year in 2024. The performance in the third quarter may weaken, with an expected year-on-year profit growth of 5.4%, but there is a possibility of significant growth in the fourth quarter.
Profit growth is expected to remain strong in 2025, with a year-on-year increase of up to 15.2%. She believes that the Federal Reserve is expected to adopt a cautious attitude towards interest rate cuts. The Federal Reserve will not conduct an emergency interest rate cut from now until the September meeting, as there is no emergency situation, so there is no reason to do so. In fact, if the Federal Reserve really cuts interest rates before September, she believes it will actually cause huge market anxiety.
She believes that the Fed's interest rate cuts will initially be very cautious, believing that the Fed's rate cut at the September meeting will not exceed 25 basis points. If the interest rate cut in September exceeds 25 basis points, it will instead trigger market anxiety, as it indicates that the Federal Reserve is more concerned about the health of the economy than ever before.
Although it is almost certain that the Federal Reserve will cut interest rates in September, the current market is concerned that the release of the July Consumer Price Index this week may weaken the relevant possibility. She has high reservations about this, as recent overall data shows that the anti inflation process continues, most notably the wage growth in the July US employment report, which only increased by 3.6% year-on-year.
Although the stock seems to have stabilized, she believes that the tension has not dissipated, which may still increase market volatility and trigger an overreaction to data and related developments. She believes that long-term investors can benefit from viewing their investment journey as a marathon rather than a sprint.