Global Markets React to Fed Rate Cut Expectations

The article discusses the current AI-driven market rally, with major US indexes hitting fresh records and tech companies like Nvidia and Microsoft seeing significant gains. OpenAI's restructuring has made Microsoft's stake in the company potentially highly valuable. Other news includes SK Hynix's record profit due to strong AI-fueled memory demand and Trump's potential tariff cuts on China. The article also touches on the Federal Reserve's expected rate cut and gold entering correction territory.

European stocks are expected to open lower on Wednesday as investors await the US Federal Reserve's interest rate decision. The Fed is widely expected to cut rates by a quarter-point, bringing the federal funds rate to 3.75%-4.00%. Investors are also awaiting guidance from Fed Chair Jerome Powell on future rate cuts. Earnings reports from major tech companies, including Alphabet, Meta Platforms, and Microsoft, are also in focus. Meanwhile, European banks Santander and Deutsche Bank reported positive earnings, with Santander's profit rising 7.8% year-on-year and Deutsche Bank's net profit beating expectations.

Japan's Nikkei 225 index has reached a record high above 51,000 for the first time, driven by optimism over U.S.-Japan trade ties and expectations of another Federal Reserve rate cut. The gain came after U.S. President Donald Trump and Japan's Prime Minister Sanae Takaichi signed a new rare earths framework. Markets are pricing in a high probability of another quarter-point reduction in the federal funds rate. Other Asia-Pacific markets traded mixed, with some gaining and others losing. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all closed higher overnight.

The US Federal Reserve's balance sheet is under scrutiny as liquidity concerns rise due to volatility in short-term interest rates and the repo market. The Fed is expected to cut interest rates and potentially end its quantitative tightening (QT) program. Analysts believe that the repo market's heaviness and consistent usage of the Fed's Standing Repo Facility (SRF) signal potential liquidity distress. The Treasury's increased issuance of Treasury bills has drained cash from the repo market, putting pressure on repo rates. The Fed faces pressure from the White House and is likely to prioritize risk management, potentially ending QT earlier than expected.