❗️ Fed Rate Decision: Buy the rumour sell the fact?

Good Morning!

Inflation in the UK remained unchanged at 2.2% in August, but services inflation ticked up to 5.6%. This data, coupled with anticipation of the Fed's decision, has London stocks pulling back. The FTSE 100 and midcap index both dipped 0.2%. Meanwhile, Reckitt Benckiser saw a 2% boost on rumors of a potential homecare asset sale. All eyes are now on the Fed, with bets on a larger rate cut surging despite most forecasts still pointing to a more modest reduction.

In today’s email:

• FedWatch: All eyes on interest rate decision today

• Bitcoin: back above $60k, awaiting FOMC

• USDS: A new stablecoin in town

• Silver: For higher % but correlated returns to Gold 🚀

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THE BIG IDEA

Fed's big decision: 25bp or 50bp cut? Markets hold their breath

The Federal Reserve's looming rate decision has the financial world on edge. With markets heavily leaning towards a hefty 50bp cut, the plot thickens. But here's the twist – a more modest 25bp slice might actually pack a bigger punch.

Why? Well, picture this: We're in uncharted territory. The Fed's never kicked off a rate-cutting spree with risk assets riding this high. A 50bp cut could send stocks into overdrive – not exactly what the Fed's after. On the flip side, a measured 25bp move? That's the Fed flexing its muscles, showing it won't be pushed around by market pressures.

Whatever the Fed decides, we could be in for a wild ride. Market rates might just pull a surprise move upwards, regardless of the cut size. It's happened before – about 50% of the time, historically.

Why? All the excitement's baked in pre-decision

Once the cards are on the table, reality sets in, and we might see a tactical bump before rates eventually test lower waters again.

Meanwhile, across the pond, the ECB's playing it cool. Despite slashing rates, their Main Refinancing Operations facility's seeing crickets – just €1.9bn allotted among 29 bidders this week. It's a far cry from the UK, where the Bank of England's short-term liquidity uptake has skyrocketed from £1bn to £44bn since March.

As we count down to the Fed's announcement, markets are holding their breath. Spain and France are keeping busy, issuing bonds left and right, while the US Treasury's dipping its toes in with some 10Y TIPS.

So, buckle up. Whether it's 25bp or 50bp, we're in for an interesting day today. The only certainty? Uncertainty itself.

MARKETS AT A GLANCE

TOP NEWS

Traders bet big on Fed's 50bp cut, risking losses if Powell goes small

Record wagers on a 50bp Fed rate cut Wednesday have pushed market-implied odds over 50%. If the Fed opts for a 25bp cut instead, short-term Treasuries could see yields jump 10-15 basis points. Recent Treasury rallies and bullish sentiment leave markets vulnerable if Powell signals a gradual approach. Hedge funds are bearish on long-end futures, while asset managers extend bullish positions.

UK inflation steady, but services sector heats up

UK inflation held at 2.2% in August, matching forecasts but below the BoE's 2.4% expectation. Services inflation, a key BoE focus, rose to 5.6%, driven by a 22.2% jump in air fares. This data dampens expectations for an immediate rate cut, with markets now pricing a 28% chance of a cut on Thursday. The government sees progress but acknowledges prices remain high.

State Street's alternative ambitions: Hedge fund returns in a bottle?

State Street's launching a new fund aiming to replicate the HFRX Global Hedge Fund Index. But with average hedge fund returns at a lackluster 1.62% over 10 years, is this just bottling mediocrity? The strategy's vague, the filing's sparse, and it's only available in Europe. Meanwhile, the ETF world's exploding with 1,192 new funds this year alone. Is State Street playing catch-up or leading the pack?

CRYPTO

Bitcoin surges past $61k as crypto outpaces stocks before Fed decision

Bitcoin spiked above $61,000 as cryptocurrencies outperformed stocks and gold ahead of the Fed's rate decision. Markets are pricing a 61% chance of a 50bp cut, with Bitcoin potentially targeting $90,000 post-cut. Analysts expect a strong Q4 for crypto, driven by macroeconomic conditions, political influence, and institutional inflows. Most altcoins also saw gains, with the total crypto market cap reaching $2.08 trillion.

BitGo unveils USDS: A new twist on stablecoins

BitGo's launching USDS, a dollar-backed stablecoin with a unique twist: it rewards institutions providing liquidity. Set for January 2025, USDS aims to create a more open, fair system. Backed by T-bills and cash, it'll distribute reserve returns to participating institutions monthly. BitGo targets $10 billion in USDS assets within a year and plans listings on major exchanges.

Singapore’s DBS Bank to Launch Bitcoin and Ethereum Options Trading

DBS Bank plans to introduce over-the-counter (OTC) crypto options trading and structured notes for institutional clients in Q4 2024, becoming the first Asian bank to offer Bitcoin and Ethereum-related financial products. These new offerings allow eligible investors to hedge against market swings and earn returns on digital assets. DBS also reported a significant increase in crypto trading volumes, with digital assets under custody rising by 80% in early 2024.

Republicans Press SEC for Clarification on Crypto Airdrops

Republican lawmakers Patrick McHenry and Tom Emmer sent a letter to SEC Chair Gary Gensler urging the agency to clarify its stance on crypto airdrops. They accused the SEC of creating a "hostile regulatory environment" by considering airdrops as potential securities and questioned how the SEC distinguishes them from airline miles or credit card points. The lawmakers demand a response by September 30, as the SEC faces scrutiny over its approach to digital assets.

GOLD

Gold Rally Reaches New Highs, Silver Follows with Strong Potential

Gold continues its record-breaking rally, nearing $2,600 per ounce with a 25% year-to-date gain, driven by geopolitical tensions, expectations of U.S. rate cuts, and central bank demand. As the cost of holding gold decreases, interest in gold-backed ETFs may rise. Meanwhile, silver has outperformed gold, delivering returns twice as large this month, benefiting from its dual role as both a precious and industrial metal. Silver remains well below its 2011 peak, offering more potential for investors cautious about gold's elevated prices.

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