The Federal Reserve's policy decision will be the focus of global markets this week. Market expectations for the Fed to cut interest rates by 25 basis points at this meeting reached 87.4%, according to CME FedWatch Tool. The change marks a significant reversal in market expectations for the direction of the Fed's monetary policy: in previous weeks, there was less than a 30% chance the Fed would cut interest rates.
Market interpretation: Many analysts believe that the Federal Reserve may temporarily keep interest rates unchanged after this rate cut, waiting for economic data in the first quarter of 2026. Although this expectation is widely held, there are also market views that disagreements may arise within the Fed meeting, especially on the specific details of monetary policy, which may leave uncertainty for the future policy direction.
Impact: Interest rates and stock market performance. Expectations for the Federal Reserve to cut interest rates have increased, causing the dollar to strengthen and U.S. Treasury yields to rise. The benchmark 10-year Treasury note yield has hit 4.17%, its highest level since September. Stocks overall were under pressure, with the S&P 500 down about 0.35% and relative strength in technology stocks, such as the S&P Technology Index.
Impact of Japan Earthquake: A powerful 7.6-magnitude earthquake struck northeastern Japan, and the Japanese government issued an evacuation order for about 90,000 residents and issued a tsunami warning. The market's reaction to the natural disaster has been relatively calm, but the potential extent of the earthquake's damage and its possible impact on the Bank of Japan's plan to raise interest rates remain key concerns.
USD/JPY exchange rate fluctuations: Due to the earthquake event, the USD/JPY exchange rate rose 0.3%, demonstrating the Japanese yen's safe-haven properties in risk events. Analysts believe that if the earthquake causes further pressure on the Japanese economy, the Bank of Japan may postpone its original plan to raise interest rates, which will affect the trend of the yen.
Market Sentiment: The earthquake news has undoubtedly exacerbated market uncertainty, especially against the dual background of slowing global economic growth and inflationary pressures. The global capital market has begun to increase demand for "safe assets."
·In addition to the Federal Reserve, the central banks of Canada, Switzerland and Australia will also hold meetings this week. However, the policy decisions of these central banks did not bring much surprise to the market. They are expected to keep rates unchanged:
·Swiss National Bank (SNB): Although the Swiss National Bank is under greater pressure from the strength of the Swiss franc, it has kept interest rates at 0% and is unlikely to cut interest rates again.
·The Reserve Bank of Australia (RBA): After the release of a series of hot economic data, market expectations for the Reserve Bank of Australia to relax policy have basically disappeared, and it is even expected that interest rates may be raised again by the end of 2026.
Market Outlook: The policy divergence of major global central banks may lead to further volatility in the currency market and bond market. Investors need to pay close attention to the statements of each central bank in order to respond to market changes.
In the energy market, U.S. crude oil prices fell $1.20 to close at $58.88 a barrel, while Brent crude oil futures also fell $1.26 to $62.49. One reason is the resumption of oil production in Iraq, which accounts for 0.5% of global oil supply. Nonetheless, crude oil prices are still supported by tight supply and demand and geopolitical conflicts, and there will still be some volatility in the short term.
1. Monetary policy uncertainty remains the dominant factor in the market: The Federal Reserve's interest rate cut signal may stimulate risky assets in the short term, but the market will pay close attention to whether it can continue to be loose, especially the economic performance in the first quarter of 2026.
2. Risk sentiment drives market sentiment fluctuations: The dual impact of the economic policies of the United States and Japan and natural disasters may intensify short-term fluctuations in global markets. Investors need to look for hedging opportunities in asset allocation amid global political and economic uncertainty.
3. Asset allocation suggestions:
·Defensive assets: Safe-haven assets such as gold, silver and government bonds may experience a phased rise.
·Volatilities in technology stocks: Although technology stocks are under pressure from market fluctuations in the short term, they still have good growth potential in the long term. It is recommended to strategically allocate high-growth stocks.
Faced with uncertainty about Fed policy expectations, geopolitical risks, and global economic growth, investors must maintain a flexible asset allocation strategy. Especially in the context of unclear monetary policy directions and intensified economic volatility, the proportion of gold and other defensive assets may need to be further increased to cope with potential market adjustments and changes in risk premiums.
