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Recently, the volatility in the U.S. financial markets is intertwined with two powerful forces: the "rate cut trade" and the "Trump trade."

According to a report released by the Zhang Jiqiang team at Huatai Securities on Tuesday, the CPI inflation data for June fell more than expected, coupled with Powell's dovish remarks, which boosted expectations for the Federal Reserve to make its first rate cut of the year in September. After the first presidential debate and the shooting incident, Trump's poll support rate advantage has expanded, and the U.S. is expected to enter the "Trump 2.0" era.

In recent days, under the alternating dominance of the "rate cut trade" and the "Trump trade," the U.S. stock market has rebounded with fluctuations, the U.S. Treasury yield curve has steepened, the dollar has weakened, gold and Bitcoin have been supported, and emerging market currencies have turned a corner.

Huatai Securities points out that the steepening of the U.S. Treasury yield curve is a direction with relatively high certainty, and small-cap U.S. stocks may benefit from the resonance of good news. CICC also points out that after the rate cut is realized, U.S. Treasury rates may fall below 4% under trading factors, and gold is expected to reach the milestone of $2,500 per ounce within the year.

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"Rate Cut Trade" VS "Trump Trade"

How will the interweaving of the "Trump trade" and the "rate cut trade" affect the market? In this regard, Huatai Securities has proposed four scenarios:

When both the "rate cut trade" and the "Trump trade" weaken, the market will enter a defensive state.

When the "rate cut trade" weakens and the "Trump trade" strengthens, moderate risk aversion may push up the dollar.

When the "rate cut trade" strengthens and the "Trump trade" weakens, the market will show a situation of repeated entanglement after weighing, but overall it is beneficial for long-term U.S. Treasuries, European stocks, and AH shares, and the renminbi and oil prices will also be boosted.

When the "Trump trade" and the "rate cut trade" both strengthen at the same time, the market may face a more complex situation:If a "weak resonance" occurs between the two, it would be beneficial for U.S. large-cap technology stocks, Japanese stocks, steel, and other assets. If a "strong resonance" emerges, assets like Bitcoin and gold may gain favor, and the U.S. Treasury yield curve could become steeper.

Clearly, the current situation does not fall into the first three categories:

On one hand, the June CPI inflation data unexpectedly declined, coupled with Powell's dovish remarks, which bolstered expectations for the Federal Reserve to cut interest rates for the first time this year in September, making the "rate cut trade" increasingly powerful. On the other hand, after the first presidential debate and shooting incidents, Trump's poll support has widened, and the "Trump trade" is making a comeback.

How can investors grasp the situation under strong resonance?

Huatai Securities points out that U.S. small-cap stocks may benefit from the resonance of the rate cut trade and the "Trump trade." Under the rate cut trade, U.S. small-cap stocks, regional banks, and biotechnology, which are rate-sensitive and lagging, may have greater elasticity.

In late July, the U.S. stock market seasonally begins to weaken, and it is necessary to pay attention to disturbances such as semi-annual earnings reports, the July FOMC, and the U.S. election. If there is a significant correction in U.S. large-cap technology stocks, it may be an opportunity to replenish positions.

Furthermore, the policy propositions of "Trump 2.0" may lead to an increase in U.S. inflation expectations and a steepening of the U.S. Treasury curve; an expansionary policy mix is beneficial to traditional energy, infrastructure, financial, and real estate industries.

The draft platform for the Republican Party in 2024 has a distinct Trumpian style, continuing to emphasize conservatism with "America First, Return to Common Sense," focusing on issues such as reducing inflation, combating illegal immigration, revitalizing the economy, and promoting the reflow of manufacturing.

The vice-presidential candidate, Vance, supports increasing tariffs, advocates for a significant reduction in immigration, raising the minimum wage, and describes himself as a "realist" in foreign affairs.

Huatai Securities believes that as long as there is no risk of recession in the U.S. fundamentals, the overall downward space for long-term interest rates is limited, and it continues to maintain the view that the 10-year U.S. Treasury rate will fluctuate widely around 4.2~4.3%, with a central axis, within the range of 4.0~4.5%. The steepening of the curve is also a feasible direction.Based on the relationship between U.S. Treasury yields and expectations for interest rate cuts, CICC (China International Capital Corporation) anticipates that U.S. Treasury yields may fluctuate within the range of 4.2% to 4.7% in the short term, which roughly corresponds to the expectations of three interest rate cuts within the year and no rate cuts. After the interest rate cuts are realized, the yields might fall below 4% due to trading factors, and then gradually rebound as expectations for positive growth emerge, eventually shifting back towards assets that benefit from reflation, such as bulk commodities like copper and oil, and cyclical sectors of the U.S. stock market.

Similarly to U.S. Treasuries, the outlook for gold is also projected in this manner. CICC points out that, assuming a real interest rate of 1% to 1.5% and a U.S. dollar index between 102 and 106, gold could potentially surpass the significant milestone of $2,500 per ounce within the year.