AMERICAS Ailing dollar gets toehold as Fed awaited

Markets are anticipating a cautious 25 basis point Federal Reserve rate cut, likely in 2025, despite robust August retail sales growth, which has stabilized the dollar at four-year lows against the euro while U.S. long bonds rallied. This outlook, combined with a generally weaker dollar, is driving varied global market responses, including Hong Kong shares hitting four-year highs, but Nvidia is experiencing a downturn due to reports of weak China demand for AI chips and regulatory pressure. Concurrently, the Bank of Canada is expected to ease rates, while the Bank of England faces sticky inflation, and geopolitical developments like the US-China TikTok deal and a US-UK tech pact are also influencing sentiment and investment flows.

Analysis

Global markets are pricing in a 25 basis point Federal Reserve rate cut for 2025, creating divergent outcomes across asset classes. This expectation persists despite strong U.S. economic data, including a 5% annual increase in August retail sales, which has tempered bets for a more aggressive cut and caused U.S. stocks to stall. While long-duration U.S. bonds rallied, with the 30-year yield hitting a 4-1/2 month low of 4.62%, the dollar has stabilized at four-year lows against the euro. This environment has fueled a rally in Hong Kong shares to a four-year high, supported by the weaker dollar and positive sentiment from a U.S.-China deal concerning TikTok. In stark contrast, Nvidia shares have declined on reports of weak Chinese demand and a regulatory directive for domestic tech firms to cease purchasing its AI chips, representing a significant geopolitical headwind. Monetary policy is also diverging globally; the Bank of Canada is expected to cut rates amid soft inflation, whereas the Bank of England is holding firm as UK inflation remains at 3.8%. A new US-UK technology pact, including a £31 billion investment pledge led by Microsoft, provides a positive catalyst for UK assets.

Key Decisions for Investors

• Given the contradiction between an anticipated Fed rate cut and robust U.S. economic data like 5% retail sales growth, investors should monitor upcoming inflation and employment figures, as any surprises could challenge the Fed's easing path and introduce volatility.
• The reported Chinese regulatory block on Nvidia's AI chips constitutes a material risk, warranting a reassessment of exposure to semiconductor firms heavily reliant on the Chinese market and a close watch for further signs of tech decoupling.
• With the dollar weak against the euro and the Chinese yuan at its strongest for the year, investors could consider overweighting non-US assets, particularly in markets like Hong Kong that are currently benefiting from these currency dynamics and positive local sentiment.
• The combination of a strong sterling, sticky 3.8% UK inflation delaying Bank of England easing, and the new £31 billion US-UK tech investment pact suggests a constructive outlook for UK-domiciled assets, especially within the technology sector.