Small caps to benefit from lower rates, yield curve disinversion
Main U.S. indexes gain; Nasdaq out front, up ~0.8%
Comm Svcs leads S&P 500 sector gainers; Real Est sole loser
Dollar dips; bitcoin up >1%; gold up >1.5%; crude gains >2.5%
U.S. 10-Year Treasury yield rises to ~3.69%
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SMALL CAPS TO BENEFIT FROM LOWER RATES, YIELD CURVE DISINVERSION
Small cap stocks should be among the bigger beneficiaries as the Federal Reserve undertakes a highly telegraphed interest rate cutting cycle that is expected to begin this month.
Smaller firms carry more floating rate debt than larger firms, which means they will benefit more from the shifting Fed policy, UBS equity analysts including Jonathan Golub said in a report.
Traders are pricing in aggressive Fed cuts, with the U.S. central bank expected to cut its benchmark rate by 250 basis points by the end of 2025. FEDWATCH
A 25-basis point reduction is seen most likely at its September 17-18 meeting, after stickier than expected core inflation for August reduced the chances of a larger 50 basis points cut. FEDWATCH
"The 50 bp cut would be obviously more beneficial to small caps than 25," said Francis Gannon, co-chief investment officer at small-cap specialists Royce Investment Partners.
But, Gannon added, "Using history as a guide, an easing Fed is positive for small caps. Twenty five or 50 kind of wouldn't matter. Just to see them starting to ease even a little bit would be positive for the small cap space."
The disinversion in the Treasury yield curve, with the 10-year yield rising above two-year ones for the first time since July 2022, is also a boon for smaller firms.
“When the curve is inverted, this is a drag on profitability and corporate risk profiles,” UBS said. “As short-term rates decline, smaller companies should benefit far more than large.”
(Karen Brettell, Alden Bentley)
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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