The May FOMC meeting in the United States resulted in no change in interest rates, which was in line with market expectations. Inflation in the US remains stable for now, and while a rate cut is still expected, the recent policy change in lowering the bank capital requirement indicates a precursor to the rate cut. Nvidia continues to outperform market expectations, leading to new highs in the US stock market. The AI narrative is still strong, but the upcoming rate cut cycle may change the market dynamics. The crypto market has seen positive developments, with the SEC approving the listing standards for Ethereum spot ETFs, and the FIT 21 bill aiming to regulate the crypto industry and guide its future development.
Firstly, the Federal Reserve in the US is still monitoring the conditions for a rate cut, but the global rate cut cycle may have already begun. Earlier this month, the FOMC announced that the target range for the federal funds rate remains at 5.25% to 5.50%, and they will slow down quantitative tightening (QT) starting from June. The meeting mainly focused on the high inflation and the need to wait for further rate cuts, which was in line with market expectations. The market currently believes that there is a close to 50% probability of a rate cut in September, with a rate cut expected by the end of the year.
As the month comes to an end, Federal Reserve Governor Christopher Waller further clarified the specific conditions for future rate cuts, providing clearer guidance to the market. Waller stated that they would need to see three to five months of good inflation data before considering a rate cut by the end of the year, as long as there is no significant weakening in the labor market.
Waller’s remarks make sense. The latest CPI data for April in the US met market expectations with a 3.4% increase. Although the labor market is temporarily not meeting expectations with an increase of 175,000 non-farm jobs in April, the initial jobless claims are still at historically low levels, indicating the resilience of the job market. In addition, the May Markit Manufacturing PMI (preliminary) rose to 50.9, higher than the market’s expected 49.9 and the previous reading of 50.0, while the Services PMI (preliminary) rose to 54.8, significantly higher than the market’s expected 51.2 and the previous reading of 51.3. Therefore, the Federal Reserve indeed needs to continue monitoring the situation.
However, despite the Federal Reserve’s cautious approach, there are already indications that a rate cut is imminent. On the 19th of this month, the Federal Reserve and two other regulatory agencies were working on a new plan to relax the previous proposal’s requirements for capital increases for large banks. The previous plan required large US banks to increase their capital by nearly 20%, but the new plan may only require around half of that. This indicates that the Federal Reserve has allowed banks to increase their lending ratios to alleviate the profit crisis, which is considered an important signal for a rate cut.
Looking at the global perspective, the rate cut cycle has already started. Nomura Securities pointed out in its latest report that the global rate cut cycle is already underway, with more than a dozen major central banks cutting rates. Nomura expects rate cuts from the European Central Bank, Swiss National Bank, Bank of Canada, and National Bank of Poland by the end of June. In the context of the global rate cut cycle, a rate cut in the US is just a matter of time.
Secondly, Nvidia continues to reach new highs, which may change the market dynamics in the upcoming rate cut cycle. On May 22nd, Nvidia announced its first-quarter performance for the fiscal year 2025, which greatly exceeded market expectations. Its revenue increased by 262% to $26 billion, surpassing the market’s general expectation of $24.5 billion and reaching a historical high. Net profit increased by 620% to $14.88 billion, with an adjusted earnings per share of $6.12, a 19% increase compared to the previous quarter and a 461% increase year-on-year, beating the market’s expectation of $5.59. Data center revenue also reached a historical high, increasing by 427% to $22.6 billion, surpassing the market’s expectation of $22.1 billion. The projected Q2 revenue is expected to increase to $28 billion, with a market expectation of $26.8 billion.
On May 23rd, Nvidia saw a maximum increase of 11.92% in its stock price, surpassing a market value of $2.6 trillion, becoming the third-largest company in terms of market value in the US, surpassing the entire German stock market. Interestingly, on the same day, the other six companies in the “big seven” of the US stock market (Apple, Tesla, Microsoft, Amazon, Meta, Alphabet) all experienced a decline. Therefore, some people jokingly said, “Now the US stock market relies solely on Nvidia.”
This statement is not entirely unreasonable. The US stock market’s gains since last year have mostly been driven by the AI sector, with minimal gains in other individual stocks. If we extend the timeline further, we can see that the “big seven” companies strongly associated with AI have almost supported the entire US stock market. Excluding these seven companies, the overall return of the US stock market is not high, and the global market, excluding the US, has almost zero gains. Therefore, it can be said that the global market’s rise in recent years has been almost entirely driven by technological innovation in the US. This is not a good phenomenon, as a market driven by AI will inevitably experience a major decline when the AI bubble bursts. Some even say that “the day Nvidia peaks will mark the beginning of a decline in the US stock market.”
However, due to the upcoming rate cut cycle, the ample liquidity may offset the potential risks of the AI bubble. In an interest rate hike cycle, the market will first embrace the sectors with the most certainty to meet the demand for risk aversion, resulting in an extreme AI consolidation trend. The arrival of the rate cut cycle will increase market liquidity and risk appetite. At that time, the long-depleted non-AI sectors may also see a revival, and the style of the US stock market may change.
Thirdly, the crypto market has seen a series of positive developments, with the SEC approving the listing standards for Ethereum spot ETFs, and the FIT 21 bill potentially becoming a guiding light for the future development of the industry.
After a dull April, crypto investors finally welcomed a new wave of market vitality in May, with Bitcoin surpassing $71,000 and Ethereum skyrocketing over 20% on May 21st, approaching $4,000.
The core reason for this violent rebound is the highly anticipated positive news about Ethereum ETFs in the US. Although the market officially reacted on May 24th, the violent rebound and subsequent consolidation indicate that the market sees this as a long-term positive development.
On May 24th, the SEC officially approved the 19b-4 filing for Ethereum ETFs, while the S-1 filing is still pending approval. The 19b-4 rule is a regulation established by the SEC to govern the trading of securities listed on exchange-traded markets. The rule requires exchanges to develop and implement reasonable rules to prevent manipulation, fraud, and unfair trading practices. The S-1 form is the registration statement form required by the SEC for companies going public through an initial public offering (IPO). In other words, the SEC has approved various regulations regarding the listing of Ethereum ETFs, but no institutional spot products have been officially listed yet. Although the S-1 has not been approved, the rules have been established, indicating that the listing of Ethereum spot ETFs is inevitable in the future.
In conjunction with the pending approval of Ethereum spot ETFs, the FIT 21 bill also received a vote in favor from the House of Representatives. The bill regulates the regulatory framework for digital assets, clearly defines what constitutes a digital asset, and delineates the responsibilities of the SEC and CFTC, providing guidance for future applications of spot ETFs for more crypto assets and a path to compliance.
For a long time, the SEC has maintained an “ambiguous and resistant” attitude towards the crypto industry, attempting to exclude crypto assets with a “strongly ambiguous” approach. However, the sudden approval of Ethereum spot ETFs by the SEC, which exceeded market expectations, is surprising. However, this sudden change may not be accidental, as both parties in the US may be using crypto assets as a bargaining chip in political games.
On May 16th, some Democratic and Republican senators in the US Senate voted together to pass the repeal of the SAB 121 bill, which established accounting standards for companies holding custody of cryptocurrencies, meaning that banks holding custody of cryptocurrencies must also hold the corresponding cash. Although President Biden previously stated that he would veto the bill to allow SAB 121 to continue, overturning SAB 121 may only be a matter of time. The repeal of SAB 121 sends a key signal as some Democratic senators have been following Senator Elizabeth Warren’s lead on financial and technology affairs, but now they are breaking away from Warren’s consensus and opposing the SEC’s excessive intervention, which may signify a major shift in the Democratic Party’s cryptocurrency policy.
On the Republican side, former President Trump even shouted the slogan “to ensure the future of cryptocurrencies in America.” Trump is trying to attract crypto asset holders in a high-profile manner in hopes of gaining their votes.
In conclusion, the global trend of loose monetary policies is taking shape. Although the Federal Reserve is cautious about rate cuts, the remarks from Powell and the Nomura report indicate the possibility of a rate cut. In addition, the rate cuts by other major central banks and the relaxation of bank capital requirements by the Federal Reserve point to a global monetary policy of easing. It is important to closely monitor these signals and consider opportunities in the bond market and interest rate-sensitive assets.
The strong performance of the technology sector continues. Nvidia’s earnings report exceeded market expectations, and the sustained new highs in the three major US stock indices indicate the growth potential of tech stocks. Continue to focus on innovative leaders in the technology industry and evaluate their long-term growth potential.
The SEC’s potential abandonment of considering Ethereum as a security, as well as the emergence of the FIT 21 bill, indicate that the crypto industry is gradually moving towards compliance, bringing positive developments to the crypto market and providing new investment opportunities for investors.
