How to trade the Federal Reserve's new round of interest rate cuts? Morgan Stanley offers advice: allocate to emerging markets, gold, mining stocks, and stock derivatives

According to the Zhitong Finance APP, the Federal Reserve lowered the federal funds rate by 25 basis points as scheduled on Wednesday local time, marking the first rate cut since 2025, and the latest dot plot indicates two more rate cuts within the year. In response, JP Morgan released a research report stating that investors can trade the new round of Federal Reserve policy easing in the following ways:

1. Buy call options on iShares Emerging Markets ETF (EEM): The Federal Reserve's easing policy and a weak dollar will drive emerging markets to continue rising and pave the way for rate cuts by emerging market central banks;

2. Buy call spread options on SPDR Gold ETF (GLD): Rate cuts, stagflation concerns, risks to the independence of the Federal Reserve, and currency depreciation hedges may accelerate the process of gold rising to $4,000;

3. Buy call options on SPDR S&P Metals and Mining ETF (XME): Favorable conditions from emerging markets, artificial intelligence, and mergers and acquisitions are expected to drive mining stocks to new highs;

4. Switch between call options on SPDR Utilities Select Sector ETF (XLU) and SPDR Financial Select Sector ETF (XLF): Utilize the performance differences between cyclical and defensive stocks, as well as opportunities arising from declining bond yields.

JP Morgan pointed out that due to concerns about a repeat of last year's year-end financing tightness, equity financing costs are high at year-end, but market positions are far from last year's extreme levels. This provides opportunities for investors—by selling S&P 500 futures (SPX) or swap contracts while buying a basket of stocks or ETFs in the spot market, thus earning substantial returns.

JP Morgan stated that in structured products, spot trading is far above peak vega levels and is in the positive vanna range for index auto-redemption products. Despite recent strong performance, most risks are still linked to the Russell 2000 index. As the Russell 2000 index (RTY) approaches historical highs, most products will be knocked out on the next observation day (unless the market sells off), potentially driving high reinvestment/issuance activity. The dividend hedging risk for auto-redemption notes remains low.

JP Morgan added that the continued supply of auto-redemption notes suppresses the long-term volatility of RTY, but the index is less affected by short-term volatility suppression compared to the S&P 500 index. The firm continues to recommend going long on a 1-year RTX 60% upside variance portfolio and shorting a 1-year SPX variance portfolio to profit from high convexity and obtain substantial premiums.

Additionally, JP Morgan noted that due to persistently low market volatility, the stock leverage of the volatility target investment portfolio is above average, while commodity trading advisors (CTAs) remain generally long on global equities. Issuers are launching a large number of new leveraged single-stock ETFs, but demand is limited except for AI/cryptocurrency-related products. The Chicago Board Options Exchange (CBOE) announced plans to launch "Magnificent 10" index futures and options in the fourth quarter, which consists of the 10 largest U.S. stocks by market capitalization. This initiative aims to meet investors' demand for hedging or speculating on market performance concentrated in technology, especially against the backdrop of a highly concentrated U.S. stock market driven by a few giants