Allocate to Emerging Markets, Gold, Mining Stocks, and Equity Derivatives

The Federal Reserve cut the federal funds rate by 25 basis points as expected on Wednesday local time, marking the first rate cut since 2025. The latest dot plot indicates two more rate cuts are anticipated within this year. In response, JPMorgan issued a research report stating that investors can trade the Fed’s new round of policy easing in the following ways, including:

1) Buy $iShares MSCI Emerging Markets ETF (EEM.US)$ call options: The Fed’s easing policy and a weaker US dollar will drive continued gains in emerging markets and pave the way for interest rate cuts by emerging market central banks;

2) Buy $SPDR Gold ETF (GLD.US)$ call spread options: Rate cuts, concerns over stagflation, risks to the Fed’s independence, and currency devaluation hedging may accelerate gold’s rise towards $4,000;

3) Buy$SPDR S&P Metals & Mining ETF (XME.US)$Bullish Options: Emerging markets, artificial intelligence, and favorable mergers and acquisitions are expected to drive mining stocks to new highs;

4) Trading$Utilities Select Sector SPDR Fund (XLU.US)$ and $Financial Select Sector SPDR Fund (XLF.US)$Bullish option switching: leveraging the performance differences between cyclical and defensive stocks, as well as the opportunities brought by declining bond yields.

JPMorgan noted that the cost of equity financing remains high due to concerns about a repeat of last year’s year-end funding crunch, but market positioning is far from the extreme levels seen last year. This provides an opportunity for investors—to sell S&P 500 futures (SPX) or swaps while buying baskets of stocks or ETFs in the spot market, thereby earning substantial returns.

J.P. Morgan stated that in structured products, spot trading is significantly higher than peak vega levels, and it is in the positive vanna range for index auto-redemption products. Despite recent strong performance, most risks are still associated with$Russell 2000 Index (.RUT.US)$Hook. With the$E-mini Russell 2000 Index Futures (DEC5) (RTYmain.US)$ Near its historical high, most products will be knocked out on the next observation date (unless a market sell-off occurs), potentially driving high reinvestment/issuance activity. The dividend hedging risk for autocallable notes remains low.

JPMorgan added that the continued supply of autocallable notes is suppressing the long-term volatility of the RTY; however, the index is less affected by short-term volatility compared to others.$S&P 500 Index (.SPX.US)$The bank continues to recommend going long on a one-year RTX 60% upside variance swap and shorting a one-year SPX variance swap to capitalize on high convexity and capture substantial premiums.

Furthermore, JPMorgan noted that due to persistently low market volatility, volatility-targeting portfolios have higher-than-average equity leverage, while Commodity Trading Advisors (CTAs) remain broadly long global equities. Issuers are launching new leveraged single-stock ETFs in large volumes, but demand is limited except for AI/crypto-related products.$Cboe Global Markets (CBOE.US)$Announced plans to launch futures and options on the ‘Magnificent 10’ index in the fourth quarter, which consists of the ten largest U.S. stocks by market capitalization. This move aims to meet investor demand for hedging or speculating on the performance of technology-heavy markets, especially amid the highly concentrated U.S. stock market where a few giants are driving the broader index higher.

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Editor/Lee