How to trade the new round of interest rate cuts by the Federal Reserve? JP Morgan recommends investing in emerging markets, gold, mining stocks, and stock derivatives.

The Federal Reserve cut the federal funds rate by 25 basis points on Wednesday, marking the first rate cut since 2025, with the latest dot plot indicating two more rate cuts within the year. In response, J.P. Morgan released a research report suggesting investors can trade the new round of Fed policy easing in the following ways: 1) Buy call options on iShares Emerging Markets ETF (EEM): Fed easing and a weaker dollar will continue to drive emerging markets higher, paving the way for central banks in emerging markets to cut rates. 2) Buy call spread options on SPDR Gold ETF (GLD): Rate cuts, stagflation worries, Fed independence risks, and currency devaluation hedging could accelerate the rise of gold to $4000. 3) Buy call options on SPDR Metals and Mining ETF (XME): Positive news on emerging markets, artificial intelligence, and mergers and acquisitions are likely to drive mining stocks to new highs. 4) Switch call options on SPDR Utilities Select Sector ETF (XLU) and SPDR Gold Trust Sector ETF (XLF): Take advantage of performance differences between cyclical and defensive stocks, as well as opportunities from declining bond yields. J.P. Morgan points out that due to concerns over a repeat of last year's year-end funding pressures, equity financing costs are high at the end of the year, but market positions are far from the extreme levels of last year. This provides investors with an opportunity to sell S&P 500 futures (SPX) or swap contracts, while simultaneously buying baskets of stocks or ETFs in the cash market to earn substantial profits. J.P. Morgan states that in structured products, cash trading is much higher than peak vega levels and in index automatic redemption products, it is in the positive vanna range. Although recent performance has been strong, most of the risks are still linked to the Russell 2000 Index. With the Russell 2000 Index (RTY) approaching historical highs, most products may knock out on the next observation day (unless there is a market sell-off), which could drive high reinvestment/issuance activities. The risk of dividend hedging for automatic redemption notes remains low. Additionally, J.P. Morgan notes that the supply of automatic redemption notes continues to suppress the RTY long-term volatility, but the index is less affected by short-term volatility than the S&P 500. The bank continues to recommend going long on a 1-year RTX 60% upside variance combination and short on a 1-year SPX variance combination to take advantage of high convexity profits and substantial premiums. Furthermore, J.P. Morgan states that with market volatility remaining low, the leverage of volatility target portfolio stocks is higher than average, while commodity trading advisors (CTAs) are generally long global stocks. 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 US stocks by market capitalization. This move aims to meet the demand from investors looking to hedge or speculate on the market performance of technology-heavy indices, especially in the context of a highly concentrated US stock market where a few giants have been driving market gains.