July twenty-fifth, two thousand twenty-five
《The Great Reversal》
《The Great Reversal》
One, another extension of the deadline and more signs of currency appreciation
Bessent is expected to meet Chinese officials in Stockholm early next week and indicated that he will likely discuss extending Trump’s upcoming trade deadline with China (the current deadline is 8 12). Bessent said, “We will look at a possible extension... I think the trade relationship with China is very good.”
Chart: A possible new extension plan
Chart: Overcapacity is also in the U.S. side’s interest
Source link:https://www.cnbc.com/2025/07/22/bessent-china-tariffs-trade-stockholm.html
Yesterday’s Notes discussed how the current improvement in the competitiveness of China’s export growth comes mainly from the renminbi’s relative depreciation, rather than price cuts. In fact, this is also a delicate, fragile balance controlled by non-market means:The resilience of China’s exports and the renminbi’s undervaluation (whether measured on a real trade-weighted basis or, especially, against the U.S. dollar) both point to potential for further renminbi appreciation, and a stronger currency would in turn undermine exports themselves.
Chart: Export data over a longer time horizon
There is another point to note: year to date, exporters’ foreign-exchange settlement ratio has remained low, which means that when the time is right, more U.S. dollars will be available to exchange for renminbi...
Chart: Another potential factor supporting currency appreciation
Two, uncertainty in the market, short portfolios, momentum factors, and exclusion-based trading
Recently, regional markets have been repricing uncertainty, the repricing process is a reshuffling of factor returns and strategy portfolios，Relatively speaking, because the repricing path is fairly clear and stable, this is also a market environment in which a stable trading edge can be obtained.
As regional agreements are gradually implemented, we can expect several things to happen:
1) Any trade agreement being implemented will be better than the previous “worst-case expectations plus uncertainty pricing”
Chart: Notes 250509 before the trade negotiations
2) This means that the concentrated momentum trades that had accumulated amid the previous uncertainty will continue to reverse
3) During the covering process, the most heavily shorted baskets in each market will also continue to reverse
4) This reversal will continue at least until all agreements are reached
Take the Japanese market after the Japan–U.S. agreement was reached as an example:
The agreement’s implementation means many industries previously excluded from the investment universe can be considered again. This is an important turning point in the market regime,
Based on the performance of momentum-factor returns over 12 months, among the key factor returns, the momentum factor fell by more than 3% that day, while the value, high-beta and high-volatility factors rose(The automotive and transport-equipment sector returned 10% that day; it had been the most heavily shorted sector previously, but the trend still holds even excluding automotive and transport equipment.)
Chart: Japan’s market on 7 23
Capital flows in European markets are highly similar:
Chart: Short baskets and momentum short baskets
In fact, the market’s most heavily shorted basket is highly correlated with the short side of momentum strategies, and during periods when agreements are implemented, both short baskets and momentum-strategy shorts see substantial short covering and gains, any positive news about future trade agreements will extend the rally driven by this round of capital flows..
In other words, As earnings season approaches and the negative effects of tariffs are reassessed, baskets of assets that have underperformed recently across markets, along with assets with high short interest, will enter a golden period of value recovery, while the momentum strategies used previously will gradually be unwound, securities bought by capital during the risk-off period solely through “exclusion” (such as stocks related to intangible assets without solid fundamental support) may face downward pressure in the medium term...
Momentum trades and exclusion strategies from the preceding period need to be monitored closely or closed out early...
Chart: Overall valuations of the intangible-asset basket have undergone a significant downward shock
In tariff-related trades, the intangible-asset basket was selected through exclusion and its valuation was pushed higher, but many of the assets in this group lack sufficient fundamental support, As uncertainty fades, exclusion-based trading is bound to come to an end.
One event worth considering occurred during the pandemic in 20, in 11, when vaccine development made a major breakthrough. This was also a global repricing of uncertainty; after the turning point materialized, the momentum factor also fell sharply:
Chart: The 12-month momentum factor return in 20-21 plunged sharply after vaccine development.
Such declines tend to persist, just as the trading phase during periods of rising uncertainty does..
Markets often move symmetrically.
We’ll talk more the day after tomorrow. Wishing everyone a happy weekend in advance!
A quick plug: we ask the traders in our trading room to produce roughly one single-market note every 2 days, covering U.S. stocks, A-shares and Hong Kong stocks, and commodities. We’ll select the better ones and post them in the relevant private groups,
Those interested can subscribe as needed (subscribe only if you need it; don’t waste your money):
U.S. stocks:https://www.meridianresearch.app/home?product=us-strategies
A-shares and Hong Kong:https://www.meridianresearch.app/home?product=asia-strategies
Commodities:https://www.meridianresearch.app/home?product=commodity-strategies
As for the level of detail, we’ll probably get down to the industry level. For mainland China, we’ll try to avoid crowded trades; if we write too specifically, people may front-run them. We may be able to be more specific about U.S. stocks, but readers will still need to think through and fill in the gaps themselves.
The overall hit rate has been pretty good lately.
We don’t know whether everyone likes this new format for Notes. If you think there’s a better approach, you can leave a like to let us know. We’ll use the feedback we receive to decide whether to continue with this kind of content or return to the previous column format.
Wishing you all the best.
2025.07.25
Note: All content in this article is for reference only, does not constitute investment advice, and should not be used as the basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information when making decisions.