From January twentieth, two thousand twenty-five to January twenty-second, two thousand twenty-five

I. Foundation

resistance to change and hence greater dependability for the results shown in the past.

How much of Trump’s tariffs has the market priced in?

1）Wall Street is generally watching S5MATR

2）Another way to observe the build-up of “tariff risk” positions is to compare the US Dollar Index with the 2-year Treasury yield:

2025.01.22

II. Insights

Our Viewpoints and ideas on market.

Interest-rate pricing, safe assets and behavioral mechanisms

Changes in bond-market yields and the market’s response are now gradually becoming a “coercive mechanism”, and the impact of this behavioral adjustment is not limited to economic policy itself, but is also gradually extending into broader social and political spheres.

European voters’ trust in traditional parties is declining, and they are turning to support non-mainstream parties, including those on the far right and far left, such as Germany’s AfD and France’s National Rally. Current polling data clearly show that support for these nontraditional parties is rising.The disputes between political parties naturally lead back to the same issue: under fiscal dominance, how much will be spent, and how will it be used?

Behind national debt is the rotation of safe assets, demand from China for US Treasuries continues to weaken. As shown below, the white line represents US Treasuries held by China, the orange line the PBOC’s gold holdings, and the blue line the 10-year Treasury yield. The rotation of safe assets is driving interest rates higher, while rising rates inevitably trigger discussion of fiscal sustainability, and that discussion further deepens the narrative crisis around safe assets, These developments reinforce and intensify one another.

Chart: Chinese demand wanes

Chart: GS has also softened on rate decisions

US equities have continued the trend from the end of 12, with very sharp price swings at the start of the new year. At a minimum, the market is currently in a transition period—not merely a shift in trading logic, but a broader transition under market logic toward a new policy regime.The defining change in the trading environment brought by this transition is a wider distribution of possible outcomes. This means greater uncertainty will create more friction, reflected in the market as reduced portfolio risk allocation.

The next question is: how should trading strategies be adjusted?

The main trend in US equities is still probably upward, but elevated volatility may persist for some time, In other words, after two years of high Sharpe ratios and excellent beta returns, the market will become more of a “Trader’s Market” than simply a “People’s Market`”; clear-cut opportunities will decline significantly.

If brute-force trading worked last year, what may be needed more at the start of this year is subtlety and flexibility.

Outside equities, it is important to go with the trend and not fight the core trends, including a strong dollar and a steep yield curve, because no one knows what will ultimately happen under a new policy regime.

Chart: The current rebound in interest rates is truly very rare

2025.01.20

The dollar’s upside potential

As mentioned in Notes 250120, “Interest-rate pricing, safe assets and behavioral mechanisms,” our market is in a transition period—not merely a transition in trading logic, but a broader transition under market logic toward a new policy regime.

In this context, the dollar’s recent strength may mainly reflect the resilience of the US economy and a shift in policy expectations, rather than a higher tariff premium. This means that the subsequent implementation of actual tariffs could further strengthen the dollar. USD/CNY will probably weaken to 7.40 within 3 months, then gradually move to 7.50; the final exchange rate will depend on policy choices.

Dollar strength may ultimately allow US equities to continue rising in line with economic performance, but If either of the following two short-term risks materializes, equities may come under pressure:1) A further rise in Treasury yields, whether due to stronger inflation data or increased fiscal concerns; 2) weak macroeconomic data that lead the market to question the sustainability of US economic “exceptionalism.”

In the first scenario, the outlook for the dollar would be broadly positive; in the second, the dollar may perform poorly against non-risk-sensitive currency pairs (such as EUR/USD) and safe-haven currencies (such as JPY and CHF).But in either scenario, SEK would usually come under pressure, while the bullish case for USD/SEK is relatively persistent.

Chart: The next technical level is probably around 11.60

2025.01.21

Wall Street’s next bet: Europe’s revival

Since the financial crisis, Europe and the United States have taken two completely different paths, the chart below compares post-crisis per-capita GDP growth in the United States and Europe. It clearly shows a significant loss of growth momentum across Europe:

Chart: Per-capita GDP in the United States and Europe after the crisis

Behind the crisis in the economic model lies a crisis in the social and political system, as Notes 250121 Interest-rate pricing, safe assets and behavioral mechanisms as described in it, traditional mainstream parties in Western Europe are facing the greatest pressure in their history.

By 25, The Europe-revival trade is now being put on the table by some investors, European equities outperformed expectations throughout January so far this year, and banks—which had been languishing for a long time—posted a clear breakout after 8 months of consolidation.

Chart: The European market as a whole delivered an upside surprise in 25

Chart: Major sectors have broken out significantly

Wall Street investors broadly believe that, amid enormous economic pressure, the renewed growth sentiment that has emerged since Trump took office could be a sufficiently powerful catalyst for substantive change in Europe. Europe needs to keep pace with growth in this reaccelerating global economic competition; this is a game it has to join for political reasons.

More and more evidence suggests that this change is possible:

1) Last week, the Bank of England followed the United States’ lead, postponing implementation of the Basel regulatory reforms until 2027;

2) Rachel Reeves, the finance minister in the UK Labour government, significantly changed her position in her latest media exchanges, conveying a message to regulators: asking them to refocus from risk prevention on prioritizing growth.

Image source: Mondaq

Image source: FT

“Media reports say that UK Finance Minister Rachel Reeves wants regulators to take more risks and reduce overly cautious rules that hinder economic growth. Apparently, this Thursday she will hold a meeting with the heads of the UK’s largest regulators, including the Financial Conduct Authority (FCA) and the Securities and Exchange Commission (CMA). She wants these bodies to outline plans to promote growth in their respective sectors by reducing red tape and opening markets to new entrants. Before Christmas, Reeves wrote to 16 UK regulators, asking them to propose plans by this Thursday to make their respective sectors more conducive to growth and investment (we have heard this before). Reports say Reeves convened the meeting to hear their plans firsthand and challenge those that are not ambitious enough. The biggest complaint Reeves has heard from business groups is red tape, so she wants to address their concerns. The timing was chosen because Reeves will deliver a speech in two weeks.”

On the fiscal side, in terms of defense spending, EU spending has risen 50% from its recent lows and is continuing to increase:

Image source: surge in fiscal/defense spending

London-listed diversified industrial company Smiths Group broke to a new high, reaching an all-time high. The trade was driven by the company’s announcement that it had attracted a new, rare US activist shareholder demanding a more proactive approach to creating shareholder value:

Image source: US capital is trying to revitalize European assets

Just a few days ago, Rio Tinto and Glencore continued negotiations on what would be the largest mining merger in history.If the two companies merge, they could overtake BHP (BHP), currently the mining industry’s leader. The main driver is producers’ desire to expand copper production, and this time the standstill agreement with BHP/Anglo has also expired. Glencore and Rio Tinto each own some of the world’s highest-quality copper mines. Glencore raised this idea in 2014, but it did not succeed at the time. If it happens this time, it will be a major landmark event for European stock indices as a whole.

Image source: Bloomberg report

Some of Europe’s most important luxury-goods consumption is now also making a strong comeback led by Richemont (see Notes 250120, “The major consumer turning point”),Under the current economic and interest-rate environment, European indices may continue to outperform.

2025.01.21

III. Market Pulse

Our latest Comments on the economic and market environment

The major consumer turning point

Benefiting from a stronger US economy and unexpectedly stable sales trends in Asia, European luxury goods strengthened, led by Richemont’s better-than-expected results, in essence, currency weakness has provided a tailwind for the market’s export-oriented segments.

Chart: Richemont trading at new all-time highs

In addition to earnings leadership, the strong comeback in luxury goods is also related to the Trump team’s discussion of replacing a one-time, large tariff increase with tariffs that rise by 2 -5% each month; the news directly triggered buying sentiment.

The main market debate now is that many hedge funds are weighing whether to short this luxury rebound, because the sector’s 14-day RSI is currently in overbought territory and prices are trading above the 200-day moving average. But with the macro narrative unchanged, shorting carries significant risk. The broad strength in this earnings season was driven by more than brand momentum, with Richemont exceeding expectations in every product category, region and channel, showing that current growth is no longer driven solely by the brand momentum of Cartier and Van Cleef。As the luxury sector bottoms out, if currency trends remain unchanged, the sector’s rebound is likely to continue.

Broad earnings outperformance suggests that industry demand may indeed be near a turning point, and momentum-driven sectors are likely to continue performing well in the short term. The counterargument from luxury bears is that an improved US outlook is already priced into the market, so that alone is not enough to drive further upward revisions to expectations, But another point worth discussing is that the Chinese market is now also showing early signs of a rebound from the bottom; that is the key factor.

2025.01.20

The major consumer turning point (supplement): characteristics of the luxury-goods industry

LVMH's earnings report will be released on 1.28. Following Richemont's results, market expectations for LVMH's constant-currency growth have risen, but mainly in Fashion & Leather Goods and Watches & Jewelry.

Please explain further.Notes250120: A Major Turning Point in Consumption In it, “European luxury stocks rallied, led by Richemont's better-than-expected results,”in essence, currency weakness has provided a tailwind for the market’s export-oriented segments.” In this sentence, investors' current concern about the luxury sector is mainly margins. The market assumes that LVMH will continue pouring money into its brands amid a difficult industry environment, though the earnings boost from exchange rates may offset this impact.

Luxury is a momentum-driven sector; as long as the news keeps improving, the sector's performance will continue to strengthen.Although visibility for 25 remains low at present, greater confidence in a recovery in the China market is needed to attract long-term capital. Positioning remains light, however, and LVMH next week may once again deliver results above expectations.

Chart: Global tourist duty-free spending is picking back up