From February tenth, two thousand twenty-five to February eleventh, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
How should we view European markets’ pricing of Trump’s tariffs?
This section is mainly intended to help everyone trade the second phase in European markets, alongside Notes 250211 The second phase of European trading: from cyclical to defensive, banks at the top Read them together.In Europe, the greatest tariff-risk exposure is concentrated mainly in industrials and consumer sectors. Here I’m including a few representative names with the largest exposures for use as proxies to monitor going forward.
(Note: When reading the notes, think one step further: high exposure to tariffs now also means repricing when tariff risks recede. We don’t know when that will be, but this trade will certainly emerge in the future.)
MBG；MAERSKB；BMW；ADS；IFX；ASSAB；P911；LR；KNIN；DGE；SKFB；VOLCARB；RI；STMMI；EVK；PUM；ELUXB；LXS；CPR；LIGHT；RCO；SVITZR
2025.02.11
II. Insights
Our Viewpoints and ideas on market.
Lagarde and von der Leyen
“We can no longer waste our advantages by imposing limits on ourselves.”—Lagarde and von der Leyen (Ursula von der Leyen), in a commentary article published in the Financial Times, “Europe has heard the signal for change» (Europe has got the message on change), they wrote.
The article concludes by emphasizing:“The stakes are too high for mistakes.” “We are ready to do whatever it takes to put Europe back on track.” This wording directly echoes Draghi’s famous 2012 speech on saving the euro—“whatever it takes.”
One is the president of the ECB, the other the president of the European Commission, further validating our next bet on 250121 Wall Street:The view on Europe’s revival is that, for the first time, a growth narrative has been put forward from the top down as Europe’s top priority. It is the clearest trend, and the trading cycle could last as little as several quarters or as long as several years.
“As the global artificial intelligence (AI) revolution accelerates, the EU risks being sidelined. Our traditional manufacturing giants are losing global market share. Geopolitical shifts have turned dependencies into vulnerabilities, while high energy costs are weighing on European businesses.”
Remember: when policymakers and politicians panic, markets rise.
[Further reading]
250121 Wall Street’s next bet: Europe’s revival
250130 European trading continues
250106 Early-year selloff in European bonds and market pricing of ECB rate cuts
250107 Divergence in European markets: The Gravitational Effect
241204 A potential long position in Germany is taking shape
250120 Interest-rate pricing, safe assets, and behavioral mechanisms
Von der Leyen and Lagarde believe that Europe has the necessary conditions to catch up in the technological race. At the same time, “We have an opportunity to bring down energy prices in a lasting way.”The final point also comes down to lowering energy prices, which is the same goal as that of the Trump administration.
“Firms still face long permitting procedures, onerous reporting requirements and diverging enforcement of digital rules.” Easing complex regulation would free up companies’ resources and dynamism; this is one of the clearest ways to lift overall valuations in European markets, The valuation gains now being realized reflect this, and the results can be seen in the differing performance across market sectors.
In 250120 Interest-rate pricing, safe assets, and behavioral mechanisms In that piece, we noted that when facing an existential threat (the governing party), leaders around the world will inevitably compete to promote output, productivity, prosperity, employment, safety, and security to meet the demands of increasingly anxious citizens, If they cannot meet those demands, the end result is that they leave office and are replaced by the next person.
Ultimately, all these goals require funding, and the most effective means are often stimulus policies, deregulation, and the market’s “animal spirits.” Fiscal austerity does not help achieve these goals.
Therefore, regardless of what is said or how documents are worded, what is certain is that any current government anywhere in the world will ultimately choose higher fiscal spending + lower taxes out of fear, with no exceptions.
Combined with the practical implementation of technological applications, this ultimately creates the macroeconomic regime of an Inflation Boom.
2025.02.10
Negative spreads and delayed rate-cut expectations
Liquidity easing in China has paused somewhat, government bond issuance has increased significantly since the Lunar New Year, with weekly net financing currently at about 3500 hundred million yuan, meaning monthly net supply could reach 1.4 trillion yuan, the highest level since 11 of last year.This will cause liquidity in the banking system to become tight.
2 20 is the tax payment date, so liquidity is likely to remain tight or tighten further over the coming week or so, until the tax payment deadline.
Market expectations for the timing of the PBOC’s next rate cut have been pushed back, particularly because foreign-exchange pressures persist and the PBOC is now continuously maintaining FX stability through signals of a strong renminbi fixing.
The next rate-cut window could open as early as 4, in which case it would either be a path in which trade negotiations fail and China decides to let the renminbi exchange rate go or a path in which trade tensions ease significantly and the USD/CNY exchange rate stays below 7.2; the former is more likely.
Now, the entire mainland China repo curve is now in negative-spread territory, and the government bond curve for 1-10-year maturities is also below interbank funding costs:
Chart: The entire CNY repo curve is below the 7-day repo benchmark rate
Chart: Government bonds with maturities of 1 years and 10 years are both currently below DR001 and DR007 (bank funding costs)
At the end of last year, investors could ignore negative carry, mainly because ongoing mark-to-market swings in long-bond/interest-rate-swap returns were generating gains, thanks to monetary policy shifting to “moderately accommodative” and the PBOC’s continued purchases of short-term government bonds through open-market operations.
However, since January, the PBOC has stopped buying short-term bonds to curb the pace of the rise. Expectations for the timing of rate cuts have now also been pushed back, and negative returns make it harder for the market to hold long-term rate positions.Beyond foreign-exchange pressures, the authorities may also want to limit leverage in the bond market and steer funds toward the real economy.
On the other hand, the positive risk sentiment in equities now may persist through the National Congress on 3/5, and market expectations that policy will tilt toward the demand side are adding further pressure:
Chart: China rates are under pressure to follow equities higher
However, This year's work report (released on 3/5) itself is still unlikely to exceed market expectations for fiscal policy.(most expect a growth target of around 5% for GDP, a deficit of 4%/GDP, 3 trillion yuan in ultra-long-term special government bonds, and local special-purpose bonds slightly above last year’s 3.9 trillion yuan), and trade tensions are unlikely to disappear, limiting bond-market selling driven by equity risk appetite Bond-market selling triggered by equity risk appetite is limited。
2025.02.11
The second phase of the European trade: from cyclicals to defensives, banks at the top
Following up on (250130 The European trade continues + 250202 Weekly Wrap+250121 Wall Street’s next bet: Europe’s revival),Since we began tracking them, European bank share prices have risen sharply, mainly because relatively optimistic earnings growth has lifted valuations across the trade.At this stage, however, the bank trade is encountering more and more problems.
1/ Fund flows between cyclical and defensive sectors
The first wave of the European trade was focused mainly on cyclical stocks, with pronounced outperformance, as we have been pointing out for some time, but by In February, more and more funds flowed into defensive sectors to protect current portfolios, reducing risk.
Chart: European defensive sectors are also moving higher; the second phase of the trade is here
2/ Tariffs
Tariffs remain a significant issue, and uncertainty around trade policy is increasing, Cyclical sectors are much more vulnerable to tariff risks, and after the valuation re-rating, the second phase of the trade is unlikely to see another large-scale move higher.
3/ Rates
European rates are being repriced now. Although the impact on European banks is limited for the moment, the more aggressive ECB rate-cutting cycle that can be anticipated may put pressure on banks. And Notes250210Lagarde and von der Leyen together Read them together.
Given forecasts of weak economic growth and continued disinflation, and Lagarde’s indication that ECB staff have lowered their estimate of the neutral rate, A rate cut on 4/17 is highly likely. The baseline forecast is for successive rate cuts totaling 25 basis points, until 7, when it reaches 1.75%.
2025.02.11
III. Market Pulse
Our latest Comments on the economic and market environment
Japan and the yen trade
I’ve noticed that some people sometimes read only the notes for trading days and skip the weekend material, but be sure to read yesterday’s weekend file, especially the sections on Japan and the yen, The yen has strengthened along with the broader currency-appreciation trend, but this trend has not yet received much attention; more capital will certainly line up to enter later.
A few additions here:
Chart: the EURJPY trade pair mentioned in the weekend file
Chart: going long the short end of Japanese rates remains a steady and sustained trading strategy
Chart: wage growth in Japan
2025.02.10
Note: All content herein is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.