January twentieth, two thousand twenty-five to January twenty-first, two thousand twenty-five

I. Foundation

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

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 gradually becoming a “coercive mechanism”, and the effects of this behavioral adjustment are not limited to economic policy itself, but are also gradually extending into broader social and political spheres.

Europeans’ trust in traditional parties is declining, and they are turning to 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 among parties inevitably lead back to the same issue: under fiscal dominance, how much is spent, and how is it used?

Behind national debt lies the rotation of safe assets, as China’s demand for U.S. Treasuries continues to weaken. See the chart below: the white line represents China’s holdings of U.S. Treasuries, the orange line the PBOC’s gold holdings, and the blue line the 10-year Treasury yield. The rotation of safe assets is pushing interest rates higher, and rising rates inevitably prompt discussion of fiscal sustainability; that discussion further deepens the narrative crisis surrounding safe assets, These developments reinforce and intensify one another.

Chart: Chinese demand wanes

Chart: GS also softened its stance at the policy meeting

U.S. stocks continued the trend from the end of 12 last year, and price volatility was quite severe at the start of the new year. At the very least, the market is currently in a transition period—not merely a transition in trading logic, but a broader shift toward a new policy framework under a wider market logic.The defining change in the trading environment brought by this transition is a wider range of possible outcomes. That 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 U.S. stocks is still probably upward, but higher volatility may persist for some time, In other words, after two years of high Sharpe ratios and excellent β returns, the market will lean more toward a “Trader’s Market” rather than a simple “People’s Market`”; clear-cut opportunities will be significantly fewer.

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

Outside equities, it is important to go with the flow and avoid opposing the core trends, including a strong dollar and a steep yield curve, because no one knows what will ultimately happen under a new policy framework.

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

2025.01.20

The dollar’s upside potential

As mentioned in Notes250120, “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 shift toward a new policy framework under a wider market logic.

In this situation, the dollar’s recent strength may mainly reflect the resilience of the U.S. 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 most likely weaken to 7.40 within 3 months, then gradually move to 7.50; the exchange rate will ultimately depend on policy choices.

The dollar’s strength may ultimately allow U.S. stocks to keep rising alongside economic performance, but if either of the following two short-term risks materializes, the stock market may come under pressure:1) A further rise in U.S. Treasury yields, whether due to stronger inflation data or increased fiscal concerns; 2) Weak macroeconomic data leading the market to question the sustainability of U.S. economic “exceptionalism.”

In the first scenario, the dollar would generally be supported going forward; in the second, the dollar may perform poorly against less risk-sensitive currency pairs (such as EUR/USD) and safe-haven currencies (such as JPY and CHF).But in either scenario, SEK would generally 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 very different paths, the chart below compares post-crisis per-capita GDP growth in the United States and Europe. It clearly shows that Europe as a whole has experienced a marked lack of growth momentum:

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 Notes250121 Interest-Rate Pricing, Safe Assets, and Behavioral Mechanisms says, 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, So far this year, European equities have performed better than expected throughout January, and banks, which had languished for a long time, broke out decisively after consolidating for 8 months.

Chart: European markets as a whole delivered an unexpectedly strong performance in 25

Chart: Major sectors stage a significant breakout

Wall Street investors broadly believe that, amid immense economic pressure, the renewed growth sentiment following Trump’s inauguration could be a sufficiently powerful catalyst to drive substantive change in Europe. Europe needs to keep pace with growth in this reaccelerating global economic competition; politically, this is a game it has no choice but to join.

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: she wants them to shift their focus back from risk prevention to putting growth first.

Image source: Mondaq

Image source: FT

“Media reports say that UK Chancellor Rachel Reeves wants regulators to take more risks and reduce overly cautious rules that impede 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 industries by reducing red tape and opening markets to new entrants. Before Christmas, Reeves wrote to 16 UK regulators, asking them to submit plans by this Thursday to make their respective sectors more conducive to growth and investment (we have heard this before). Reeves reportedly called this meeting to hear their plans in person 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 give a speech in two weeks.”

On the fiscal side, in terms of defense spending, EU spending has risen 50% from its recent low and continues to climb:

Image source: Fiscal/defense spending surge

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

Image source: U.S. capital is trying to revitalize European assets

Just a few days ago, Rio Tinto and Glencore continued negotiations on the largest mining merger in history.If the two companies merge, they could overtake the mining industry's current leader, BHP (BHP), driven mainly by producers' desire to expand copper production, and this time BHP/Anglo’s standstill agreement has also expired. Glencore and Rio Tinto both own some of the world’s highest-quality copper mines. Glencore raised this possibility in 2014, but it did not succeed then. If it happens this time, it will be an important landmark event for European equity indices as a whole.

Image source: Bloomberg report

Europe’s important luxury-goods consumption is also now making a strong comeback led by Richemont (see Notes250120, “A Major Inflection Point in Consumption”),In 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

A major inflection point in consumption

Benefiting from a stronger U.S. economy and unexpectedly stable sales trends in Asia, European luxury goods have risen, led by Richemont’s better-than-expected results, essentially, a weaker currency has provided a tailwind for the export-oriented segment of the market.

Chart: Richemont trading at new all-time highs

Besides the earnings leadership, the luxury sector’s strong comeback is also related to the Trump team’s discussion of replacing a one-off, sharp tariff increase with tariffs that rise by 2-5% each month. The news was the direct catalyst for buying sentiment.

The main market discussion now is that many hedge funds are debating whether to short this luxury rebound, because the sector’s 14-day RSI is currently in overbought territory and the trading price is above the 200-day moving average. But with the macro narrative unchanged, shorting carries substantial risk. The broad strength shown in this earnings release is driven by more than brand momentum., with Richemont beating expectations in every 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 beats suggest that industry demand may indeed be near an inflection point, and momentum-driven sectors will most likely continue to perform well in the short term. The counterargument now made by luxury bears is that an improved U.S. outlook is already priced into market expectations, so that alone is not enough to drive further upward revisions to expectations, But another point worth discussing is that early signs of a rebound from the bottom are now emerging in the Chinese market too; that is the crucial factor.