February third, two thousand twenty-five to February fourth, two thousand twenty-five

I. Foundation 

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

1948: The Fed, foreign exchange markets, commodities, and U.S. Treasuries

The main issue in 1948 was combating postwar inflation; the economy was in a phase in which inflation was extremely high in absolute terms (CPI reaching 10%) but was falling rapidly.In 1948year 1month 9day, the Federal Reserve announced its first interest rate hike in ten years, raising the discount rate; it also raised the reserve requirement ratio for commercial bank deposits on 1month 23day, tightening monetary policy.

Before the Federal Reserve became independent in 1951, it was responsible for keeping Treasury rates low to facilitate government financing, which kept U.S. Treasury rates at very low levels. Commodity prices fell sharply that year, which on the one hand could not cause interest rates to fall much further, while on the other hand it hurt corporate earnings; therefore, during this period, stocks and commodities were positively correlated. Falling commodity prices hurt the U.S. stock market, and the Dow Jones Industrial Average continued to decline, reaching its market low in 48.

After the market bottomed in 2, on 5 3 of that year, the Federal Reserve amended Regulation T and Regulation U, allowing investors to engage in securities-market margin trading (75%), while the tax-cut billThe Revenue Act of 1948 was forced through (Truman vetoed it; the House passed it). The market bottomed and rebounded. On 3 4, Truman signed the Marshall Plan to rebuild Europe, and the rally continued through 6 of that year.

On 1 6, the Federal Reserve tightened monetary policy further, raising the reserve requirement ratio from 22% to 24%; in mid-to-late 6, the First Berlin Crisis broke out, The threat of war halted the market’s advance.In 8 of the same year With commodity prices falling, CPI remained volatile at high levels, and the Federal Reserve tightened monetary policy further; on 12 8, rates were raised again, with the discount rate moving from 1.25% to 1.5%, and the market declined unevenly from 6 through 9.

From 9 to 11, the international situation improved and U.S. domestic industrial production recovered year over year, until Truman in 11 won reelection on a platform of government intervention and social welfare, dashing expectations of tax cuts; the market fell, then recovered in 12, but declined 2.1% for the year.

On 16 1 of the same year, the French government contacted the British Parliament to discuss and consider adjusting the franc’s exchange rate, in the hope of reaching a new workable arrangement for the franc-dollar exchange rate The French government’s main goal was to stabilize the French economy, and its fiscal and budgetary measures were the first step in this plan. The next step was to adjust the exchange rate to account for rising prices in France. In their view, setting a new fixed exchange rate was not feasible at this stage of the economic program. They therefore considered it necessary, during the transition, to let some of the convertible currencies entering France find their appropriate exchange-rate level through the operation of the free market.

Washington believed that freedom in the foreign exchange market should not apply to exchange rates for commercial transactions, but should be limited to financial transactions, such as repatriating French capital from abroad. France found that, given its own economic circumstances, it could not depart from its existing approach.

The Bretton Woods Agreement required members to obtain approval from the Fund before changing the par value of their currencies, and they had also pledged not to adopt multiple-currency practices without authorization from the Fund. There is no doubt that it was for these reasons that France applied for the Fund’s approval.

France repeatedly made clear that these proposals were intended as transitional measures to address the current urgent needs, with the goal of stabilizing the franc at a single fixed exchange rate.British policy chose a two-pronged approach: doing everything possible to help the French government achieve its goal of a single fixed exchange rate as soon as possible, while taking the necessary measures along the way to limit the effects on its own currency and the many other currencies it was closely monitoring.

Paris’s new free market differs from the free foreign-exchange market before the war. It would operate through authorized banks in Paris and be open only to residents of French territory wishing to buy dollars or escudos for approved purposes. It was not intended to facilitate capital flight, currency speculation, or arbitrage between different currencies.

The International Monetary Fund tried to persuade France to make it a transitional measure rather than a permanent arrangement.France’s actions effectively demonstrated that if a government cannot prevent inflation and rising production costs, no system of foreign-exchange controls can keep a currency at a fixed level, calling the effectiveness of the entire Bretton Woods system into question to some extent; this raised the question of whether the system was based on the availability of various currencies rather than on people’s willingness and ability to exchange services, raw materials, and goods.

The franc crisis occurred in January of that year, and the franc depreciated 44.45% against the U.S. dollar.

[Further reading]

n 1948-01-26 FRENCH FRANC (DEVALUATION)

2025.02.03

II. Insights 

Our Viewpoints and ideas on market.

Revisiting political noise and the ultimate performance of assets

Last year, we published an article in the Foundation section of our community titled “Micro-level corporate performance matters more than macro politics in the U.S. stock market.” It said:“In the U.S. stock market, political developments may have less influence on stocks than people imagine. Even clearly directed policies, such as tax rates and fossil-fuel regulation, sometimes produce results contrary to expectations. Experience shows that corporate earnings matter far more than who occupies the Oval Office.”

See Notes241031 Micro-level corporate performance matters more than macro politics in the U.S. stock market Today, I’d like to add some further thoughts on this issue.

Many people who started investing in China’s A-share market feel uncomfortable when they begin trading U.S. markets. Many mainland researchers also naturally tend to view overseas markets through the lens of a policy-driven market and, when taking a top-down approach, start with policy.

This is not that the interaction between policy changes and local market fluctuations is unimportant; in fact, this interaction clearly exists, especially when the government is large and highly visible (as with the deficit issue).The key is that a basic principle of trading overseas markets is to first distinguish everyday political noise from the ultimate performance of assets.

 Chart: S&P sector performance during Trump’s previous term and Obama’s terms

Contrary to many people’s intuition; the chart above compares sector returns during Trump’s first term with those during Obama’s two terms. Although their policies and philosophies were completely different, the leaders of the rankings were broadly similar: technology and consumer discretionary were the best-performing sectors under both administrations. This was driven by industry cycles, business characteristics, and the micro-level performance and growth of companies themselves.

Policy merely raises volatility in parts of the market for a time. Over the long term, one of the most important macro perspectives remains that: the long-term determining influence of the economy and earnings outweighs domestic politics (and international geopolitics).

2025.02.05

III. Market Pulse 

Our latest Comments on the economic and market environment

Trump imposes tariffs on imports from Mexico, Canada, and China

Trump signed an executive order imposing tariffs on imports from Mexico, Canada, and China, effective 2 4 The White House has tied the removal of these tariffs to improvements in immigration and fentanyl issues, but has provided no specific targets. Although the outlook remains uncertain, Wall Street broadly believes that the tariffs on Canada and Mexico tariffs may be short-term.

This order is essentially identical to the proposal he put forward last year, so it has effectively already been priced in.(See Notes241130 Trump Tariffs Impact on Greater China Tech Hardware & Server ODMs)

1) The executive order signed by Trump imposes a 25% tariff on imports from Mexico and a 25% tariff on imports from Canada, excluding energy products, Energy products are subject to a 10% tariff, while imports from imports from China are subject to a 10% tariff.

These tariffs will be added on top of the existing tariffs. Details on the specific products subject to the lower energy tariff have not been announced, but it is expected to cover oil, natural gas, and electricity. A subsequent Federal Register notice may provide implementation details, including the specific product codes eligible for the lower rate.

2) The White House emphasized in the executive order a“retaliation clause”, meaning that if a country responds to U.S. tariffs by imposing import duties on U.S. exports or taking similar measures, the president can increase or expand the tariffs imposed under this order to ensure the measure’s effectiveness.Although this is clearly a warning of possible retaliation, it does not actually take effect automatically.

3) The tariff program takes effect on 4 2. The White House fact sheet on tariffs and executive orders emphasized that fentanyl and immigration issues were the reasons for imposing the tariffs, but provided no clear conditions for their removal apart from cooperation and improvements on immigration and fentanyl issues. Given their potential economic effects and the general conditions the White House set for lifting the tariffs, it is reasonable to consider these tariffs are more likely to be temporary.

4) According to estimates by GS, tariffs lasting 25% on imports from Canada and Mexico would raise the U.S. effective tariff rate by 7 percentage points, increasing core PCE prices by 0.7% and negatively affecting GDP by 0.4%. A 10% tariff on energy products would partially mitigate this effect.

[Further reading]

n Notes250122 How much of Trump’s tariffs has the market priced in?

n Notes241127 The renminbi: no rush to act

n Notes250129 How did the Fed view tariffs during the previous trade war?

n Notes241226 U.S. consumer exposure to imports from China

n Notes250115 Extreme Market Pricing and Inauguration Day Behavior

n Notes241120 Commodities: Three Trades on Tariffs and Tail Risks

2025.02.03

Policy Whiplash and Dollar Trades

The dollar plunged sharply throughout the day, quickly erasing its earlier outperformance driven by tariff news.

Tariffs on Canada and Mexico were delayed by 30 days following talks with Sheinbaum and Trudeau, sending the Canadian dollar soaring 80 basis points; after Trump spoke with Trudeau, Canada agreed to a 13-billion-dollar border plan to stem fentanyl inflows, while the Mexican peso rebounded sharply, falling USDMXN by 160 basis points and returning to Friday’s level.

The euro also fell under pressure by 30 basis points, becoming the weakest currency in G10 as Trump continues to consider 10% tariffs on Europe. Tariffs on China have not gone away, but USDCNH fell 20 basis points over the day, steadily declining since news broke that tariffs on Mexico were delayed. It is also supported by the People’s Bank of China’s midpoint mechanism, which kept volatility within a 2%-day trading range of around 7.34;The first pricing after China’s holiday ends on Wednesday will be the most important signal for the subsequent direction of the move. Keep a close eye on it.

Long USD in the short term (This is a short-term trend, so short-term traders should continue to trade with the trend; pullbacks are entry points, and there may be a symmetrical move lower.)It mainly rests on three factors: 1)Flexible exchange rates The mechanism offsets cost changes; 2) tariff implementation and potential supply disruptions fuel demand for the dollar Safe-haven demand, driving the dollar’s outperformance against currencies of small open economies and emerging markets; 3)Tariffs take effect Releases room for upside, as the market prices in subsequent policy adjustments by China.

Overall, if policy does not change much, we still see USD/CNY in the 7.40–-7.50 range, and EUR/USD is still likely the clearest pair to trade to the downside, but In the short term, only partial realization is likely; the market is familiar with Trump’s tendency to change course on a whim.With FX trading proving difficult, you can position in equity markets in line with this trend.

2025.02.04

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.