February tenth, two thousand twenty-five to February twelfth, two thousand twenty-five

I. Foundation 

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

How to read European markets’ pricing of Trump’s tariffs

This section is mainly intended to help you trade the second phase of the European market, alongside Notes250211 The Second Phase of European Trading: From Cyclicals to Defensives, Banks at the Top Read them together.In Europe, the sectors most exposed to tariff risk are concentrated mainly in industrials and consumer goods. Here we provide several representative names with the greatest exposure to use as proxies for monitoring going forward.

(Note: When reading the notes, think one step further: high exposure to tariffs now also means repricing when tariff risks recede. We do not know when that will be, but this trade will definitely 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 strengths by imposing limits on ourselves.”—Lagarde and von der Leyen (Ursula von der Leyen), in their opinion article in the Financial Times, “Europe has got the message on change”Europe has got the message on change» (Europe has got the message on change), they wrote.

The article concludes:“The stakes are too high for us to fail.” “We are ready to do whatever it takes to put Europe back on track.” This statement directly echoes Draghi’s famous 2012 speech about saving the euro—“whatever it takes.”

The two women, one the president of the European Central Bank and the other the president of the European Commission, further validate our next Wall Street bet in 250121:Our view on Europe’s revival is that the growth narrative is being elevated to the top priority by Europe’s leadership, for the first time. This is the clearest trend, and the trading cycle could last as little as several quarters or continue for 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 companies.”

The point to remember is that when policymakers and politicians panic, markets rally.

【Further reading】

250121 Wall Street’s Next Big Bet: Europe’s Revival

250130 The Europe trade is still going

250106 Euro bond sell-off at the start of the year & 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 havens, and behavioral dynamics

Von der Leyen and Lagarde believe that Europe has the necessary conditions to catch up in the technology race. At the same time, “We have an opportunity to bring down energy prices in a lasting way.”The final point is also directly about bringing energy prices down, which is the same goal as the Trump administration’s.

“Firms still face long permitting procedures, onerous reporting requirements and diverging enforcement of digital rules.” Easing complex regulation would free up businesses’ costs and dynamism; this is one of the clearest ways to lift overall European market valuations, The valuations moving higher now are reflecting this, and the results can be seen in the differing performance across market sectors.

In 250120 Interest-rate pricing, safe havens, and behavioral dynamics As we mentioned, when facing existential threats (the governing camp), those in power around the world will inevitably compete to advance output, productivity, prosperity, employment, safety, security, and other areas to meet the demands of an increasingly uneasy public, Those who fail to meet these demands will ultimately be voted out and 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 them.

Therefore, regardless of what is said or how the documents are written, what is certain is that one can expect any government anywhere in the world today to ultimately choose higher fiscal spending and lower taxes out of panic; there will be no exceptions.

Adding the real-world implementation of technology, the result is a macroeconomic regime of Inflation Boom.

2025.02.10

Negative spreads and delayed rate-cut expectations

Liquidity easing in China has paused somewhat, government bond issuance rose significantly after the Spring Festival Net financing is currently about 3500 hundred million yuan per week, which means Monthly net supply could reach 1.4 trillion yuan, the highest level since 11 last year.This will lead to tight liquidity in the banking system.

2 20 is the tax payment date, so liquidity is likely to remain tight or tighten further over roughly the next week, until the tax payment deadline.

Expectations for the timing of the PBOC’s next rate cut have been pushed back, particularly given persistent foreign-exchange pressures and the PBOC’s ongoing use of a strong renminbi midpoint fixing to signal currency stability.

The next rate-cut window could open as early as 4 then it will either be the path of failed trade negotiations, with China deciding to let the renminbi exchange rate go or the path of a significant easing in trade tensions, with the dollar/renminbi exchange rate staying below 7.2; the former is more likely.

Now the entire onshore repo curve is now in negative-spread territory and the 1-10-year government bond curve is also below interbank funding costs:

Chart: The entire CNY repo curve is below the 7-day repo benchmark rate

Chart: 1-year and 10-year government bonds are both currently below DR001 and DR007 (bank funding costs)

At the end of last year, investors could look past negative carry, mainly because persistent mark-to-market fluctuations in long-bond/interest-rate-swap returns were generating gains, supported by the shift in monetary policy toward “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 rally; 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 interest-rate positions.Beyond foreign-exchange pressures, the authorities may also want to limit leverage in the bond market and direct funds toward the real economy.

On the other hand, the current positive risk sentiment in equities could persist through the National Congress on 3 5, with the market expecting policies to tilt toward the demand side, adding to the pressure:

Chart: China rates have pressure to follow equities higher

However, this year’s government work report (released on 3 5) itself is unlikely to exceed market expectations for fiscal policy(Most people expect a GDP growth target of around 5%, a deficit of 4%/GDP, 3 trillion yuan in ultra-long-term special treasury bonds, and local government special-purpose bonds slightly above last year’s 3.9 trillion yuan), and trade tensions are unlikely to disappear; the stock market’s risk appetite Selling in the bond market triggered by equity risk appetite is limited。

2025.02.11

The second phase of the Europe trade: from cyclicals to defensives, banks at the top

Following on from (250130 The Europe trade is still going + 250202 Weekly Wrap+250121 Wall Street’s Next Big Bet: Europe’s Revival),Since we began tracking them, European bank stocks have risen sharply, mainly as relatively optimistic earnings growth has driven up overall trading valuations.However, at this stage, the bank trade will face an increasing number of challenges.

1/ Capital flows between cyclical and defensive sectors

Europe’s first wave of trading was concentrated in cyclical stocks with very clear outperformance, something we had been emphasizing for some time, but by in February, more and more capital flowed into defensive sectors to protect existing portfolios and reduce risk.

Chart: Europe’s defensive sectors are also rising; the second-phase trade is here

2/ Tariffs

Tariffs remain a significant issue, and uncertainty around trade policy is increasing, cyclical industries are much more vulnerable to tariff risks, and after the valuation uplift, the second-phase trade is unlikely to see another major leg higher.

3/ Interest rates

European interest rates are being repriced now, although the impact on European banks is limited so far, but The more aggressive ECB rate-cutting cycle anticipated going forward could put pressure on banks.And Notes250210 Lagarde and von der Leyen Read them together.

Given forecasts of weak economic growth and continued disinflation, as well as Lagarde’s suggestion that ECB staff have lowered their estimate of the neutral rate, A rate cut on 4 17 is highly likely. The current base case is a series of cuts totaling 25 basis points, reaching 1.75% by 7.

2025.02.11

III. Market Pulse 

Our latest Comments on the economic and market environment

Japan and the yen trade

Some people sometimes only read the trading-day notes and skip the weekend material, but be sure to look at yesterday’s weekend file, especially the parts on Japan and the yen, The yen has strengthened alongside the broader currency-appreciation trend, but the trend has received little attention so far, and more capital will surely line up to enter later.

A few additions here:

Chart: The EURJPY pair mentioned in the weekend file

Chart: Going long the short end of the yen curve remains a robust and persistent trading strategy

 Chart: Wage growth in Japan

2025.02.10

The first CPI data release under Trump

1/ First, let’s look at the market narrative before the CPI data

Chart: Estimate distribution on Bloomberg before the result was released (Core CPI MoM)

Dom Wilson：

Official CPI forecasts are somewhat complicated—the headline CPI is expected at 0.4%, slightly above consensus, while core CPI is expected at 34bp (elevated, but in line with 0.3% consensus when rounded).Given that the 1-month effect may still have an impact, along with new seasonal factors, volatility could be higher than usual.

If the data match market expectations, the year-over-year growth rate will ease, which could offer some relief, but the market may need to see the data for 2 and 3 to confirm whether the overall first-quarter trend is clearly better than the volatile period last year.As with many macroeconomic data points, the bigger driver remains the policy backdrop, rather than inflation itself or any single reaction from the Federal Reserve (Fed).

Excluding tariffs, underlying inflation pressures may be more moderate than the market expects. In the short term, however, the impact of tariffs could offset this trend, so we recently raised our inflation forecast.The market has already priced in some of this risk—the near-term inflation outlook recently climbed to a new local high, while the market currently expects fewer than 1.5 rate cuts in 2025 and has priced in little beyond that.

Over the medium term, the balance of inflation risks is more favorable, which means the market may be underestimating the scope for rate cuts over the next few quarters.However, given that trade policy is the key variable, unless the CPI data deliver a major surprise, this release will not significantly change the market’s view.We still think investors should maintain a long position in line with the baseline scenario, but recommend diversifying, including into non-U.S. markets, alongside a long U.S. dollar position.

Joe Clyne：

As the CPI data approach, the market is broadly long gamma, so it favors holding forward volatility rather than short-term volatility.

Current straddle pricing is around 80bp, broadly in line with recent realized volatility. Even allowing for the impact of the CPI event, this level still suggests that the market is generally long gamma.

On the other hand, we think 3-month 25 delta calls (especially SPX) around 11v are a good position. Overall, along the volatility curve, longer-dated upside volatility is more attractive than gamma.

The volatility pricing on the Nasdaq 100 (NDX) and Russell 2000 (RUT) looks reasonable, but if positioning in gamma, we prefer RUT although it has recently faced some pressure from the cost of holding the position. Overall, we remain bullish on forward volatility, especially upside volatility.

Chart: In terms of the market’s reaction function …

because it is Trump’s first CPI report + market interest in tariffs and the Fed’s path is currently at a high the market has high expectations for this report, and firms across the industry have made forecasts; broadly, a slight increase is within expectations.

2/ Data that beat expectations

1 CPI inflation rose to 3.0%, above the market expectation of 2.9%.

Core CPI inflation rose to 3.3%, above the market expectation of 3.1%.

Headline CPI has risen for four consecutive months, and core CPI has also officially returned to an upward trend.

Chart: This chart is relatively more intuitive

Chart: Let’s break it down

Inflation data remain hot. Although some residual seasonal factors may affect the readings, the Fed is clearly less tolerant of this situation this year, and its policy response may be more sensitive.

Put simply: Inflation in the US is HOT..

3/ Housing CPI is core

Chart: CPI is majority Shelter

However, looking at it now, actually this time’s housing CPI was still the main driver in the data, accounting for 30% of the overall CPI data increase;

It is important to note that this part of the data has a 12-month lag effect, which means actual inflation is much more moderate. The market’s initial reaction may cause overtrading, and it is quite likely that a rebound will follow the first selloff.

Chart: Another presentation; the core CPI components show that housing and transportation services were the largest contributors to this month’s increase

4/ The Treasury market’s reaction

The data were above expectations, but the market’s reaction to the upside surprise in CPI data is more interesting: 10-year Treasury yields continued to rise, while yields at other maturities tended to remain stable.

This implies an important conclusion: the policy rate may not currently be restrictive, but instead be at a level considered neutral.

5/ How to interpret the January data

Since COVID, In fact, U.S. inflation data for the month of 1 have consistently come in “hot,” and today’s core CPI followed the same pattern as the previous few readings.

Chart: The persistently elevated “January data”

Robin Brooks believes that the best measure of underlying inflation should be “core services” (the blue line), which has been relatively stable in the data. So this “high” reading is mainly due to noise and residual seasonal factors, as in 2023 and 2024. As we have said on the Planet, the downward trend in inflation will not be reversed so easily.

Further reading: Notes250130 The rate-hike narrative is completely out of the picture

6/ Finally, here are the major investment banks’ expectations for the Fed’s rate-cut path this year

2025.02.12

Note: All content in this article is for reference only and does not constitute investment advice or form the basis for any law, regulation, or regulatory policy. Investors should not use or rely on this information as a basis for decision-making.