February third, twenty twenty-five to February fifth, twenty twenty-five

I. Foundation 

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

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

The main issue in 1948 was combating postwar inflation. The economy was in a period when inflation was high in absolute terms (CPI reaching 10%) but falling rapidly.On 1948 1 9, the Federal Reserve announced its first rate hike in ten years, raising the discount rate. It also increased the reserve requirement ratio for commercial bank deposits on 1 23, tightening monetary policy.

Before the Federal Reserve became independent in 1951, it was responsible for keeping Treasury yields low to facilitate government financing, so U.S. Treasury yields were held at very low levels. Commodity prices fell sharply that year: on the one hand, this could not lead to a further sharp decline in interest rates, while on the other, it hurt corporate earnings., so during this period, equities and commodities were positively correlated. Falling commodity prices hurt the U.S. stock market, and the Dow Jones Industrial Average continued to decline, setting the market low for 48.

After the market bottomed in 2, on 3 5 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 rebounded after bottoming out, and on 4 3 Truman signed the Marshall Plan to rebuild Europe. The rally continued through 6 of that year.

On 6 1, 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 rise.In 8 of the same year With commodity prices falling, CPI continued to fluctuate at elevated levels, and the Federal Reserve tightened monetary policy further, on 8 12 it raised rates again, increasing the discount rate from 1.25% to 1.5%. The market fluctuated lower from 6 through 9.

From 9 to 11, the international situation improved and U.S. domestic industrial production recovered year over year, until in 11 Truman was reelected on a platform of government intervention and social welfare, dashing tax-cut expectations, and the market fell before recovering in 12, but declined 2.1% for the year.

On 1 16 of the same year, the French government contacted the British Parliament to discuss the possibility of adjusting the franc exchange rate, in the hope of reaching a new, workable arrangement for the franc-dollar exchange rate. The French government’s primary objective was to stabilize the French economy; its fiscal and budgetary measures were the first step in that plan. The next step was to adjust the exchange rate to account for rising prices in France. In its view, setting a new fixed exchange rate was not feasible at that stage of the economic plan. It therefore considered it necessary, during a transitional period, to allow some of the convertible currency entering France to find a reasonable exchange-rate level through the operation of the free market.

Washington believed that freedom in the 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 practices.

Under the Bretton Woods Agreement, members had to obtain the Fund’s approval to change the par value of their currencies and also undertook not to adopt multiple currency practices unless authorized by the Fund. There is no doubt that it was precisely for these reasons that France applied to the Fund for approval.

France repeatedly made clear that these proposals were intended as transitional measures to address current urgent needs, with the aim of stabilizing the franc at a single fixed exchange rate.British policy chose a two-pronged approach: to do 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 in the process to limit the impact on its own currency and on the many other currencies it watched closely.

Paris’s new free market differed from the prewar free foreign-exchange market. It would be organized through authorized banks in Paris and open only to residents of French territory seeking 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 this a transitional measure rather than a permanent one.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 into question to some extent the efficacy of the entire Bretton Woods system, raising the question of whether the system was based on the availability of various currencies rather than 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 against the dollar by 44.45%.

【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 “In the U.S. stock market, micro-level performance matters more than macro politics.” It said:“In the U.S. stock market, political developments may matter less to equities than people imagine. Even clearly targeted policies (such as tax rates and fossil-fuel regulation) can sometimes produce results opposite to expectations. Experience shows that corporate earnings matter far more than who occupies the Oval Office.”

See Notes241031 Micro-level performance matters more than macro politics in the U.S. stock market, today we’re adding further thoughts on this issue.

Many people who started out in the A-share market feel uncomfortable when they encounter U.S. markets. Many mainland Chinese researchers also naturally tend to view overseas markets through the lens of a policy-driven market and begin with policy when taking a top-down approach.

This is not to say 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 in the case of deficit issues); it is even more pronounced then.The key starting point for trading overseas markets is to first distinguish everyday political noise from the ultimate performance of assets.

Chart: Performance of S&P sectors 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 and Obama’s two terms. Although their policies and ideologies were entirely different, the top of the rankings was broadly similar: technology and consumer discretionary were the best-performing sectors under both administrations. This was driven by micro-level factors such as industry cycles, business characteristics, and corporate performance and growth.

Policy only imposes greater volatility on parts of the market for a period of time. Over the long term, one of the most important macro perspectives has always been: the long-term impact of the economy and earnings will outweigh 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 starting 2 4. The White House has linked the removal of these tariffs to improvements on immigration and fentanyl, but it has not provided specific targets. Although the outlook remains unclear, Wall Street broadly believes that the tariffs targeting Canada and Mexico tariffs may be short-lived.

The order that was implemented is essentially identical to the proposal he made 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 tariffs of 25% on imports from Mexico and 25% on imports from Canada (excluding energy),while energy products are subject to tariffs of 10%, on imports from imports from China are subject to tariffs of 10%.

These tariffs will be added on top of existing tariffs. Specific details on the products covered by the lower energy tariffs have not yet been announced, but they are expected to include oil, natural gas, and electricity. A subsequent Federal Register notice may provide implementation details, including the specific product codes eligible for the lower rates.

2) The White House emphasized one provision in the executive order:“retaliation clause”, under which, 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 plan is scheduled to take effect on 2 4. The White House fact sheet on tariffs and the executive order emphasizes fentanyl and immigration issues as the reasons for imposing tariffs, but it does not specify clear conditions for removing them beyond cooperation and improvements on immigration and fentanyl. Given their potential economic effects and the broad conditions set by the White House for lifting the tariffs, these are considered tariffs are more likely to be temporary.

4) According to estimates from before GS, tariffs on imports from Canada and Mexico lasting 25% 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%. Tariffs of 10% on energy products would somewhat reduce this impact.

【Further reading】

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

n Notes241127 The renminbi: no need to rush

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

n Notes241226 U.S. consumers’ exposure to imports from China

n Notes250115 Extreme market pricing and inauguration-day behavior

n Notes241120 Commodities: three major trade pairs for tariffs and tail risk

2025.02.03

Policy whiplash and dollar trading

The dollar plunged 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 up 80 basis points. After Trump spoke with Trudeau, Canada agreed to a 13-billion-dollar border plan to stem fentanyl inflows. The Mexican peso rebounded sharply, with USDMXN falling 160 basis points to return to Friday’s level.

The euro came under pressure and fell 30 basis points, becoming the weakest currency in G10, as Trump continues to consider 10% tariffs on Europe. Tariffs on China have not disappeared, but USDCNH fell 20 basis points over the day, declining steadily since news broke that tariffs on Mexico had been delayed. At the same time, the People’s Bank of China’s midpoint mechanism kept volatility within a 2%-day trading range of around 7.34;The first pricing after China’s holiday ends on Wednesday is the most important signal for the subsequent direction of the trend. Keep a close eye on it.

Long USD in the short term (This is a short-term trend, so short-term traders should continue trading with the trend; pullbacks are entry points, and there may be a symmetrical downward move.)It is mainly supported by three factors: 1)Flexible exchange rates mechanisms offsetting changes in costs; 2) Tariff implementation and potential supply disruptions spur demand for the dollar safe-haven demand, driving the dollar’s outperformance against currencies of small open economies and emerging markets; 3)tariffs taking effect opens up upside potential, as the market prices in subsequent policy adjustments by China.

Overall, if policy does not change much, USD/CNY is still expected to stay in the 7.40-7.50 range, and EUR/USD is probably still the clearest trade to the downside, but in the short term, only part of this will be realized; the market is familiar with Trump’s habit of changing course repeatedly. If currency-market trading is choppy, this trend can guide positioning in equity markets.

2025.02.04

Note: All content in this article 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 making decisions.