From December ninth, two thousand twenty-four to December eleventh, two thousand twenty-four

I. Foundation 

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

Can tariffs be both a political tool and an economic tool?

A key question for next year is whether tariffs can be both a political tool and an economic tool.

Supporters of U.S. tariff policy have long argued that tariffs are versatile tools for achieving economic and political objectives. However, a closer examination of these objectives and the reasoning behind them readily reveals significant gaps between the actual effects of tariff policy and its expected results, and even the possibility of deep-seated contradictions.

The first economic objective of tariffs is to protect domestic industry from “unfair competition” from abroad.

Supporters argue that foreign companies have a competitive advantage because of lower labor costs and government support, and that tariffs can offset this advantage by raising the cost of imported goods.However, research by the New York Fed reveals a very different reality.

The study found that those U.S. companies theoretically positioned to benefit from import protection instead faced significant declines in market value on the day tariff policies were announced and subsequently performed poorly on key indicators such as profits, employment, sales, and labor productivity.

This suggests that Tariffs may have failed to effectively protect the target industries and instead triggered market uncertainty and cost pass-through, ultimately weakening corporate competitiveness. For investors, this “valuation shock” is a key risk on the day tariff policies are announced. Particular attention should be paid to manufacturing and consumer goods, which are highly sensitive to trade policy.

The second economic objective is to reduce the trade deficit by adjusting the relative prices of goods.

In theory, tariffs balance trade by raising the prices of imported goods and encouraging domestic production as a substitute. However, the effectiveness of this mechanism depends on the adaptability of domestic supply chains and consumers’ sensitivity to price changes.

In the U.S. consumer goods market, many product categories, such as electronic devices, clothing, and auto parts, are highly dependent on imports, while domestic substitutes cannot be brought online quickly in the short term.

As a result, tariffs may improve the trade deficit in the data, but in practice consumers bear greater cost pressures. This deserves particular attention against the backdrop of persistently high inflation: tariff policies may push core inflation higher still, triggering a chain reaction in market expectations.

From the perspective of political objectives, tariffs are viewed as a lever for compelling trading partners to adopt policies aligned with U.S. interests.

This strategy was especially prominent during the Trump administration. Its central logic is to use the scale of the U.S. market to make countries that depend on the United States for exports compromise in the face of tariff costs.

The sustainability of this logic is in question because the political effectiveness of tariffs depends heavily on the United States maintaining large-scale imports and a trade deficit. If total imports fall, the influence tariffs exert on trading partners will gradually weaken.

For example, U.S. imports from Russia have fallen to about 10% of their peak in 2022 3, and the bilateral trade deficit has nearly disappeared. In In this situation, tariffs are much less important to U.S.-Russia relations, showing that their leverage diminishes sharply when trade volumes are sufficiently small.

The long-term effectiveness of tariffs as a policy tool is also constrained by changes in the international economic system.

Some argue that, compared with economic sanctions (sanctions), tariffs may be a more sustainable tool of international influence.The effectiveness of sanctions depends to a large extent on the dollar’s dominant position in the global economy, and that position is not unassailable forever. Although discussion of “de-dollarization” has intensified in recent years, the dollar still has no viable competitor as the global reserve currency.

This means tariffs remain a policy tool the U.S. government can rely on in the short term. In the long term, however, as global supply chains are reconfigured and trade patterns diversify, whether the leverage effect of tariff policy can endure deserves further scrutiny.Implementation could trigger significant market volatility in the short term, especially among valuation-sensitive industries and companies that rely heavily on imports.

2024.12.10

What has changed in the market since the “moderately loose” monetary policy at the time, 14 years ago?

After fourteen years, monetary policy has once again used the phrase “moderately loose,” signaling a major shift in the policy environment. The last similar wording appeared during the global financial crisis of 2008 (GFC). At that time, China implemented a fiscal stimulus plan of “4 trillion” and injected liquidity into the economy through substantial cuts to reserve requirements and interest rates, along with other policy tools. This historical context can provide a useful framework for considering the current policy shift.

 Chart: Performance of Chinese assets during the “moderately loose” monetary policy period of 2008-2011

What happened in 2008?

Looking back at 2008, China cut the reserve requirement ratio (RRR) by 200 basis points in just three months, from 17.5% to 15.5%, and lowered the lending rate from 7.47% to 5.31%.

The 10-year government bond yield quickly fell from 4.5% to 2.7%, while Short-term yields fell even further, from 3.6% all the way to 1%, driven by abundant liquidityMeanwhile, the Shanghai Composite Index (SHCOMP) plunged 30% at the start of the crisis, but thanks to strong fiscal stimulus, the market subsequently bottomed out and rebounded and doubled in less than a year.

On the exchange-rate front, The renminbi stopped appreciating in the second half of 2008 and was pegged to the U.S. dollar, only resuming a gradual appreciation in 2010.

This policy mix clearly shows China’s objectives at the time:To stabilize liquidity quickly through monetary easing, stimulate domestic demand through fiscal stimulus, and maintain financial-market stability at the same time. The current call for “moderately loose” monetary policy clearly draws on this model.

 Chart: History of China’s macro policy stance

What might this new round of “moderately loose” policy bring?

Reintroducing “moderately loose” policy will have far-reaching effects on the bond, equity, and foreign-exchange markets. First, The bond market’s pricing logic will inevitably need to be reassessed When monetary policy shifts toward easing, rate declines are usually front-loaded. The previously expected downside room of 40-50 basis points in Chinese interest rates in 2025 could be realized more quickly over the coming quarters as the policy shift comes earlier.

The likelihood of a substantial reduction in the central bank’s reserve requirement has risen significantly. Governor Pan Gongsheng had already signaled a 50-basis-point reserve-requirement cut, which could become the first step in subsequent policy measures In addition, the use of unconventional tools such as open-market operations and direct purchases of government bonds (CGB) may be expanded to inject medium- and long-term liquidity into the market.

It is important to be cautious: the full effects of the current policy mix remain to be seen, Monetary easing will benefit the bond market in the short term, but once the details of fiscal stimulus become clear, long-term rates may come under renewed pressure, bringing the risk of a steeper yield curve.In particular, If the scale of fiscal policy exceeds expectations, the rise in government bond yields seen in 2008 could recur.

Chart: Goldman Sachs expects China’s easing policies may continue through 2025 or even longer

On equities and foreign exchange

Underweight positioning in Chinese assets has returned to its previous trading range, especially among offshore investors. If the post-policy-shift improvement in risk appetite is gradually confirmed, it will certainly drive further foreign inflows. But this will be a process, not a sudden surge in buying and allocation.Historically, A-shares have shown a strong beta effect under “moderately loose” policy, and this time is expected to be no exception.

In the near term, the Central Economic Work Conference on 12 11–12 will be an important point for observing policy intentions going forward. Although the meeting may not provide specific data, its directional guidance on key areas of support will be crucial.

Clear signals of a policy shift have arrived, and markets need to prepare for larger interest-rate adjustments and asset-price revaluations. These changes will emerge gradually over the coming months. Ultimately, this round of “moderately loose” policy is not a return to the experience of 2008; it is more likely to be a new test of the policymakers’ ability to manage market expectations.

2024.12.11

II. Insights 

Our Viewpoints and ideas on market.

Trading Expectations: Fast Announcement, Slow Implementation

Tariffs, taxes, immigration, and regulation are the four key variables in market pricing. The new administration’s post-election policy cadence is clear: announce quickly, implement slowly. This combination is market-friendly in the short term, but carries clear medium-term risks.

At present, the broad backdrop for U.S. equities is the expectation of a policy path of Fast Announcement, Slow Implementation. “Slow Implementation” supports risk assets, The negative effects of tariff and immigration policies are slow to materialize, while positive expectations for taxes and regulation are driving valuation expansion.

What is actually implemented will inevitably lag behind what is expected psychologically.

The biggest risk at present is the asymmetric risk distribution around rapid implementation. If tariffs are applied across the board or immigration policies are accelerated, stagflation risks will intensify and market logic will quickly shift from momentum trading to defensive pricing. On portfolio rebalancing, either use a balanced mix or keep a close watch, If this paradigm shift occurs, it will happen quickly, so don’t hesitate when the time comes.

The main approach is to take advantage of the time lag between policy announcements and implementation, focusing on sectors with stronger fundamentals that benefit from low interest rates and deregulation, while applying defensive strategies to highly valued and policy-sensitive areas. The bullish dollar thesis remains valid. Rotation between cyclical and growth stocks should be adjusted dynamically according to the policy timeline; keep positioning flexible in the short term and capture structural opportunities amid volatility.

Key background on several core variables

1) High tariffs on Chinese goods are the most readily implementable policy, supported by existing executive authority and requiring no congressional approval.However, expanding its scope is constrained by the budget reconciliation process and lacks broad support within Congress. For markets, thisThe “limited coverage, phased implementation” model reduces supply-chain disruption in the short term, but the risk of gradual escalation in the medium term cannot be ignored.

If policy shifts to “comprehensive coverage, rapid implementation,” stagflation risks will emerge. Once tariffs are fully implemented, they will certainly weigh on GDP growth, push up imported inflation, strengthen the dollar through safe-haven liquidity flows, and place consumer and retail sectors under systemic pressure, Market dynamics will shift from trading on expectations to pricing in actual impacts.

2) Taxes: continuity in tax policy may be finalized before the year-end deadline in 2025, while political wrangling over extending, raising, or cutting taxes will slow the process, The marginal improvement in corporate earnings will lag policy implementation, contributing little alpha to the market in the short term.

3) Immigration policy changes may be announced quickly, but their actual effect in reducing labor supply will take time. The impact of structural changes in the labor market on wage growth and consumer spending power will emerge in the medium term, The market is currently underpricing this variable.

4) Deregulation is expected to be announced quickly, but implementation will take a long time; historical experience shows that rewriting rules is an extremely time-consuming process. This variable provides substantial valuation support for highly leveraged sectors such as energy and finance, but contributes little to near-term earnings growth, The risk to watch is that expectations of subsequent policy implementation may trigger premature, misaligned trades.

2024.12.09

Short the Dollar: The Pain Trade

In the past few days, I’ve seen some traders who are good at pain trades mulling a short-dollar position. The risk is very, very high. I’ll lay out the logic behind this trade here; the risk really is high, so just be aware of it.

For some traders who like to go against the trend, the current risk/reward profile of shorting the dollar is attractive. On one hand, good news for the dollar is already heavily priced in, including strong U.S. data, optimistic expectations for fiscal and trade policy, and market pricing of the Federal Reserve’s rate-cut path.

Positioning data show that dollar longs are significantly overweight. Technical indicators such as RSI point to excessively one-sided market sentiment; the current economic surprise index (ESI) is also near a historical high. If data start to diverge from expectations, sentiment could reverse quickly and sharply.The current consensus long position in the dollar is not only a concentration of risk but also, in some people’s view, the perfect setup for a pain trade.

The three pillars of the bullish dollar thesis are beginning to wobble:First, the U.S. data advantage remains, but it has been overvalued by the market; extreme readings in ESI often coincide with expectations being reset, and the “surprise window” for economic growth may have closed. Second, the market is too optimistic about the impact of trade policy changes, especially significantly overestimating the potential extension of tariffs to regions outside China. Third, the mismatch in the Federal Reserve’s rate-cut path gives dollar bears clear room for downside, The market currently prices in rate cuts at only the next four meetings 50bp, and this pricing gap will be exposed when the Federal Reserve cuts rates further.

12 is a key window for dollar bears:The upcoming CPI data (12 11) may come in below market expectations, reinforcing expectations of continued Federal Reserve rate cuts; the FOMC meeting (12 18) is currently expected to deliver a cut of 25bp while also signaling future cuts. If the subsequent guidance deviates from current pricing, it will significantly weaken the support that front-end rates provide to the dollar; the ECB meeting (12 12) could also dampen bullish sentiment toward the dollar with a mildly dovish stance. Meanwhile, if the economic work conference in CN introduces more easing than expected, it will drive the renminbi higher and curb the dollar’s relative strength.

From a trading perspective, AUD/USD and GBP/USD are in fact the best expressions.These two have less exposure to trade tensions while offering higher carry, and their technicals are near the bottom of their historical ranges, giving these long trades a clear risk/reward advantage.

EUR/USD have faced pressure from yields and fundamentals over the long term, but near-term risks now skew to the upside. The market’s extremely pessimistic pricing of the euro creates the possibility of a technical rebound, with short covering likely to be a key driver. Trade risks are already largely priced in, leaving limited room for further downside; an upside surprise could instead prompt the market to reassess the euro’s potential.

2024.12.09

Politburo meeting: the most stimulative tone in a decade?

The meeting clearly set the policy direction, placing consumption-driven demand expansion at the center. This language is plainly a policy adjustment in response to weak domestic demand. The dual easing path of fiscal and monetary policy strengthens the credibility of the policy signal, but the key lies in the pace and force of actual implementation. Real estate and consumer sectors may benefit from this policy push, while the bond market could strengthen further on larger liquidity injections and rate-cut expectations. In addition, renminbi assets may attract more foreign inflows on expectations of economic recovery and policy support.

In short, near-term risks are greater than in the previous policy trade, and near-term returns are smaller. Rather than an endpoint, this is more likely the true starting point of a long-term trade. Make your own decisions.

The Politburo meeting sent a strong signal of support for consumption, directly driving a reversal in offshore Chinese markets despite their initial weakness at the open. The meeting mentioned greater support for consumption, policy preferences for the real estate sector, and a shift toward moderately accommodative monetary policy, but Clearly, the phrase “boost consumption forcefully” is now the market’s central focus.

Chart: Offshore Chinese stocks rebounded sharply after the Politburo meeting, with HSCEI/HSTECH up 3%/4%, respectively.

Morgan Stanley’s Xing Ziqiang also commented on this meeting, saying“The pre-CEWC Politburo meeting sent most aggressive stimulus tone in a decade.”This Politburo meeting sent the strongest stimulus signal in a decade ahead of the economic work conference.

The meeting statement exceeded market expectations, particularly against the backdrop of relatively subdued expectations for its outcome.Compared with the 9 meeting, this time the meeting’s wording included many new phrases, indicating a gradual shift in policy thinking from supply-side adjustment toward demand-side balance.

The key points are as follows:

1) The wording on monetary policy has shifted to “moderately accommodative.” This is the first time since 2011 There may be larger rate cuts in the future (a reduction of 40-50bp is expected next year), while the People’s Bank of China may use new tools more proactively, such as buying government bonds (CGB) and conducting outright repo operations, to increase liquidity.

2) Fiscal policy emphasizes “more proactive” measures and adds the phrase “strengthen countercyclical adjustment,” indicating that the policy mix will tilt further toward easing. It explicitly calls for “actively promoting consumption and improving investment returns” and “expanding domestic demand across the board.” Judging from the wording, this is clearly a direct response to the current problem of insufficient demand。

3) Emphasizes the leading role of economic reform in the economy, while also proposing expanded high-level opening to the outside world and stable trade and foreign investment, reflecting consideration of both domestic and external balance in policy.

4) For the first time, “stabilizing the housing and real estate markets” is grouped into a single phrase, and “preventing and defusing risks in key areas and external shocks” has been added. “External shocks” clearly refers to uncertainty in the international trade environment, including tariffs. “Stabilizing expectations and revitalizing the economy” is also new; this reflects policymakers’ concern about low market expectations and a lack of “animal spirits.”。

The economic work conference will also take place this week. With the Politburo meeting having significantly boosted market sentiment, the market will certainly expect more policy details to follow. If policy really does shift, then not only in China, Some lagging sectors in European and U.S. markets outside China, such as luxury goods and mining stocks, and even parts of the commodities market, could see further catch-up gains.

It should be noted that this meeting did not provide quantified data on specific stimulus measures, and the economic work conference that is likely to take place soon (12 11-12) may not offer clearer details either. This may explain the relatively subdued market reaction.

In fact, the direction of the bond market matters more than the meeting itself.

Chart: Government bond yields hit a new low

It never moves in one direction; it fluctuates both ways. This time, the synchronized trend may mean something more.

Judging from the Politburo meeting’s strong statements, policy implementation may be forceful.

From a market perspective, given that current offshore positioning is significantly lighter than in 9 -10 the tactical rally in mainland markets driven by policy expectations may continue. Going forward, attention should turn to the actual implementation of more proactive policies. With consumption and real estate especially likely to benefit further, the A-share market may continue to receive inflows and sentiment support in the short term.

Chart: Positioning in the Chinese market

For medium-term developments, the consensus among foreign investors is still that the “expansionary fiscal plan” expected in 2025 will be investment-led, but the balance between consumption and investment will improve somewhat, for example through an expanded consumer goods trade-in program. On monetary policy, actions from now through the end of 2025 are expected to exceed broad market expectations. The central bank may also inject further liquidity by lowering the reserve requirement ratio (RRR) and buying government bonds in the secondary market.

Meanwhile, the likelihood is rising that the official deficit will reach 4% as a share of GDP, slightly above the previously expected 3.5%-4.0%. The market should interpret this positively.In addition, more quasi-fiscal expansion measures, such as special bonds issued by central state-owned enterprises, may also be adopted, further increasing policy support.

Chart: Trading flows in the Chinese market

We do not view this as the end of the trade. On the contrary, looking back much later, this may well prove to be the true starting point of a long new trade. That also means there is no need to rush in; there is still a long road ahead.

2024.12.10

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only and does not constitute investment advice, nor does it serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as the basis for their decisions.

The Federal Reserve focused on liquidity

The message here is that although QT is continuing and the balance sheet is gradually shrinking, the potential liquidity release from cutting the ON RRP rate could ease funding tightness to some extent, creating a potentially favorable backdrop for risk assets.

The minutes of the latest FOMC meeting indicated that The Federal Reserve is considering lowering the ON RRP (Overnight Reverse Repo Facility) rate.This development reflects the Federal Reserve’s continued focus on liquidity management and could affect markets in multiple ways.

ON RRP: background and current situation

ON RRP are important tools introduced after the pandemic, primarily intended to provide money market funds (MMFs) with a safe place to park cash and prevent yields from turning negative due to excess liquidity. At the time, large-scale QE and fiscal stimulus measures prompted MMFs to buy large amounts of short-term Treasuries, putting yields at risk of falling below zero.

However, the situation is completely different now. The yields on ON RRP are more attractive than those on short-term Treasuries such as T-Bills, which has kept large amounts of funds in RRP rather than flowing into the bond market or the broader economy.The Federal Reserve plans to encourage MMFs to shift funds from RRP into T-Bills by lowering the ON RRP rate.

Potential liquidity injection

If MMFs transfer funds from ON RRP to T-Bills, this process would essentially inject cash back into the banking system, increasing reserves and systemic liquidity.Although the ON RRP balance has fallen to a cyclical low, about 1500 hundred million dollars of potential liquidity reserves remain, which is no small amount. Especially with the Federal Reserve conducting quantitative tightening (QT), this operation would effectively offset part of the liquidity drain caused by balance-sheet reduction.

2024.12.11