March ninth, two thousand twenty-five (250303-250309)
The market’s trading focus still leans toward Europe & China vs. US.
Four catalysts remain at work: tariffs, China, valuation, and positioning. On tariffs, the market has reacted mildly to new negative news, but their impact continues to weigh on U.S. stocks and spill over into Europe, consistent with GDP and earnings-growth dynamics. The Chinese market is showing resilience with policy support. Although fiscal expansion is weaker than expected, the “high-quality growth” theme is lifting confidence, especially the emphasis on innovation and AI.European equities are discounted and earnings are beating expectations, while positioning remains underweight. Wednesday’s sharp rally in the German mid-cap index of 10-20% is a typical example of funds buying back in.
The moves in European markets are the core of this week’s trading.
European bond and currency markets have both seen volatility on a historic scale. Merz’s “whatever it takes” pledge ignited market sentiment: EURUSD rose 4.7% in a week, while the yield on Germany’s 10-year bonds surged 37bp—moves of 5x and 3.5x the standard deviation, respectively.
UBS’s FX Flow Monitor shows that on 3 4, Hedge Funds’ net buying of EUR reached 4.8 standard deviations—its largest one-day EUR buying since 2022 2, and the second-largest buying since 2016. Although hedge funds remain net short in the delta-one market, the current EURUSD’s 1M 25-delta option skew has jumped from -0.85 to 0.26, its highest since 2021 5. The market is unwilling to give up the options upside exposure to a rally in EURUSD; CTA flows have also turned from short to long, and trend traders are actively adding to EURUSD longs.
Germany’s defense spending is rising from GDP’s 2.5-3% to a higher level. Defense spending is a medium- to long-term investment; reaching “war footing” requires spending above 5%. This means the trend will continue and is not just a one-off plan for 2025. Over the long term, fiscal expansion is clearly supportive of equities.
Read alongside: Notes 250304 Europe vs. U.S.: pricing fiscal expansion and fiscal contraction
Notes 250406 Whatever it takes: The era of the United States subsidizing European defense is over
That said, if European defense companies (up 400% since the Russia-Ukraine war began, with year-to-date gains of 60%) cannot expand capacity enough to meet demand, U.S. defense companies will step in to fill the supply gap. Europe’s arms buildup has potential spillover benefits for U.S. defense contractors, so those concerned that European shares have risen too far, too fast can add some U.S. names as a complement.
The next catalyst for the China trade
The index broke above the highs from 2023 1 (the post-pandemic reopening) and 2024 9 (the policy shift), gaining 7% last week; the Hang Seng Tech Index rose 8%. The meetings that began this week did not bring major fiscal expansion, but the “high-quality growth” theme and “firm support” for the private sector are lifting investor sentiment, and the data are indeed improving at the margin.
Read alongside: Notes 250306 China’s economy is indeed recovering at the margin
Notes 250305 A brief discussion of the “meetings”
It is not only renewed U.S. investor interest in Chinese tech; global capital also appears to be following suit (see https://mp.weixin.qq.com/s/eBYYu9o8LDUZiJrpwhXzgg）；纽约的Hedge Funds), seeking further upside in Chinese tech after the first round of profit-taking. The next catalyst may be Tencent’s earnings on 3 19.
Continue following Japan’s wage-price spiral
The logic for Japan remains the same as last year: watch the virtuous wage-price cycle. That is also why, after discussing a series of these points in Notes last year, I stopped posting them and now mention them only briefly in the weekend weekly wrap.
The path to JPY strengthening is becoming clearer. Markets expect the timing of Bank of Japan rate hikes to move forward. On the eve of the Shunto negotiations, Japan’s largest labor union, Rengo, proposed wage increases of 6.09%, further above last year’s 5.85%. The “wage-price virtuous cycle” continues to strengthen the case for the BoJ to raise rates sooner.
OIS markets are pricing only a 50% probability of a rate hike in 6, but Former Bank of Japan chief economist Toshitaka Sekine said that, according to the Taylor Rule, the BoJ’s policy rate could theoretically rise to 2%, and expects the BoJ may make an “opportunistic rate hike” in 5.
Looking back at five historical downturn cycles, USDJPY still has further room to fall; it has dropped 9% from its high 8 months ago. As Japanese yields rise, funds may flow back more quickly.
Read alongside: Notes 240921 FX trading amid the Bank of Japan decision narrative
Notes 241024 Tariff trades beyond China: Europe and Japan
Notes 241129 USD/JPY breaks below 150, the next key level
Notes 241220 BOJ decision: truly unexpected
Weekly Wrap 250209 Tamura and Kuroda: betting on a stronger yen
Notes 250210 Japan and yen trade pairs
Notes 250214 The historical “U.S. stocks and the dollar falling together”
Notes 250226 Two trading theses for USD/JPY
Notes 250226 Why the yen’s safe-haven logic did not hold in 22
Notes 250226 Why the U.S. dollar depreciated in 17
Notes 250305 The dollar smile and yen trading: The USD Smile’s 3rd regime:
The weekend is over. Wishing everyone reading this a happy life and a smooth week ahead!
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Note: Everything in this article is for reference only and does not constitute investment advice or 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.