February third, two thousand twenty-five to February sixth, two thousand 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 Treasury bonds

The main issue in 1948 was combating postwar inflation; the economy was experiencing high absolute inflation (reaching 10% in CPI) but a rapid decline.On 1948year1month9day, the Federal Reserve announced its first rate hike in a decade, raising the discount rate; then, on 1month23day, it raised the reserve requirement ratio on commercial bank deposits, tightening monetary policy.

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

After the market bottomed in 2, the Federal Reserve amended Regulation T and Regulation U on 3 5 of that year, 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 from its low, and on 3 4 Truman signed the Marshall Plan to rebuild Europe. The rally continued until 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 a high level, and the Federal Reserve tightened monetary policy further The Federal Reserve raised rates again on 12 8, lifting the discount rate from 1.25% to 1.5%; the market declined unevenly from 6 to 9.

From 9 to 11, the international situation improved and U.S. domestic industrial production recovered year over year, until Truman in 11 was reelected on a platform of government intervention and social welfare, and expectations of tax cuts were dashed The market fell, then recovered in 12, but declined 2.1% over the full year.

On 16 1 of that year, the French government contacted the British Parliament to discuss considering 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 objective was to stabilize the French economy; 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 its view, establishing a new fixed exchange rate was not feasible at the current stage of the economic plan. It therefore considered it necessary, during a transitional period, to allow some of the currency entering France to find a reasonable exchange rate through the operation of a 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 practices.

Under the Bretton Woods Agreement, members had to obtain the Fund’s approval to change the par value of their currency and also undertook not to adopt multiple-currency practices without the Fund’s authorization. There is no doubt that these were the reasons France applied to the Fund for approval.

France repeatedly made clear that these proposals were intended as transitional measures to address immediate needs, with the aim of stabilizing the franc at a fixed, unified exchange rate.The United Kingdom adopted a two-pronged policy: on the one hand, to do everything possible to help the French government achieve its goal of a fixed, unified exchange rate as soon as possible; on the other, to take the necessary measures in the process to limit the impact on its own currency and on the many other currencies it was closely monitoring.

Paris’s new free market differed from the free foreign-exchange market before the war. Organized through authorized banks in Paris, it would 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 treat it as 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 foreign-exchange control system can keep a currency at a fixed level, calling into question to some extent the effectiveness 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 U.S. 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 updated an article in the foundation section of our community titled “Micro-level performance outweighs macro politics in the U.S. stock market.” It said:“In the U.S. stock market, political developments may have less influence on equities than people imagine. Even policies with a clear direction, such as tax rates or fossil-fuel regulation, sometimes produce results opposite to what was expected. Experience suggests that corporate earnings matter far more than who occupies the Oval Office.”

See Notes 241031 Micro-level performance outweighs macro politics in the U.S. stock market Today, we will add some further thoughts on this issue.

Many people who started out in the 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, starting with policy when taking a top-down approach.

This is not to say that the interaction between policy changes and localized market fluctuations is unimportant In fact, this interaction clearly exists, and it is more pronounced when the government is large and highly visible (as with the deficit issue).The key basic principle of trading overseas markets is first to 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 philosophies were entirely different, the sectors near the top of the rankings were broadly similar: technology and consumer discretionary were the best-performing sectors in both periods, driven by industry cycles, business characteristics, and the micro-level performance and growth of companies themselves.The top of the rankings is actually quite similar: technology and consumer discretionary were the best-performing sectors in both periods, driven by industry cycles, business characteristics, and the micro-level performance and growth of companies themselves.

Policy only imposes greater volatility on parts of the market for a time. Over the long term, one of the most important macro perspectives has always been: Over the long term, the economy and corporate earnings will be more decisive than domestic politics (and international geopolitics).

2025.02.05

Global PMIs: expansion territory, U.S. Treasuries, commodities, reflation

Global PMI surged to 50 in 1, reaching this key level for the first time since 2022 9. This is a relatively healthy rebound because this time it is driven jointly by the activity and price subindices, which is very positive.

https://mp.weixin.qq.com/s/A_QhGmdoD9IONOyjkUu9qA   Read this together with the article at this link

The recovery in manufacturing confidence is mainly due to global monetary policy easing, and manufacturing, as a highly interest-rate-sensitive sector, is particularly responsive to this. The net share of central banks cutting rates has now risen to 55%, while PMI typically leads monetary policy by about 9 months, and the drag from financial conditions is gradually easing. This is the same trade as Bessent’s desired long-term U.S. Treasury trade, so the recovery trend is sure to continue, and this area can be positioned for.

At the country level, the activity subindex shows that 50% countries PMI are in expansion territory (>50), with 35% among them showing acceleration. India still has the world’s highest activity index, while The U.S. is accelerating the most (is it all connected?)In Europe, France and Germany are also moving into recovery mode;

Image: Bloomberg report

Image: Bowman recommends adjusting the leverage ratio and the global systemically important bank surcharge so that banks can hold more U.S. Treasuries

Note: Bowman is currently a leading candidate for the Federal Reserve Vice Chair of Supervision position.

A manufacturing recovery led by commodities will provide downside support for commodity prices，This refers to base metals, and the recovery in base metals is more certain than in energy this time around, For base metals, the trend will continue to rise in tandem with the recovery in the new orders to inventories ratio.On the other hand, the price subindex for DM did rise slightly, reaching its highest level since the end of 2022, providing near-term inflation support, However, this indicator remains far below its long-term average, indicating Inflation is still moving back toward its target.

Taking the copper reflation trade as an example:

Chart: Recovery trade—the trend rises with the recovery in the new orders to inventories ratio, and inflation is moving back toward its target, so the reflation level becomes a key resistance line

Chart: January discussion on reflation from Commodity Planet

To recap, the recovery in the new orders to inventories ratio provides downside support;Inflation is still moving back toward its target, which caps the trade.

[Further reading]

n Notes250128 The four quadrants of the macro cycle

2025.02.06

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 conditions for rescinding these tariffs to improvements on immigration and fentanyl, but has provided no specific targets. Although the outlook remains unclear, Wall Street generally believes that the tariffs on Canada and Mexico tariffs may be short term.

The order as implemented is actually 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 Trump signed imposes 25% tariffs on imports from Mexico and 25% tariffs on imports from Canada (excluding energy),Energy products are subject to 10% tariffs, on imports from imports from China are subject to 10% tariffs.

These tariffs will be added on top of existing tariffs. Specific product details for the lower energy tariffs have not been announced, but they are 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 rates.

2) The White House emphasized one“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 may increase or expand the tariffs imposed under this order to ensure the measure’s effectiveness.Although this is clearly a warning about possible retaliation, it does not actually take effect automatically.

3) The tariff plan takes effect on 2 4. The White House fact sheet on tariffs and the executive order emphasized that fentanyl and immigration issues were the reasons for imposing the tariffs, but provided no clear conditions for their removal beyond cooperation and improvements on immigration and fentanyl. Given the potential economic effects and the broad conditions the White House set for lifting the tariffs, these are considered The tariffs are more likely to be temporary.

4) According to estimates from before GS, tariffs lasting 25% on imports from Canada and Mexico would raise the U.S. effective tariff rate by 7 percentage points, pushing core PCE prices up 0.7% and causing a negative impact of 0.4% on GDP. Tariffs of 10% on energy products would mitigate this impact to some extent.

[Further reading]

n Notes250122 How to assess how much of Trump’s tariffs the market has priced in

n Notes241127 Renminbi: no rush to act

n Notes250129 How did the Federal Reserve view tariffs during the last 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 trade pairs for tariffs and tail risks

2025.02.03

Policy flip-flops and dollar trading

The dollar reversed sharply over the course of the day, quickly wiping out its previous 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’s call with Trudeau, Canada agreed to a 13 billion dollar border plan to stem fentanyl flows. The Mexican peso rebounded sharply, with USDMXN falling 160 basis points to return to last Friday’s level.

The euro fell 30 basis points under pressure, 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 of the Mexico tariff delay, while being cushioned by the People’s Bank of China’s fixing mechanism. Its volatility was confined to 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 what comes next. Keep a close eye on it.

Short-term long USD (This is a short-term trend, so short-term traders should still trade with the trend; pullbacks are entry points, and there may be a symmetric move lower.)This is mainly based on three factors: 1)Flexible exchange rates mechanisms offsetting cost changes; 2) tariff implementation and potential supply disruptions spur the dollar safe-haven demand, driving the dollar’s outperformance against small open economies and emerging-market currencies; 3)tariffs take effect opens up upside potential, with the market pricing in subsequent policy adjustments by China.

Overall, if policy does not change much, USD/CNY still sees a range of 7.40 to -7.50, and EUR/USD is still probably the cleanest pair to trade on the downside, but In the short term, only part of this will be realized; the market is familiar with Trump’s tendency to change course repeatedly.. If trading in the foreign-exchange market is not going smoothly, you can position yourself in the equity market in line with this trend.

2025.02.04

Note: All content 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 a basis for decisions.