January sixth, two thousand twenty-five to January ninth, two thousand twenty-five

I. Foundation

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

Divergence and convergence: the historical relationship between US and CN10Y, and market signals

The divergence in the movements of US10Y and CN10Y shows characteristics similar to those seen before the global financial crisis of 05-06:

Chart: The last occurrence was nearly 20 years ago

When US10Y and CN10Y converged again after diverging, the previous cycle’s $SPX peaked; this occurred roughly a year after CN10Y bottomed.The movements of CN10Y often signal the bottom of the Chinese economic cycle. Behind the divergence between the U.S. and Chinese bond markets lie structural differences in global monetary policy and economic fundamentals.

Chart: Two possible paths toward convergence

The divergence in their movements will not continue indefinitely. The two may not cross, but their directions will eventually align.

The main macro shocks 10Y is still absorbing are the China-U.S. tariff issues and marginal policy measures. The time needed to absorb these two factors indicates when the downside room in CN10Y may be nearing its end, namely,“Once the tariffs and the stimulus from the major policy meeting have been absorbed, CN10Y will probably be near the bottom too.”

When US10Y and CN10Y eventually converge again, Whether the former comes down or the latter bottoms out, either could mark a cyclical top for the S&P in this cycle.

Chart: US 10Y Term Premiums v. 10Y CGB Yield

2025.01.07

Liquidity: year-over-year change in global M2 denominated in U.S. dollars as a turning-point indicator

A single indicator can hardly capture monetary-liquidity dynamics in full, but The year-over-year change in global M2 measured in U.S. dollars (Y/Y Change in Global M2 in USD) has historically shown a high correlation with major movements in global stock markets.Although it is not perfect, it can still serve as a reference for monitoring key market turning points.

As the chart shows, the global bull market in 2017, the liquidity-driven bull market in 2020-2021, and the turning point of the bear market in 2022 all coincided closely with—or were anticipated by—movements in this indicator.

Chart: The year-over-year change in global M2 measured in U.S. dollars aligns with major movements in the stock market

2025.01.09

Stocks and rates: the ten-year Treasury range and the paradigm logic behind shifts in the stock-bond relationship

The sweet spot for 10-year U.S. Treasury yields may be 4.00%-4.50%.

Once yields move above this range, if the move is driven by a shift in monetary-policy expectations toward “Less Dovish” or by a rise in term premiums, this will create significant headwinds for stock-market valuations.

Chart: This rise this time was driven by the Term Premium

A similar situation occurred in 2024, 4:

Chart: Valuations came under pressure when the ten-year U.S. Treasury yield broke above 4.50%

This means the logic behind the stock-bond relationship is shifting.

In fact, Since the summer of 24, bond-market yields and stock-market performance have been positively correlated and, while As key levels from the month of 12 were breached, their negative correlation began to return meaning yields are rising and stocks are under pressure.

Chart: The correlation between stocks and bond yields is now negative

Interest rates will be the most important market variable at the start of 25.

2025.01.09

II. Insights

Our Viewpoints and ideas on market.

Contrarian market positioning: lessons learned

The past two years, equity and credit investors captured significant market alpha through their strong conviction in a soft landing,rate investors were whipsawed by sharp market volatility, mainly because they relied too heavily on the recession-risk assumption and favored duration-heavy asset allocations:

The U.S. Treasury index significantly underperformed USD cash:

Equity and credit investors were the group that focused on corporate fundamentals over the past two years, placing greater emphasis on identifying the health of the companies themselves. This focus on micro-level fundamental health leads to fewer positions betting on deviations in macro risk / soft landing, as we mentioned in our previous Notes:

When the overall U.S. macro backdrop holds up, micro-level corporate earnings support the market more than macro risks do, corporate resilience is sufficient to offset uncertainty in the economic environment. In other words, strong earnings visibility is the core rationale supporting equity valuations and tight credit spreads.

Further reading:

Market Notes 24-10-31: Micro-level earnings outweigh macro politics in the U.S. stock market

This also means that trading throughout 25 will necessarily revolve around earnings visibility, which is the key risk point during earnings season.

By comparison, rate investors’ strategies rely more on the idea of “hedging against tail risk.”A notable feature is their preference for UST duration long to hedge against recession, but this strategy has frequently faced headwinds over the past two years. First, the negative carry issue has significantly reduced the appeal of long-duration bonds; second, an inverted yield curve has increased volatility in long-term bond yields, directly hurting rate investors’ positions:

Differences in how asset classes price recession risk are also a key factor, Over the past two years, equity and credit markets priced in too little recession probability, while the rates market priced in too much:

This disconnect not only led to sharply divergent strategy performance, but also further confirmed the long-standing conflict between macro sentiment and the corporate-health narrative.

Two key points:First, In a market marked by divergence, corporate fundamentals are crucial., following the market, overreliance on macro-driven strategies may cause investors to miss actual market signals. Second, an overly concentrated asset allocation strategy (such as duration-heavy positioning) significantly increases risk exposure, especially when there is a disconnect in the market pricing mechanism.

Further reading:

JPM：Flows & Liquidity, 10 lessons from the past year

JPM: Flows & Liquidity, Why equity and credit investors got it right while rate investors got whipsawed?

2025.01.06

Where’s the problem: market breadth is only the surface

Although 2024 was another solid year for U.S. equities, performance in 12 was disappointing. The weak finish to an otherwise strong year may be attributable to several factors.

First, the strong rally from 9 to 11 largely exhausted near-term upside momentum, absorbing almost all the positive macroeconomic news.Support from macro drivers such as Fed easing, the Federal Reserve’s 50bp rate cut (kick-off new easing cycle), and the Republican election victory (a pro-market outcome) arrived one after another, but the positive news has now been priced in, Such rapid rallies are never easy to sustain, and the unwinding of large hedging positions at the start of 12 further amplified volatility.

Second, the rebound in the 10Y Treasury yield is clearly a key variable in the shift in market pricing.From the interest-rate low of the summer of 2024 to now, yields have recovered about 100 basis points, even as the Federal Reserve has already cut rates by 100 basis points.

This suggests that the bond market may be questioning whether the Federal Reserve cut rates too early or too much.

The widening of the term premium (Term Premium widen) is another noteworthy signal, having widened 77 basis points since the 9 low, this may be a second reflection of uncertainty about the Fed or fiscal sustainability;Indeed, the S&P 500 index’s price-to-earnings ratio peaked in early 12, just as the term premium broke above 50 basis points.

Chart: Term premium and the S&P 500

Third, rising interest rates and Trump’s election victory strengthened the dollar, and the dollar’s strength has now reached a level that could weigh on stocks with a high share of overseas sales, with last year’s low base effect, the dollar index is approaching +10% year over year, which will be a key topic during the fourth-quarter earnings season for some multinationals.

All these factors have jointly weighed on market breadth, which still appears fragile. The gap is enormous between the S&P 500 index’s ratio to its 200-day moving average and the percentage of stocks trading above their 200-day moving averages, The market rally is still being driven more by a handful of mega caps than by a broad-based recovery.

This divergence could narrow in two ways:Either market breadth improves, or the S&P 500 index pulls back toward its 200-day moving average. The former would require lower interest rates, a weaker dollar, greater clarity on tariff policy, and stronger earnings revisions.Without these developments, 2025 may follow a “weak first half, strong second half” pattern, with more challenges in the first half and policy changes in the second half (such as extending or expanding tax cuts and reducing the term premium through greater government efficiency) potentially more favorable to equities.

2025.01.08

III. Market Pulse

Our latest Comments on the economic and market environment

The early-year selloff in European bonds and market pricing of ECB rate cuts

In the first week of the year, Real Money investors made large-scale sales of the long end of German government bonds (especially outright Bund positions) and spread trades against 10-year U.S. Treasuries.This selling may have been intended to prepare for the pressure from the large supply of European government bonds over the next two weeks.

Looking back at the selloff in the final two weeks of 12, it can be attributed to two factors

1) Fast Money reduced positions for risk-management purposes

2) Expectations of large-scale European bond supply at the start of 1 triggered a market adjustment

CTA remain long European interest-rate duration positions and are expected to sell mainly key securities such as Schatz, Bobl, and Bund if the market moves sideways.

At the short end of the yield curve (short-term government bond yields), as natural gas and crude oil prices rose in tandem with the dollar, The market revised its expectations for potential rate cuts at the European Central Bank (ECB) rate decision in 2025 9, reducing expected rate cuts by 10 basis points.

ECB Executive Board member Stournaras said that interest rates would reach around 2% in the autumn. These remarks triggered selling at the short end of the curve.Although Stournaras is not the most influential member of the Executive Board, given his very dovish stance and the absence of any rebuttal from other board members, a new narrative has emerged in the market:“European markets have priced in too many rate cuts”, so the risk-reward favors short positions in euro-area rates. This suggests that The first two trading days of the new year were driven mainly by selling pressure amid insufficient market liquidity.

Looking ahead to this week, European inflation data and the U.S. nonfarm payrolls report (NFP) will be key drivers. As most market participants return, liquidity is expected to improve.

2025.01.06

Divergence in European markets: The Gravitational Effect

From the perspective of economic uncertainty, European valuations should have declined, but the “gravitational effect” of U.S. market valuations continues to pull global valuations broadly higher:

Chart: Divergence in European markets

If the U.S. session continues to trade sideways without moving higher, convergence trades in Europe will also begin. In the U.S. session, we are watching 10Y; trades across markets are all interconnected.