January twentieth, two thousand twenty-five

I. Foundation 

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

II. Insights 

Our Viewpoints and ideas on market.

Interest-rate pricing, safe assets, and behavioral mechanisms

Changes in bond-market yields and the market's reactions are gradually becoming a “coercive mechanism”and the effects of this behavioral adjustment are not limited to economic policy itself, but are also gradually extending into broader social and political spheres.

Europeans are losing confidence in traditional political parties and shifting their support to non-mainstream parties, including those on the far right and far left, such as Germany's AfD and France's National Rally. Current polling clearly shows that support for these nontraditional parties is rising.The disputes between political parties inevitably come back to the same issue: under fiscal dominance, how much to spend and how to use it.

Behind national debt lies a rotation in safe assets China's demand for US Treasuries continues to weaken further. In the chart below, the white line represents China's holdings of US Treasuries, the orange line the People's Bank of China's gold holdings, and the blue line the yield on 10-year US Treasuries. The rotation of safe assets is pushing interest rates higher, and rising rates inevitably prompt discussion of fiscal sustainability. That discussion further deepens the crisis in the safe-asset narrative.These developments reinforce and intensify one another.

Chart: Chinese demand wanes

Figure: GS also softened its stance at the rate-setting meeting

U.S. stocks continued the move from the end of 12 last year, with price swings quite sharp at the start of the new year. At the very least, the market is currently in a transition period—not merely a transition in trading logic, but a shift, under a broader market logic, toward a new policy regime.The key change in the trading environment brought about by the transition is that the range of possible outcomes is widening. This means more uncertainty will bring more friction, reflected in the market as reduced portfolio risk allocation.

The next question is: how should trading strategies adjust?

The main trend in U.S. stocks is still likely upward, but elevated volatility may persist for some time, In other words, after two years of high Sharpe ratios and excellent beta returns, the market will lean more toward a “Trader’s Market” rather than a simple “People’s Market`”; clear-cut opportunities will be significantly fewer.

If brute-force trading worked last year, more finesse and flexibility may be needed at the start of this year.

Outside equities, it is important to go with the trend and not fight the core trends, including a strong dollar and a steep yield curve, because no one knows what a new policy regime will ultimately bring.

Chart: the current rebound in interest rates is truly rare

2025.01.20

III. Market Pulse 

Our latest Comments on the economic and market environment

A major turning point in consumption

Benefiting from a stronger U.S. economy and unexpectedly stable sales trends in Asia, European luxury goods rose, led by Richemont's stronger-than-expected results, essentially, a weak currency has provided a tailwind for the export-oriented part of the market.

Chart: Richemont trading at new all-time highs

Beyond the earnings leadership, the luxury sector's strong comeback is also related to discussions within Trump's team about replacing a large one-off tariff increase with tariffs that rise by 2 -5% each month. The news was the direct trigger for buying sentiment.

The main market debate now is whether many hedge funds should short this luxury rebound, since the sector's 14-day RSI is already in overbought territory and trading prices are above the 200-day moving average. But with the macro narrative unchanged, shorting carries considerable risk. The broad strength in this earnings season was driven by more than brand momentum., with Richemont beating expectations in every product category, region, and channel, indicating that current growth is no longer driven solely by the brand momentum of Cartier and Van Cleef。As the luxury sector bottoms out, if currency trends remain unchanged, the sector's rebound is likely to continue.

The broad earnings beats suggest that industry demand may indeed be near an inflection point, and momentum-driven sectors are likely to continue performing well in the short term. The counterargument from luxury bears is that an improved U.S. outlook is already priced into the market, so this alone is not enough to drive further upward revisions to expectations, But another point worth discussing is that the Chinese market is now also showing early signs of a rebound from the bottom. That is the key point.

2025.01.20

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.