From June thirtieth, two thousand twenty-five to July second, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
Expectations lead: reviewing the 18-19 rate-cutting cycle
The sustained decline in 2-year Treasury yields combined with the upward trend in stock prices,
show that the market is displaying a “expectations lead” pattern,
The 2018-2019 rate-cutting cycle offers a useful reference:
Chart: 2-year Treasury yields have fallen sharply since 6 20
At the time, the Fed did not begin its first rate cut until 2019 7,
But 2-year Treasury yields had already begun falling at the end of 2018...
Chart: Among the 2018-2019 policy rate and 2-year yields, 2-year yields began falling ahead of the policy rate
Although Major market indices fell sharply at the end of 2018,
but then rebounded quickly and remained resilient throughout 2019.
Chart: Price action of SPX from 18 year 10 month 1 day to 19 year 12 month 31 day
2025.07.02
II. Insights
Our Viewpoints and ideas on market...
Oil trading returns to fundamentals (with expected trading range)
The geopolitical risk premium in oil prices has fallen sharply from highs above 15 dollars per barrel and now stands at only a few dollars. Oil prices have largely returned to their levels before the conflict escalated, and the implied risk reflected in options pricing has also declined substantially:Take the Strait of Hormuz as an example: the options-implied probability of a major supply disruption has fallen from a peak of about 15% to a very low level, almost matching the beginning of 6.
The sharp decline in the risk premium in oil prices reflects several key market consensuses:
1) Several major geopolitical shocks in recent years have not caused actual oil and gas supply disruptions, and the market has grown accustomed to this. This is also why we previously judged that the price action was “more likely to continue repeating last October’s pattern.”
2) The reactions of other trading parties have been relatively mild, suggesting that the United States and Qatar had advance warning.
3) Both the United States and China have a strong incentive to avoid a large-scale supply disruption.
4) Trump is highly focused on energy affordability and will not let prices surge unchecked.
5) Many investors are reluctant to actively bet on a sharp rise in oil prices and generally expect a clear oil-market surplus to emerge in the autumn.
On the supply surplus, we have discussed oil fundamentals many times before in the group, and this was also the basis for our earlier short positions (see Notes250523 Reasons to short oil prices + Notes250527 Reasons to short oil prices, continued),This part is “largely unchanged” apart from geopolitical shocks: 1) OPEC+ ample supply; 2) weak demand growth; 3) inventories have risen for several consecutive months and, based on current indications, will continue to grow over the next 18 months.
Bulls are focused on the decline in U.S. inventories, but global data show that over the past 90 days, global crude inventories actually increased by about 130 million barrels per day. In particular, In emerging markets such as Asia, inventories have accumulated substantially, possibly as precautionary stockpiling against geopolitical uncertainty.
These data further support our view that the oil market is oversupplied and prices are moving lower.
The chart below shows changes in inventories since the start of the year:
Chart: Oil inventories have risen for several consecutive months and will remain significantly oversupplied in the autumn
Oil-producing countries are now focused on capturing as much market share as possible...
Based on current estimates from various institutions, the oil market will see a substantial supply surplus this year, with full-year supply growth nearly 4 times global demand growth. This includes strong production growth from non-OPEC countries such as Brazil and Guyana, as well as an expected additional 100 thousand barrels per day of supply from OPEC+ countries between 7 and 8 (equivalent to 1% of the global market).
However, Structurally, before the more likely downside trade returns to fundamentals, what is more likely is a period of easing, with volatility levels falling, first，Tensions in the Middle East are easing, and summer demand is entering a transition phase, but After this conflict alert is lifted, the market is bound to become more cautious in pricing sudden events, which also means it will continue to demand a higher geopolitical risk premium for some time.(At present, the 15-day call-option skew remains near a three-year high, indicating that some risk premium has yet to be fully absorbed.)
Chart: Prices may form a range between 55-65, with the upper bound a potentially viable area for shorting
At present, In the second half of the year, prices are more likely to form a trading range between 55-65, with the upper bound a potentially viable area for shorting.
For a further actual decline, absent another event shock, we will have to wait until year-end.
I will provide updates as things change.
2025.07.01
Adding a chart:
2025.07.02
Pricing logic in U.S. (European) equity markets
The chart below shows the co-movement between the Cyclicals vs Defensives Pair and the 1y1y SOFR rate:
The spread between the baskets clearly reveals the current pricing logic in the U.S. equity market (and not just in the U.S.; European markets are pricing the same thing):The market expects the Fed to begin cutting rates while growth remains decent, and the benefits of those cuts are being concentrated in cyclical sectors.
A similar situation occurred last summer, At the time, the weak economic data released afterward undermined the market’s confidence in growth, causing the cyclical-versus-defensive trade to be heavily repriced against cyclicals after they had moved ahead.
Chart: Horizon Global Strategy economic calendar
With the nonfarm payrolls report due soon, a strong CPI report afterward could again catalyze a shift in the market from a Goldilocks narrative toward slower growth and a slower Fed.
2025.07.02
III. Market Pulse
Our latest Comments on the economic and market environment
Another spot for shorting the dollar
When the market has priced in about 2.5 Fed rate cuts this year, leaving some pricing room relative to the most aggressive expectation of 3 cuts for the full year, but short positions are relatively crowded in the near term,
which is also why we did not set our initial EUR/USD target too far away:
Chart: approaching the initial target
If the dollar rebounds in the short term after reaching the target, it may first return to around the 55-day moving average. If the thesis remains unchanged, that would be an ideal level to consider shorting the dollar again later.
Chart: the 55-day line is a possible rebound level
On the other hand, note that for EUR/USD, once it breaks through smoothly again,
its 21 high (1.235)will face no resistance along the way:
Chart: no more resistance before the 21 high
2025.06.30
Another spot for shorting the dollar (continued)
EUR/USD has reached the target price mentioned earlier, and the market also encountered clear resistance after reaching 1.18:
Chart: microstructure
Meanwhile, the U.S. Dollar Index also rebounded toward the 55-day line as expected:
Chart: retracement
2025.07.02
Note: Everything in this text 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 decisions.