June thirtieth, two thousand twenty-five to July third, 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 continued decline in 2-year US Treasury yields, combined with the upward trend in stock prices,
showing the market is showing characteristics of “expectations leading”
The 2018-2019 rate-cutting cycle offers some useful points of reference:
Chart: 2-year US Treasury yields have fallen sharply since 6/20
At the time, the Federal Reserve did not begin its first rate cut until 2019/7,
but 2-year Treasury yields had already begun to decline as early as the end of 2018...
Chart: 2018-2019 policy rates and 2-year yields; 2-year yields began falling ahead of policy rates
Although major market indexes had fallen sharply at the end of 2018,
but then rebounded quickly and remained resilient throughout 2019.
Chart: price trend for 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 a high of more than 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 fallen substantially:Take the Strait of Hormuz as an example: the options-implied probability of a major supply disruption has fallen from a peak of around 15% to a very low level, nearly matching the start of 6.
The sharp decline in the risk premium in oil prices reflects several core 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 trajectory was “more likely to replicate last October.”
2) The reactions of other trading parties have been relatively mild, indicating that the United States and Qatar had advance warning.
3) Both China and the United States have a strong incentive to avoid a large-scale supply disruption.
4) Trump is highly focused on energy-price 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 marked oil-market supply surplus in the autumn.
On the supply surplus, we have discussed oil fundamentals on Planet many times before, and this was also the basis for our earlier short positions (see Notes 250523, “Reasons to short oil prices,” and Notes 250527, “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 current indications are that inventories will continue to rise over the next 18 months.
Bulls are focused on the decline in US inventories but global data show that global crude inventories actually increased by about 130 ten thousand barrels per day over the past 90 days. In particular, There has been substantial inventory accumulation in emerging markets such as Asia, possibly as precautionary stockpiling against geopolitical uncertainty.
These data further support our view that the oil market is oversupplied and prices are headed lower.
The chart below shows inventory changes since the start of the year:
Chart: Oil inventories have risen for several consecutive months and will remain significantly oversupplied in the autumn
Oil producers 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. Full-year supply growth will be nearly 4 times global demand growth, including strong production increases from non-OPEC countries such as Brazil and Guyana, as well as an expected additional 100 ten thousand barrels per day of supply from OPEC+ countries between 7 and 8 (equivalent to 1% of the global market).
However, structurally, before a downside trade returns to fundamentals, it is more likely that there will first be a period of easing with volatility levels falling，Tensions in the Middle East are easing, and summer demand is entering a transition period, but after the conflict alert was lifted, the market is bound to price unexpected events more cautiously. This also means that a higher geopolitical risk premium will continue to be required for some time.(At present, the 15-day call-option skew remains at a three-year high, indicating that some risk premium has yet to be fully absorbed.)
Chart: Prices may form a range around 55-65, with the upper bound a potentially viable level for shorting
At present, In the second half of the year, prices are more likely to form a trading range around 55-65, with the upper bound a potentially viable level for shorting.
For a further outright decline, absent another event shock, we may have to wait until year-end.
We will provide updates as things change.
2025.07.01
Adding a chart:
2025.07.02
Pricing logic in the US (European) equity market
The chart below shows the relationship between the Cyclicals vs Defensives Pair and 1y1y SOFR rates:
Behind the basket spread, one can clearly see the pricing logic of the current US equity market (and not only the US market; Europe is pricing the same way)—The market expects the Fed to start cutting rates against a backdrop of still-decent growth, and the benefits of these cuts are being concentrated in bets on cyclical sectors.
A similar situation occurred in last summer, when subsequent weak economic data undermined the market’s confidence in growth, causing the trade favoring cyclical over defensive stocks to be sharply repriced after it had gotten ahead of itself.
Chart: Horizon Global Strategy economic calendar
With the nonfarm payrolls report due soon, a strong CPI report afterward could once again trigger a shift in the market from a Goldilocks narrative to one of slowing growth and a slower-moving Fed.
2025.07.02
III. Market Pulse
Our latest Comments on the economic and market environment
Another level for shorting the US dollar
At the market has priced in around 2.5 Fed rate cuts this year, with some pricing room still remaining for the most aggressive full-year scenario of 3 cuts, but short positions are relatively crowded in the near term,
This is also why we did not set the initial target for EUR/USD too far away:
Chart: nearing 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, this would also be an ideal level to consider shorting the dollar again later.
Chart: the 55-day chart shows a possible rebound level
On the other hand, it is worth noting that, For EUR/USD, once it breaks through smoothly again,
on its way to reaching the 21 high (1.235)there will be no further resistance zones:
Chart: No obstacles remain before the 21 high
2025.06.30
Another position for the dollar bears (continued)
EUR/USD has reached the target price mentioned earlier, and the market also encountered clear resistance upon reaching 1.18:
Chart: Microstructure
Meanwhile, the U.S. Dollar Index also rebounded toward the 55 daily moving average as expected:
Chart: Retracement state
2025.07.02
June Nonfarm Payrolls & Another Position for the Dollar Bears (continued, part two)
June nonfarm employment data far exceeded market expectations(In line with our expectations; see our previous series of discussions on unemployment on the platform. This is also why we have been tracking dollar positioning daily throughout this week.), with government-sector employment support and a decline in labor-force participation jointly bringing the unemployment rate back to 4.1%:
Dollar surge:
Chart: The surge returned above the daily moving average we identified for 55
EUR/USD pricing also moved lower as expected:
Chart: After the data shock, the market plunged straight down after our target
2025.07.03
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 decision-making.