In the past two weeks, global capital markets have experienced modest volatility. Europe’s markets have been led by Germany, which surged ahead, while the Nasdaq continued to lead global gains. Japan maintained a certain degree of stability, while gold saw a slight pullback before gradually stabilizing. Bitcoin surpassed $100,000, and the U.S. Dollar Index retreated from 108, stabilizing at 106. We believe two key trading dynamics are at play: first, the upcoming U.S. CPI data to be released next week, and second, regulatory factors.
Since the U.S. CPI rebound last month, the U.S. Dollar Index rose sharply to 108, and the 10-year Treasury yield surged past 4.4%, causing a broad pullback in global liquidity. The Dow Jones has fully retraced the gains triggered by Trump’s presidency, with the Asian markets particularly impacted. Japan, South Korea, and India all saw significant declines. Over the past two weeks, as the Federal Reserve enters its quiet period, numerous Fed officials have stepped in to reassure the market, signaling that a rate cut will likely take place in December. The probability of a 25bps rate cut by the Fed in December has returned to 75%, and U.S. Treasury yields have adjusted down by approximately 25bps. This has led to a general rebound in global capital markets, moving out of the recent trough. The CPI data next week is critical; if the reading is lower or in line with expectations, global markets may see a strong rebound, but the risk of a surprise uptick in data should also be monitored. Hence, holding positions in the Nikkei and gold remains a solid strategy.
On the regulatory front, market conditions vary significantly across different regions, with the world economy showing distinct divergences in growth trends.
Europe: Both Germany and France are undergoing significant political shifts, but their capital markets are responding differently. Germany’s market is rallying, while France’s is underperforming. One possible explanation is the weakening of Germany’s Green Party, which could signal a potential shift back toward nuclear and coal energy policies, disrupting Germany’s deindustrialization process. As the German market is largely driven by expectations, a stronger-than-expected performance by the Green Party could lead to a downturn. German political forces seem to be moving from the extremes toward a more centrist stance, while in France, the center-left is losing power, leading to greater uncertainty in economic policy. Since France’s parliamentary elections in July, the stock market has shown sustained weakness.
Asia: South Korea is experiencing political upheaval, though the government’s 40 trillion won bailout plan has prevented a broad market downturn. However, it is not recommended to make large-scale purchases at this stage. Political instability often translates into economic policy uncertainty, but should moderate factions come to power, this could improve the situation on the Korean Peninsula, potentially presenting trading opportunities. In Japan, the market remains restrained by expectations of future interest rate hikes by the Bank of Japan, which limits upward momentum in capital markets. Japan’s bond yields have been rising, which is generally positive for its economy. If Japan can exit the deflationary cycle, the economic environment would be more conducive to expansion, and an improved situation on the Korean Peninsula could further benefit Japan’s economy. In India, economic data has shown some signs of slowing, and the RBI’s 50bps rate cut may not be enough to stabilize the stock market. However, India’s long-term economic outlook remains positive, and it seems likely to retain its position as the third-largest economy in the world.
U.S.: Former President Trump has nominated a new SEC Chairman and a digital asset commissioner, breaking the regulatory stalemate surrounding cryptocurrencies. Whether the U.S. will establish a digital currency reserve remains uncertain. Next week, whether MSTR is included in the Nasdaq index is also crucial. If included, this could bring a continuous stream of passive capital flows to MSTR, injecting liquidity into the cryptocurrency market. The immense size of the cryptocurrency market undoubtedly enhances the appeal of the U.S. dollar as the global reserve currency. Traditional theories of international trade currencies suggested that maintaining U.S. capital market leadership was key to dollar hegemony, but with the rise of digital currencies, another “reservoir” has emerged. Regardless of the gray-market activities involving Bitcoin, using the cryptocurrency requires entering the U.S. dollar ecosystem. Furthermore, the volatility of this market is not a burden for the U.S., as it holds no direct downside.
Looking ahead, reviewing our trading experience for 2024, macroeconomic fundamentals remain the main driver for market movements. AI and digital currencies represent the biggest growth drivers, while regulatory policies offer short-term trading opportunities—yet timely profit-taking is crucial. Regulatory-driven trades can only yield short-term gains, as after any rally, a period of pullback is inevitable. To lock in excess returns, it’s essential to act quickly and exit positions. Of course, timing the bottom in such uncertain markets is challenging; after several attempts, one is likely to buy in at less-than-ideal prices. Thus, trading uncertainty must align with macro trends, as favorable macroeconomic conditions generally yield superior returns.
Buckle up and hold positions in the Nikkei, gold, and digital currencies while waiting for clearer data and a more coherent global economic policy framework.