Since our recommendation to buckle up and prepare for market shocks, global stock, forex, and bond markets have all undergone significant adjustments. The U.S. 10-year Treasury yield, as a representative example, surged by 125 basis points at its peak, marking a period of high volatility. This could largely be attributed to rising CPI data in the U.S., with readings of 2.6%, 2.7%, and 2.9% for October to December, respectively. Although a rebound in global stock markets followed the release of the December CPI, the overall trend remains downward. Our advice to hold positions in the Nikkei and gold to hedge against this market turbulence has proven to generate excess returns.
Last week, we liquidated our Nikkei positions. The primary reason was the domestic market’s focus on foreign-related assets, with Nikkei 225 ETFs, Nasdaq ETFs, and German ETFs trading at significant premiums. We exited these positions before market sentiment gained momentum. These assets experienced large fluctuations under the influence of market sentiment, and without timely profit-taking, substantial risks could have been incurred. This market behavior has not been isolated to 2024.
Given the sluggishness of the domestic equity market, with sentiment low in China’s capital markets, domestic funds have increasingly turned to speculation in bonds, gold, and foreign-related assets. While the speculation aligns with valuation adjustments, it is evident that some were caught off guard by market sentiment at the high end, incurring significant losses. Thus, our recommendation is either to avoid participating in such markets, as these trends are usually short-lived, or to take profits at the right time. For commodity assets, a 3% monthly gain is considered an excellent performance. This level of return reflects a major adjustment in global economic and policy expectations, making it a good point to lock in profits.
Looking ahead, aside from China, global capital markets face inflation as the primary risk. While the market believes the U.S. CPI performance in December met expectations, actual inflation levels have been rebounding. Furthermore, in January, global oil prices surged significantly, with Brent crude staying at around $80 per barrel, a 14% month-over-month increase. This will likely be reflected in the CPI data for the coming quarter.
We believe that oil prices are unlikely to retreat in the short term. Since Trump’s presidency, the Russia-Ukraine conflict has not ended as expected, and Ukraine’s efforts to disrupt Russia’s natural gas exports continue. Additionally, there is a possibility of large-scale conflicts involving Turkey, Israel, and Iran. While Trump may push for lower energy prices, the swift ramp-up of production requires time. With rising energy prices, inflation will likely remain sticky, and the Federal Reserve’s extensive rate hikes will provoke strong opposition from Trump. Currently, both the Fed’s key officials and the new U.S. Treasury Secretary are attempting to reassure the market, which explains the strong market rebound seen in recent weeks. However, this rebound is largely driven by sentiment, and given the overall inflationary backdrop, we expect increased market volatility. Those wishing to participate in this market should focus on trading based on policy and economic data expectations, executing tactical moves. With rising risks, gold remains an attractive asset (though with limited upside).
It is important to note that there are substantial differences between markets, which we analyze in detail below:
Europe:
Since the start of January, the German market has led the global rally, as investors are pricing in Germany’s next chancellor. This has clearly led to overbought conditions. From a fundamental perspective, Germany’s CPI continues to rise, and bond yields have surged. If AFD takes office, these issues may be resolved. The German stock market will continue to react to this uncertainty, and this trend is likely to persist until the election results become clearer.
Japan:
The market has been oscillating within a range, with a significant pullback this week. The main driver is the growing likelihood of an interest rate hike at next week’s policy meeting. On Friday, Japan’s stock market tested its lower resistance, but immediately rebounded, reflecting market sentiment and speculation that the Bank of Japan will prevent a sharp decline, thus avoiding a repeat of the previous carry trade-induced stock market crash. We believe there may be an opportunity to trade on Japan’s interest rate hike expectations next week, but timing is critical.
United States:
With Trump set to take office next Monday, policy expectations will gradually become clearer. Despite the pressure of high inflation and interest rates, Trump’s policies are expected to favor technology markets. The strong rebound in the Nasdaq reflects this, offering opportunities for tactical trades, but these are difficult to execute with precision.
China:
On Friday, China’s macroeconomic data for the year was released, in line with market expectations, meeting the annual growth target. The overall market performance was rather flat, with some skepticism about the quality of the data, which was evident in the stock market. Since the Shanghai Composite Index fell below 3,300, a panic-driven adjustment ensued, largely triggered by December’s PMI data. The macro authorities have introduced numerous regulatory measures, such as tools to balance the bond and equity markets, issuing central bank bills in the offshore market to stabilize the exchange rate, expanding the scope of subsidies for new energy vehicles and consumer electronics, and other measures to stabilize both bond and stock markets. However, stock markets are always driven by excess returns, and with the overall inflation environment improving, funds seeking excess returns are likely to recede, potentially causing a rapid pullback in the indices. Such market corrections are often event-driven. As key economic data releases approach, caution is advised. Recently, overnight lending rates have surged rapidly, which we believe is largely driven by the bond market. When asset prices are underperforming, tight liquidity could spill over into cash flows seeking excess returns, increasing the likelihood of a sharp correction.