- Quant (h)Edge
- Posts
- Off To The Races
Off To The Races
Happy new year, and welcome to the first Weekly Market Dossier for 2025!
Editor’s note: Sorry guys but due to unavoidable commitments, I didn’t have time to include everything that should go in this report. I’ll do better. Instead, I will share what interesting things I came across while doing market research this week.
🌐 Economic Releases
The first trading day of 2025 saw the dollar rise against most currencies after Jobless Claims came in lower than expected (211k v 222k). This prompted a large move lower in EURUSD as the EU is now expected to cut much more than the Fed. However, EURUSD recovered some.
Friday we had US ISM Manufacturing PMI which came in higher than expected (49.3 v 48.2), adding wood to the US exceptionalism fire.
💵 Central Banks
The only central banker I kept up with this week was Richmond Fed President Tom Barkin who gave his outlook for 2025. He pointed out that since consumer spending makes up two-thirds of GDP, as long as unemployment stays where it’s at (near the neutral rate) and asset values remain ‘solid’, consumer spending should remain robust. He also expects consumer pressure to pull inflation down. In terms of risks to the US economy, he highlighted inflation as the main risk and very surreptitiously pointed out that Trump has a lot to do with that.
Take tariffs, for example. What tariff rates will actually be imposed? On what countries? On which products? For how long? Will there be retaliation? If so, at what levels? Through tariffs or export restrictions on key commodities? How will supply chains evolve in response? How will manufacturers, retailers, and consumers react? I could lay out a comparable set of questions around other policy areas in the discussion, such as immigration, regulation, government spending and taxation.
💱 Currencies
The sentiment around the US dollar is that it is ‘too strong’, and charts are circulating showing how eerily similar the trajectory of the USD after Trump was first elected is to his second win. Here’s one. Brent Donnelly showed in last week’s Friday Speed Run how the EURUSD in particular is trading almost exactly like it did in late 2016-early 2017.
I have no view on anything in FX this week. But I am watching CAD closely because it has been reported that Trudeau could step down as soon as tomorrow (Monday). Canadian elections will be in focus this year and there’s a chance it could lean right just like in the US.
📉 Stocks
US equities arrested their initial decline to end this week higher in response to the Manufacturing PMIs.
Investors also digested the 2025 S&P 500 forecasts from major Wall Street institutions. It’s been noted that all of last year’s forecasts were way below the outcome, but at the turn of last year, equity sentiment was very bearish and even the most optimistic among the forecasters couldn’t see the SNP closing the year higher than 5500. But if you trade on sentiment, the extremely negative sentiment would have been a bullish signal. Here are this year’s forecasts. All of them are bullish which for sentiment traders is a bearish signal.
💰 Bond Markets
Bonds won’t budge. I suck at bond analysis and only use rates as indicators, but I am aware that a brewing narrative around bonds has to do with just how inflationary Trump’s administration is expected to be, and in particular, if the US’s ability to repay debt could be affected. Musk and Ramaswamy wrote an Op-Ed in the WSJ about how they will go about reducing the spending, but there’s also a lot of skepticism.
It's unclear how much real impact Musk and Ramaswamy's Department of Government Efficiency will have — DOGE can only make recommendations and doesn't have the power to cut. - Emily Peck, Axios
Right now it’s more of an uncertainty than a risk, and with the Fed not expected to cut rates anytime soon, bonds have no real reason to go anywhere.
₿ Crypto
Bitcoin is starting to creep towards 100k, sparking optimism that the crypto rally will continue. The crypto rally hinges on the regulatory overhaul that Trump’s administration is expected to implement in favor of Crypto. The crypto community backed 58 candidates in the election, 50 of whom won.
Some of the biggest challenges that crypto executives have identified are preventing regulatory oversight from hampering their growth, gaining access to banking, and stabilizing dollar-pegged cryptocurrencies. - WSJ
Such regulations (more like deregulation) would benefit coins like XRP, Ethereum, and Solana. For example, XRP enables faster and cheaper cross-country transactions, which would benefit banks should they adopt it. 80% of Japanese banks are expected to make this change in 2025.
Banks are developing comprehensive blockchain strategies, incorporating Ripple's technology into their existing frameworks. This integration represents a fundamental shift in how traditional finance views digital assets, with XRP at the forefront of this transformation. - Financemagnates
You can see this narrative (pro-crypto Trump admin helping with Ripple's adoption by financial institutions) in the correlation between XRP and XLF which is presently 67% (note how the correlation started increasing from 0 after the election).
The other story in crypto is the meteoric rise in Fartcoin.
You can tell Fartcoin sentiment is at a peak as the catchphrase ‘hot air rises’ is all the rage on X. Here’s where it came from (lol)
⛽ Commodities
Oil is up 8% in the past 30 days. No one has a compelling argument as to why, but the last two trading days saw big moves up after Xi Jinping said the Chinese government would be conducting more proactive macroeconomic policies and continue to support the economy in response to weak Kaixin Manufacturing index data and a drop in the Shanghai Composite. This was interpreted as a likely increase in Chinese demand. Any oil story in 2024 was somehow linked to Chinese demand, but there are concerns that China’s economy could struggle in 2025, and maybe even head for a depression.
NatGas came off the boil and closed its gap, however, there are speculations that due to more extreme cold temperatures than forecasted, Europe and the UK may draw on their supplies more which would trigger a move higher.
Everything I read this week about Gold was mega-bullish. Gold’s rally depends on yields,
The lower rates get, the lower the opportunity cost of owning gold, which pays no interest or dividends. - WSJ
central bank buying,
In a 2024 poll of central bankers, 29% said they intended to increase their gold reserves in the subsequent 12 months, according to the World Gold Council, the most since it started the survey in 2018.
It will be a long re-balancing. While advanced economies hold as much as 70 percent of their reserves in gold, BRICS central banks typically hold around 10 percent, with most of the rest in dollars. That means that they are likely to stay gold buyers in the long term even if — as is currently the case with the People’s Bank of China — they can hold off when they think prices have gone too far. - Politico
and tariffs,
Gold may offer hedging benefits against potential geopolitical shocks, including potential rises in trade tensions, - gs
Investors large and small tend to flock to gold in times of heightened conflict. And there is plenty of that headed into 2025, from wars in the Middle East and Ukraine to President-elect Donald Trump’s vows to escalate trade disputes with China and other countries. - WSJ
the U.S and European debt
Nor is it just about the fear of hostilities and sanctions, but also the failing reliability of the states that built the postwar global financial order. Both the U.S. and Europe are laboring under growing debt burdens that look unsustainable in the long term, as the International Monetary Fund highlighted at its annual meeting. - Politico
plus it’s increase in value to small investors.
“Gold has been a symbol of trust for 3,000 years,” said Salvatore Rossi, a historian and former deputy governor of the Bank of Italy. “Gold bars for central banks are like grandpa’s old gold watch for a family: it’s the last resource, the one you would not sell, but everyone knows that you have it.”
FT report that Wall Street analysts are bullish on Gold.
I have no view on Gold but I think it will be an interesting play once Trump takes office.
🤝 Macroeconomics
🇨🇳 China
The only macro research I did this week was about China. Despite Xi Jinping’s remarks, there are concerns that China could experience what Japan went through—the ‘Lost Decades’. The similarities are compelling.
Like Japan’s property bubble that burst in the last 80s, causing a banking crisis and economic stagnation, China’s real estate was a key driver of economic growth, but the overbuilding led to ‘ghost cities’ and empty apartments. This caused a collapse in housing demand and wiped out $18 trillion (trillion with a T) since 2021.
China’s debt-to-GDP is about 300% with significant off-balance-sheet borrowing through local government financing vehicles. This debt burden will be hard to sustain and could end up posing systemic risks. Japan also had a lot of non-performing loans after the housing bubble burst.
Due to decades of the one-child policy, China’s population is aging. Population growth turned negative in 2022, and the working-age population is declining which could affect output and consumption. Japan also had similar demographic issues with declining birth rates and an aging population.
China, like Japan in the 80s, had industrial overcapacity, much to the chagrin of its competitors i.e. India.
China’s growth has relied on infrastructure, real estate and manufacturing exports, but with the high debt burden, low domestic demand, declining property values, and and overleveraged financial system, China can’t continue taking loans for infrastructure and real estate. Xi’s new policies are meant to increase domestic demand to balance its economy, but there’s a risk that such efforts just end up sustaining industrial overcapacity, or even making things worse.
All these factors point to deflationary pressures and Chinese bonds have responded by going higher (rates lower).
🕵🏾♂️On my Radar
Long Term but how the imminent election in Canada will affect oil and gas.
European weather developments and NatGas.
Can India’s increasing oil demand replace China’s declining demand?
📁 Docket
A new explanation of inflation dynamics.
Paul Krugman has a substack which is a rather interesting read. Here are his principles for research.
I’m currently reading Red Blooded Risk by Aaron Brown.
🎶 Music
I thought I’d heard everything by Myon and Shane 54 but I recently found this song. I’m not crazy about it but I think it’s nice.
🔖 Theoretical Stuff
I’m reading a lot about factors this week as I work on some factors in crypto. Besides size (SMB) and momentum, there not much to go on, but I have found some pretty interesting papers that attempted to do the same. One way to find ‘black-box’ factors is to use Principal Components Analysis (PCA) but it’s fraught with challenges. The methodology is similar to this paper.
Visual of the trending issue in 2024 (credit: @exec_sum on X)
Feedback and criticism welcomed.
Reply