SignalPlus Macro Analysis Special Edition: Happy New Year

Looking back at 2024, the market once again showed a comprehensive upward trend, with almost all major macro asset classes achieving positive returns. Stocks performed outstandingly in both absolute returns and risk-adjusted returns, while gold steadily rose throughout the year with minimal volatility, performing excellently. In contrast, the Japanese yen and Japanese government bonds lagged behind, as the Bank of Japan refused to tighten monetary policy even in the face of rapidly rising domestic inflation.

As we enter 2025, market sentiment remains consistently bullish, with most Wall Street banks predicting that the SPX index will rise another 10% this year, with a forward price-to-earnings ratio reaching around 24-25 times, and EPS expected to reach about $270 by the end of the year.

In fixed income, due to persistently high inflation and the Federal Reserve showing a clear hawkish stance in December, bond investors expect fewer than 2 rate cuts in 2025.

"I believe the upside risks outweigh the downside risks," Richmond Fed's Barkin said last Friday during a talk in Maryland, "Therefore, I think it is more appropriate to keep rates restrictive for a longer period."

Additionally, the Trump 2.0 policies are expected to exert upward pressure on prices, although the extent of the transmission will depend on the implementation of these policies. We anticipate that the resistance faced by the new administration may be greater than the current market expectations.

At the same time, most of the funds from global investors are already fully allocated, with cash holdings at a low point, leading to a somewhat difficult start for 2025. The market is still affected by the Federal Reserve's unexpected hawkish shift, with the 10-year U.S. Treasury yield rapidly approaching the highs seen before the Fed's rate cuts in 2024.

Nevertheless, market volatility is expected to remain low ahead of Friday's non-farm payroll report, which will officially kick off the trading activities for the new year. In the short term, economic data is expected to show signs of a "soft landing," with the highest volatility event this month likely to be the FOMC meeting at the end of the month.

A potential source of volatility may come from China, where 30-year bond yields have fallen below Japanese bond yields for the first time. As deflation concerns intensify, the People's Bank of China is expected to adopt more aggressive easing policies. The interest rate differential between China and the U.S. as well as developed markets continues to widen, which will have a significant impact on the renminbi exchange rate, and the market has high hopes for the People's Bank of China's policies this year.

In the cryptocurrency space, the significant pullback in Microstrategy's stock price has led brokerages to raise trading margins, and there has been a substantial outflow of funds from ETFs, with IBIT recording a net outflow of $333 million in a single day, the largest single-day outflow since its launch, and marking the third consecutive day of net outflows, the longest streak of consecutive outflows. In contrast, futures clearing has been much milder, indicating that this adjustment is more driven by TradFi and is a response to the sharp decline in MSTR's stock price, with the company's net asset premium now falling back to "only" 1.8 times.

Finally, based on on-chain activity data, thanks to the altcoin craze, the trading volume on decentralized exchanges (DEX) has surpassed historical highs, but the dominance of DeFi has declined, with the total value locked (TVL) still far from its peak in 2021. As Trump’s policies are expected to bring new hope for mainstream adoption of cryptocurrencies, will this year become a year of renewed inflow of venture capital into cryptocurrencies?

Happy New Year, wishing everyone smooth trading and abundant gains in the new year!