Looking back at 2024, the market once again showed a trend of comprehensive growth, with almost all major macro asset classes achieving positive returns. Stocks performed outstandingly in absolute returns and risk-adjusted returns, gold steadily rose throughout the year with very little volatility, performing excellently, while the performance of the yen and Japanese government bonds lagged behind; 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 bullish, with most Wall Street banks predicting that the SPX index will rise another 10% this year, with a forward P/E 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's evident hawkish stance in December, bond investors expect fewer than two rate cuts in 2025.
"I believe the upside risks are greater than the downside risks," said Richmond Fed's Barkin during a talk in Maryland last Friday. "Therefore, I think it is more appropriate to keep interest rates restrictive for a longer period of time."
Additionally, the Trump 2.0 policy is expected to exert upward pressure on prices, but the degree of transmission will depend on the implementation of these policies. We expect the resistance faced by the new government may be greater than current market expectations.
At the same time, most global investors' funds are 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 turn, and the yield on the 10-year U.S. Treasury bond is rapidly approaching the high point before the Fed's rate cuts in 2024.
Nevertheless, it is expected that market volatility will remain low ahead of Friday's non-farm payroll report, which will officially kick off a new year of trading activity. 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, as the yields on 30-year bonds have fallen below those of Japanese bonds for the first time. With deflation concerns intensifying, 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 exchange rate of the yuan, and the market has high hopes for the People's Bank of China's policies to be successful this year.
In terms of cryptocurrencies, Microstrategy's significant stock price correction has led brokers to raise trading margins, and ETFs have experienced substantial capital outflows, with IBIT setting a record for a single-day net outflow of $333 million, the largest since its launch, marking the third consecutive day of net outflow and the longest continuous outflow record. In contrast, futures clearing has been much milder, indicating that this adjustment is more driven by TradFi and is a reaction to the sharp decline in MSTR's stock price, with the company's net asset value premium now falling back to 'only' 1.8 times.
Finally, from on-chain activity data, thanks to the altcoin craze, the trading volume of decentralized exchanges (DEX) has hit a historic high, but the dominance of DeFi has declined, with the total value locked (TVL) still significantly below the peak in 2021. With Trump policies expected to bring new hope for mainstream adoption of cryptocurrencies, will this year become a year of renewed venture capital inflow into cryptocurrencies?
Happy New Year! Wishing everyone a smooth trading year ahead with abundant gains!
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