Global election year, Federal Reserve turning point, AI frenzy, Bitcoin surging...

2024 is a year full of excitement and surprises, with Trump returning to the White House after four years, major central banks around the world entering a rate-cutting cycle, Gold and Bitcoin both soaring, and these events that are enough to be recorded in history collectively depicting the fluctuations of the capital markets.

This year, inflation pressure has significantly eased globally, with central banks in various countries successively starting rate-cutting cycles, entering a loose monetary policy phase. Among them, the Federal Reserve has lived up to expectations by implementing its first rate cut in four years, calming the intensifying recession fears. As inflation gradually approaches its target level of 2%, the Federal Reserve has also been slowly relaxing its monetary policy, with the rate cut during the year reaching 100 basis points.

Unlike other central banks, the Bank of Japan has finally announced a rate hike and exited the YCC framework after experiencing deflation for thirty years, marking the end of ultra-loose monetary policy. As a result, the yen's exchange rate surged, triggering massive unwinding of arbitrage trades, which once caused tremors in the global financial markets.

In various asset markets, the concept of generative AI remains hot; the U.S. elections have fueled enthusiasm for the 'Trump trade,' and the 'rate cut trade' has alternately dominated market styles. In an environment filled with macro uncertainties, Gold and Bitcoin have shown unexpected growth, making them among the best-performing assets of the year.

In the second half of the year, driven by positive impacts from China's policy measures, Chinese assets also saw a tremendous surge; many major foreign banks have become bullish on China, making it one of the most attractive investment symbols in the global market.

As the end of the year approaches, with inflation rising, the Federal Reserve's rate cut expectations are once again converging, with increased downward risks in the U.S. Treasury market, resulting in a temporary pause in the rise of Gold and Bitcoin, while any actions by the Bank of Japan will continue to affect the global financial circle.

1. A false alarm! The USA has triggered a recession warning.

Due to the frequent weakening of economic data in the USA, concerns about a recession have arisen, making the "Sahm Rule" an focus of market attention.

The Sahm Rule states that when the 3-month average unemployment rate changes by more than 0.5 percentage points from its 12-month low, the USA's economy will enter a recession. Since 1960, the predictive accuracy of this indicator has been 100%.

In the first half of the year, the unemployment rate in the USA has been trending upwards, continuously raising concerns about the state of the labor market. In July, the unemployment rate unexpectedly rose to 4.3%, exceeding the critical value of 4.2% that triggers the Sahm Rule's recession warning.

After the data was released, fears of a recession ignited "Black Monday," with the S&P and Dow Jones experiencing their steepest declines in two years. All sectors of the US stock market closed down, and the panic index VIX surged to 65, the highest level since the COVID-19 pandemic.

"Sahm Rule" proposer, Chief Economist at New Century Advisors and former Federal Reserve economist Claudia Sahm warned that the Federal Reserve is "playing with fire":

"Waiting for the job growth to 'worsen' is dangerous, we have experienced recessions at various unemployment rate levels, and these dynamics can reinforce themselves. If people become unemployed, they will stop consuming, leading to even more unemployment."

Sahm stated, "The labor market is increasingly approaching the danger zone, while inflation is moving further away from the danger zone. It is clear what the Federal Reserve should do."

Fortunately, with the unemployment rate easing in August, market concerns have been alleviated. As the Federal Reserve begins a rate cut cycle, economic data for the second half of the year shows increasingly strong performance, and the recession alarms released by the Sam Rule have proven to be a false alarm.

Secondly, the Federal Reserve launched the easing process by cutting rates by 50 basis points.

To curb the deteriorating employment market, the Federal Reserve announced its first interest rate cut in four years.

On September 18 local time, the Federal Reserve announced a significant reduction of the federal funds target rate by 50 basis points to a range of 4.75%-5.00%, marking the first rate cut since March 2020 and indicating a shift in the country's monetary policy towards an easing cycle.

Even more exciting for the market is that the Federal Reserve initiated the rate cut with an extraordinary margin and further emphasized the employment target within its dual mandate in the resolution statement, reflecting its determination to curb a significant slowdown in the labor market.

Reporter Nick Timiraos, known as the 'new Federal Reserve correspondent,' commented that the magnitude of the Federal Reserve's rate cut was even larger than most analysts had anticipated just days ago. This decision firmly places the Fed in a new phase of its fight against inflation: the Fed is now trying to prevent past rate hikes from further weakening the US labor market.

Following the Federal Reserve's rare 50 basis point cut, central banks around the world have initiated a wave of rate cuts. On September 19, the Hong Kong Monetary Authority, the Central Bank of Kuwait, the Central Bank of Bahrain, the Central Bank of the UAE, and the Central Bank of Qatar collectively announced cuts.

Before the Federal Reserve, several central banks had already chosen to 'jump the gun' on rate cuts as inflation showed signs of stabilizing.

In March of this year, the Swiss National Bank fired the "first shot" of the global interest rate cut year of 2024, becoming the first developed country in Europe and America to announce a rate cut.

On June 6 local time, the European Central Bank announced a reduction of 25 basis points in the three key interest rates of the Eurozone for the first time since 2019, becoming the second G7 member after Canada to cut interest rates. As economic headwinds outweighed inflation concerns, the ECB also pressed the "accelerator" on its interest rate cut path, implementing four rate cuts this year.

On July 31 local time, the Bank of England announced a rate cut of 25 basis points, lowering the benchmark interest rate from 5.25% to 5%, marking its first rate cut since March 2020, and announced a package of measures to provide additional stimulus for economic growth.

3. The Bank of Japan shifts: exit YCC and raise interest rates.

Contrary to the global "interest rate cut tide," the Bank of Japan has become a very special existence.

During the long period of deflation lasting thirty years, the Bank of Japan has long implemented ultra-loose monetary policy to boost the economy. Since the beginning of this year, as Japan's price levels steadily rise and wage growth gradually stabilizes, the virtuous cycle between wages and prices that the Bank of Japan values highly has emerged. Against this backdrop, economists and investors generally expect the Bank of Japan to raise interest rates soon.

As the market awaited eagerly, the normalization of the Bank of Japan's monetary policy finally landed. On March 19, the Bank of Japan announced an increase in the benchmark interest rate from -0.1% to 0-0.1%, marking the first rate hike since 2007 and declaring the end of the eight-year negative interest rate era.

The Bank of Japan also announced the end of the YCC (Yield Curve Control) framework, no longer mentioning the guidance of long-term interest rates to around 0% in its statement, and canceled the purchase plans for Japanese stock ETFs and REITs.

The Bank of Japan has initiated an interest rate hike cycle for the first time in seventeen years, marking the complete end of ultra-loose monetary policy, which may signify that Japan has emerged from a 30-year period of deflationary gloom.

However, the market generally expects that the process of normalizing Japan's monetary policy will be gradual. During the announcement of the interest rate decision, the bank also stated that it would temporarily maintain an accommodative monetary environment, and in the future, the Bank of Japan will implement monetary policy at its discretion.

The Bank of Japan's unexpected interest rate hike has led to the yen entering an upward Range, prompting Japanese households' assets that had fled abroad to flow back domestically, quickly shaking global financial markets.

On the day the Bank of Japan announced the adjustment to YCC, global stock markets experienced a "Black Monday," evaporating over 6 trillion dollars in market cap, the bond market was briefly filled with despair, benchmark bond prices plummeted in multiple countries, and yields surged, with the 10-year Japanese bond yield reaching a new high since 2014; the prices of U.S. long-term bonds recorded their worst single-day performance of the year.

Some viewpoints suggest that after nearly 17 years of ultra-loose monetary policy, Japan's series of aggressive interest rate hikes this year has triggered predictable and necessary risk repricing.

Four, the reversal of yen arbitrage trading.

Around the time of the Bank of Japan's interest rate hike, coinciding with the slowdown of the U.S. economy, expectations for a narrowing of the U.S.-Japan interest rate spread have greatly intensified, leading to a significant reversal of yen arbitrage trading and triggering a large-scale global "clearing," with the asset markets experiencing massive turbulence.

Since the stock market crash in the 1990s, the ultra-loose policies implemented by the Bank of Japan have made the yen a primary source of financing for interest rate differential trading. Currency market investors typically choose to borrow cheap yen to buy high-inflation emerging market currencies and other overseas high-yield assets for arbitrage.

Moreover, Japan has been the world's largest creditor nation since 1992, with the USA, France, and the United Kingdom being its top three debtor nations. In addition, Japanese funds have made significant investments in European power plants and high-risk loans.

As the Bank of Japan initiates its interest rate hike cycle, the rapid appreciation of the yen and increased borrowing costs have raised both financing costs and exchange rate risks, diminishing the allure of yen arbitrage trading. Investors began to liquidate positions, triggering a global sell-off of financial assets.

The potential for the yen to continue strengthening has made interest rate differential trading in the forex market less attractive. As the scale of arbitrage trading unwinds, currencies of emerging markets have depreciated, and major global stock indices suffered a sharp decline, with assets including Stocks and Cryptos facing severe blows.

Some analysts believe that considering the potential impact of the Bank of Japan's policy on yen arbitrage trading, the future of the Bank of Japan's monetary policy has become as critical as that of the Federal Reserve.

5. Ride the Wave! NVIDIA Continues to Stand at the Forefront of AI.

Fueled by the generative AI wave ignited by ChatGPT, interest has remained high this year. With its flagship chip product, GPU, AI concept leader NVIDIA has entered the 3 trillion dollar Market Cap club, being hailed as "the most important stock in the world."

Driven by the trend of generative AI and large models, NVIDIA's stock price has continued to soar this year, with a cumulative increase of over 180%, reaching a Market Cap of 3.36 trillion dollars.

Some analysts indicate that NVIDIA has become one of the favorite stocks for retail investors in 2024.

Vanda's research shows that as of December 17 this year, retail investors have net purchased nearly 30 billion USD in NVIDIA stocks, making it the company with the most retail capital inflow this year.

The agency stated that this amount is nearly twice that of the Large Cap ETF - SPDR S&P 500 ETF (SPY), and is expected to surpass the 'most favored stock by retail investors' of 2023, Tesla. Moreover, the net purchase amount by retail investors for NVIDIA in 2024 has surged 8.85 times compared to three years ago.

In October this year, NVIDIA's Company Executives mentioned at the 'AI Summit DC' that its next-generation Blackwell chips will be shipped to customers in the fourth quarter of this year, reigniting investor enthusiasm, with NVIDIA's stock price reaching a historical high after four months.

According to NVIDIA's founder and CEO, Jensen Huang, the performance of Blackwell will improve by 3-4 times compared to the previous generation, and with mass production starting in the fourth quarter, it is expected to bring in billions of dollars in revenue.

In the latest quarterly conference call, NVIDIA stated that it will accelerate the production pace of Blackwell in the coming year, with demand expected to exceed supply by fiscal year 2026; the growing demand for inference will drive continuous growth in chip demand.

However, as AI large models mature, some believe that inference chips represented by ASICs (Application-Specific Integrated Circuits) will gradually replace training chips represented by GPUs, becoming the 'new favorite' among major AI companies.

This view once ignited investment enthusiasm for ASIC chip manufacturer Broadcom, leading to a market trend of 'sell NVIDIA, buy Broadcom' towards the end of the year.

6. Trump's victory, the 'Trump trade' is hot.

As one of the most significant global macro events, this year's US presidential election continues to stir the global financial markets.

From a round of presidential debates on June 27, Trump being attacked on July 15, to mid-October when Trump's advantage expanded in key swing states, the expectation of Trump's election gradually intensified, and the "Trump Trade" became increasingly fervent, boosting risk assets.

HTSC Analysts stated that the main logic behind the "Trump Trade" includes: 1) Trump's combination of domestic tax cuts, external tariffs, and immigration restrictions may escalate inflation risks; 2) High inflation may drive US Treasury rates to remain elevated for a long time; 3) Loose fiscal and monetary policy tendencies support the US fundamentals, trade protection → narrowing of the dollar trade deficit + rising risk aversion sentiment, which may drive the dollar higher; 4) Large-scale tax cuts + deregulation are overall favorable for US stocks.

Ping An Securities noted that the capital markets have restarted the "Trump Trade," mainly reflected in positive performances in US real estate and financial stocks, a continuously strengthening dollar, and some pressure on non-US currency exchange rates. Due to Trump’s public support for the cryptocurrency market and traditional fossil energy, energy stocks and cryptocurrencies also further benefited from this.

After Trump's victory and the Republican majority in the Senate, the "Trump Trade" entered a frenzied mode. During the week of election day, Bitcoin broke the $88,000 mark for the first time in history, Tesla rebounded sharply by 39% since the election day, and the dollar also rose to a four-month high.

Additionally, due to Musk's strong support for Trump, Tesla experienced an almost absurd rebound, with its stock price nearly doubling since election day.

Seven, US Treasuries are being sold off, and the yields remain high.

The implied inflation expectations behind US Treasury yields are driven by market forecasts on future interest rates, inflation, bond scale, and deficits.

At the end of last year, after Powell sent interest rate cut signals to the market, there was a significant bet that the 10-year U.S. Treasury yield would fall to around 3.5% this year, and a new bull market for U.S. Treasuries was expected.

However, by 2024, due to persistent price pressures, the Fed's interest rate cut measures were postponed from early in the year to the second half, and the 'hawkish' shift at the end of this year rekindled inflation concerns, compounded by Trump's policy tendencies adding fuel to the U.S. Treasury yield, along with ongoing massive debt pressures, leading to a sharp sell-off in long-term U.S. Treasuries.

After experiencing a significant decline from late April to late September 2024, the 10-year U.S. Treasury yield curve, known as the 'anchor for global asset pricing', suddenly turned to a bullish trend since October, now standing at 4.6%, the highest since May.

Last week, the Fed sharply lowered its interest rate cut forecasts in the latest 'dot plot', indicating only two more rate cuts in 2025, down from the four rate cuts implied in September. The futures market currently expects the federal funds rate to reach around 4% by the end of next year, implying one or two rate cuts.

At this current point in time, investors' attitudes towards the U.S. Treasury market are generally pessimistic. Analysts believe that looking ahead to 2025, potential tariff policies in the USA, Military Industry defense spending, and domestic tax cuts will drive deficit expansion, concerns over long-term inflation risks will persist, and the ongoing expansion of U.S. Treasury interest rates may be brewing a wave of increases even wilder than the surge to over 5% in 2023.

8. The Explosion of Chinese Assets

On the eve of the National Day on September 24, the People's Bank of China released a surprising package of policy measures, giving the A-share market a shot of 'super boosting', and Chinese assets set multiple records.

At the press conference held by the State Council Information Office that day, the three major financial regulatory institutions in China gathered, and the Governor of the People's Bank of China, Pan Gongsheng, announced three major policies: first, lowering the reserve requirement ratio and policy rates, leading to a decline in market benchmark interest rates; second, reducing existing mortgage rates and unifying the minimum down payment ratio for mortgages; third, creating new policy tools to support the development of the stock market.

The policy "combined punches" has caused a market frenzy. On the 25th, the Shanghai Composite Index rose 4.15%, marking the largest single-day increase in over four years, the Shenzhen Component Index rose 4.36%, the Chinext Price Index rose 5.54%, and the Hang Seng Index achieved its largest single-day increase in a year and a half.

The Nasdaq Golden Dragon Index performed remarkably throughout the day, rising over 9%, the largest increase since 2022 and the highest in four months. China Concept Stocks that had already outperformed before continued to soar overnight, with PDD Holdings, XPeng, NIO, and Li Auto all rising over 11%, Bilibili rising 17%, JD.com rising nearly 14%, and Alibaba rising nearly 8%.

Huachuang Securities believes that the frequency and extent of future monetary policy may have greater imaginative space than in the past year. For the equity market, a policy shift may help enhance market risk appetite, which will drive the battle in the equity market. The switch between stocks and bonds still needs to observe the trend of corporate profit improvement, and adjustments in real estate policies provide some support.

The political bureau meeting at the end of this year has once again released Bullish Signals. On December 9, when the Political Bureau of the Central Committee held an economic work meeting, it clearly pointed out the need to implement a more proactive macro policy, execute a more active fiscal policy and moderately easing monetary policy, expand domestic demand, stabilize the real estate and stock markets, and prevent and mitigate risks in key areas and external shocks.

As a result, Chinese assets surged once again. That evening, the Nasdaq Golden Dragon China Index rose over 10% at one point, closing with an increase of over 8.5%, achieving the best single-day performance since the end of September.

Popular China Concept Stocks celebrated collectively, with Fangdd Network rising over 166% and closing up 52.23%, Tiger Brokers rising over 26.3%, Bilibili rising over 21.6%, XPeng rising at least over 13%, and NIO, iQIYI, KE Holdings, Vipshop, JD.com, and NetEase rising at most over 12.3%.

Huachuang Securities analysis suggests that this meeting indicates a "more proactive" fiscal policy, opening room for central government deficit financing; "moderately easing" monetary policy, the first time in 14 years, with greater interest rate cuts expected and retaining the possibility of QE expansion. In real estate, the positive stance from September 26 continues; the December political bureau meeting first mentioned the stock market, indicating that more innovative policies to stabilize the stock market can be expected.

Looking ahead to next year, there is considerable external attention on the operating space of incremental fiscal policies. HTSC predicts that next year's incremental fiscal benchmark figure may be around 3 trillion (the actual excessive deficit of the two accounts exceeds 2 trillion + the required 1 trillion for tariff benchmark scenarios).

9. Gold continues to reach new highs.

In an uncertain environment, gold has successfully outperformed various assets this year, achieving remarkable ROI.

Since the beginning of this year, gold prices have risen nearly 30%, briefly touching the $2800 per ounce mark, repeatedly setting historical highs.

A major driving force behind this round of gold bull market comes from the active buying by central banks. The 2024 central bank gold reserves survey (CBGR) shows that 29% of central banks plan to increase their gold reserves in the next 12 months (up from 24% in 2023), and 69% believe the proportion of gold in global reserves will rise in the next five years (up from 62% in 2023).

According to analysts at Tianfeng Securities, the changes in gold holdings on central banks' balance sheets are just part of the reserves. If the 'residual items' (unobserved demand or implicit inventory) are summed along with the changes in gold holdings within central banks, the annualized increase in gold demand for the first three quarters of this year (1595 tons) exceeds last year's historical high (1509 tons), indicating an increase in reserve demand.

HTSC believes that besides central bank purchases, the turmoil in international affairs, the US interest rate cut cycle, and the ongoing debt issues in developed countries raise concerns about the US dollar monetary system, all of which drive gold prices to repeatedly hit new highs.

Goldman Sachs believes that the US policy interest rate is the main factor affecting gold demand, rather than the dollar. Goldman Sachs forecasts that if the Federal Reserve lowers rates by 125 basis points by the end of next year, it will boost gold prices by 7%; if the Federal Reserve only cuts rates once more, gold prices are expected to reach only $2890 per ounce.

Goldman Sachs also believes that a strong dollar will not prevent central banks from purchasing gold. Although central banks tend to use dollar reserves to buy gold, even if the dollar appreciates, major buyers may increase gold purchases when their local currencies weaken to boost currency confidence.

As geopolitical and financial environments become increasingly complex, Tianfeng believes that managing gold reserves is more relevant than ever. As tariffs have shifted from a 'campaign agenda' to reality, the intensity of de-dollarization will continue, further strengthening the attitude of central banks in various countries to increase their gold reserves. As the most important driving force behind this round of the gold bull market, there are currently no signs of reversal or even weakening, and gold should continue to maintain a bullish perspective.

10. The approval of the spot ETF, supported by Trump, has led Bitcoin to hit new highs.

Bitcoin has been the best-performing digital asset in this year's 'Trump trade', while Cryptos have seen the most significant price increases among all assets in 2024.

At the beginning of this year, the U.S. SEC approved the Bitcoin spot ETF, meaning that investors can conduct corresponding transactions through their traditional stock brokerage accounts, marking a milestone moment for the digital currency market. Since then, as the largest crypto asset, Bitcoin has been oscillating upwards, frequently reaching new historical highs, with an increase of over 120% within the year.

Another driving force pushing Bitcoin prices upwards comes from the 'Trump trade'.

In this presidential election, Trump changed his previously dismissive attitude towards crypto assets and explicitly supported the crypto market, loudly proclaiming the slogan 'Make Bitcoin Great Again' while declaring a vow to make the USA a 'Bitcoin Superpower' and 'Global Crypto Capital'.

As investors rush to bet that Trump's 'pro-Bitcoin' intentions will lead to a prosperous crypto market, Bitcoin has embarked on another wave of crazy growth. Since Election Day, the price of Bitcoin has risen nearly 40%, reaching a peak of $0.1 million, while the trading volume of U.S. Bitcoin ETFs has exploded, attracting over $10 billion.

The hottest 'Bitcoin shadow stock', MicroStrategy (MSTR), has personally jumped in to aggressively increase its holdings, with the stock price rising nearly 400% this year.

In addition, the geopolitical situation has also driven the safe-haven Bid for Bitcoin. Zach Pandl, Research Managing Director at the crypto asset management firm Grayscale Investments, commented:

"We have observed that the recent geopolitical tensions have driven the demand for scarce assets, including physical Gold and Bitcoin, with many investors viewing Bitcoin as digital Gold."