Today's Charts & Ideas: What Markets Are Telling Us #27

06/27/2025 | Unsubscribe

Good Morning!

Here are some important charts and ideas capturing the latest trends in US markets to help you understand what is happening from multiple different perspectives:

China’s exporters are adapting fast to US tariffs by targeting regional trade partners. But this workaround may prove temporary if regulators crack down. Investors and policymakers should watch for inflation impacts, enforcement actions, and regional supply chain shifts.

✅ What the Chart Shows

This six-panel chart visualizes China’s monthly trade flows (seasonally adjusted) with:

• USA

• Indonesia

• Malaysia

• Singapore

• Thailand

• Vietnam

Key trend post-December 2024 (tariff imposition on China by the US):

• 📉 USA: China's exports sharply declined, while imports stayed flat.

• 📈 Indonesia, Malaysia, Thailand, Vietnam: Exports surged in April 2025, signaling a possible redirection of goods.

• 🔁 Singapore: Exports rose ,but with more volatility.

Each chart uses a red vertical line to mark Dec 2024, highlighting the divergence that followed US tariffs.

💼 What This Could Mean for You

• 🇨🇳 China Faces Deflationary Pressures
  China's redirection of exports is likely to create regional supply gluts, pushing down global goods prices.

• 📦 Trade Diversion Is Happening
  The surge in exports to ASEAN nations suggests "transshipment" — Chinese goods routed through intermediaries to avoid US tariffs.

• 💰 US Corporates See Margin Risk
  Companies relying on Chinese imports may face higher input costs. Domestic competitors might benefit from new tariff shields.

• 📉 Disinflation Tailwind for the Fed
  Global oversupply of Chinese goods could help cool inflation, potentially supporting rate cut prospects.

🔁 Alternative Perspectives to Consider

• 🛃 Tariff Evasion vs. Legal Trade?
  Some rerouting may be legal transshipment, but customs enforcement could tighten if patterns look suspicious.

• 🚢 ASEAN Demand May Be Real
  Strong domestic demand in countries like Vietnam and Indonesia could explain part of the surge, not all of it is rerouted trade.

• 🔁 Temporary Spike Possible
  April’s spike may reflect frontloading or logistical adjustments, which could normalize soon.

• 🇺🇸 US Consumers Still Vulnerable
  Even with rerouting, friction in supply chains might lead to price hikes or delays in electronics, apparel, and other consumer goods.

Japan’s bond market continues to defy global norms, but that divergence may be unsustainable. Global investors should stay alert for signs of yield regime shifts — in Japan and elsewhere — especially amid growing fiscal concerns.

✅ What the Chart Shows

This scatter plot compares:

• Y-axis: 30-year government bond yields

• X-axis: General government gross debt as a % of GDP

• Data as of: May 2025

• Points shown:

  • 🔷 Blue diamonds: G10 countries (e.g., US, JP, CA, GB)

  • 🔺 Red diamonds: Eurozone countries (e.g., IT, FR, GR, DE)

Key Observations:

• 🇯🇵 Japan (JP) is a clear outlier:

  • Highest debt-to-GDP ratio (~250%)

  • Still among the lowest 30Y bond yields (~2.5%)

• 🇺🇸🇬🇧🇳🇿 US, UK, and New Zealand show:

  • Much higher yields despite significantly lower debt burdens

💼 What This Could Mean for You

• 📈 Japan’s Yields May Be Mispriced
  Ultra-low long-term yields despite sky-high debt suggest risk of repricing if inflation expectations shift or BOJ tightens.

• 💥 Repricing Risk for Global Portfolios
  Japan's bonds are globally held. If yields rise, bond prices fall, potentially spilling into other markets and currencies.

• 🇺🇸 Signal for the U.S. as Well?
  The U.S., with debt over 100% of GDP, might also face higher yields if market confidence in fiscal sustainability weakens.

• 🔄 Relative Value Rotation
  Investors could move out of low-yield, high-debt sovereigns (e.g., Japan, Italy) and into better-yielding, lower-debt economies.

🔁 Alternative Perspectives to Consider

• 🇯🇵 Japan Is Structurally Unique

  • Large domestic bond demand

  • Entrenched deflation mindset

  • BOJ owns >40% of all JGBs
    All these suppress yields regardless of debt.

• 🧮 Debt Alone Isn’t Destiny

  • Countries like Germany maintain low yields due to strong credibility and safe-haven demand, even with elevated debt.

• ⚠️ Premature Market Moves Could Backfire
  If bond yields spike too fast, it may trigger financial instability, requiring policy responses like yield curve control or intervention by central banks.

The bond-equity tug-of-war is at a critical level. If yields break higher from here, expect equity volatility. But if yields stall or reverse, the bull market may breathe easier. Stay attentive and adaptive.

✅ What the Chart Shows

This two-panel chart from BCA Research illustrates a recurring inverse relationship between:

• Top Panel: US 10-Year Treasury Yield

• Bottom Panel: S&P 500 Index

• Timeframe: Since 2023

Key Features:

• Shaded regions mark periods when the 10-year yield rises above 4.5%.

• In each shaded phase, the S&P 500 either corrected or stalled.

• As of now, yields are hovering just above 4.5%, putting markets at another critical decision point.

💼 What This Could Mean for You

• 📉 Rising Yields = Equity Risk
  If the 10Y yield breaks higher, history suggests equities—especially growth stocks—may correct or pause.

• 💸 Valuation Pressure on Equities
  Higher long yields raise discount rates, negatively impacting high-multiple sectors like tech.

• 🔁 Portfolio Rebalancing Opportunity
  Consider trimming exposure to rate-sensitive sectors or adding duration hedges in bond allocations.

• 🧭 Macro Shift Warning
  A sustained rise in yields may reflect sticky inflation or growing fiscal risks, undermining rate-cut bets.

🔁 Alternative Perspectives to Consider

• 📊 Yields Could Plateau
  If yields stabilize around 4.5%, equity markets may absorb the move, particularly if driven by growth, not inflation.

• 💪 Corporate Earnings Strength
  Robust earnings could offset valuation pressures, especially if nominal GDP remains strong.

• ❗ Historical Patterns Aren’t Destiny
  Past yield/equity patterns may not hold if Fed posture, macro backdrop, or global capital flows shift.

This chart highlights the historical inverse relationship between the US dollar and the trade balance. A weaker dollar could help narrow deficits, but structural imbalances and policy frictions make a full reversal uncertain.

✅ What the Chart Shows

This chart from Deutsche Bank illustrates how movements in the broad real trade-weighted dollar index (inverted axis, dark blue line) tend to lead shifts in the US trade balance:

• Inverted Dollar Index (left axis): Rises when the dollar weakens, falls when it strengthens.

• Trade Balances (right axis):

  • Real trade balance (light blue) and nominal trade balance (medium blue) tend to improve (less negative) when the dollar is weaker.

  • When the dollar strengthens, the trade balance typically worsens.

• Since the late 2000s, a sustained strong dollar trend has accompanied a deteriorating trade balance as a share of GDP.

💼 What This Could Mean for You

• 💵 Stronger Dollar = Larger Deficit
  A firm dollar makes US exports more expensive and imports cheaper, widening the trade gap.

• 🏛️ Policy & Fiscal Implications
  Persistent trade deficits may exacerbate fiscal pressures, especially alongside high public debt.

• 🏗️ Reshoring Limits
  Without a weaker dollar, efforts like reshoring and tariffs may not meaningfully reverse trade imbalances.

• 💼 Investment Angle

  • A weaker dollar could boost US exporters, industrials, and multinationals with overseas earnings.

  • It may also benefit commodities and emerging market (EM) assets.

🔁 Alternative Perspectives to Consider

• 🧮 Structural Deficit Drivers
  The US trade deficit stems partly from low domestic savings and global demand for USD assets, not just FX moves.

• 🏛️ Policy Can Reshape Trade
  Tariffs, reshoring incentives, or tax shifts could alter trade dynamics even if the dollar remains strong.

• ⏳ Lagged and Mixed Effects
  FX movements often take years to reflect in trade data, and are frequently offset by other global factors like oil prices or supply chain realignments.

Despite a recent rebound in equity exposure, investor positioning remains deeply cautious by historical standards. That creates risk and opportunity: room for bullish catch-up flows if confidence improves and vulnerability if markets disappoint.

✅ What the Chart Shows

This chart from Deutsche Bank displays Consolidated Equity Positioning, a composite indicator built from Z-scores of various investor positioning metrics:

• 📉 Sharp Drop: Positioning fell significantly from March to April 2025, reflecting risk-off sentiment.

• 📈 Six-Week Rebound: Investor equity exposure increased steadily into May, suggesting tentative optimism.

• 🟡 Still Below Average: Despite the rebound, positioning remains in the 23rd percentile relative to data since 2010—indicating investors are still underweight equities.

💼 What This Could Mean for You

• 🧍‍♂️ Cautious Sentiment Lingers
  Many investors remain defensive, skeptical of the rally or bracing for downside, limiting the risk of exuberance or overextension.

• 🔁 Fuel for Catch-Up Buying
  Underexposed investors may re-enter the market if equities continue rising, driving further gains via FOMO-driven inflows.

• 📊 Tactical Bullish Tilt
  Low positioning historically suggests that markets have room to run, as rallies tend to be reinforced by sentiment normalization.

🔁 Alternative Perspectives to Consider

• ⚠️ Positioning ≠ Timing Tool
  Underexposure doesn’t guarantee upside. Adverse macro data, Fed surprises, or geopolitical shocks could keep investors on the sidelines.

• 📉 Bearish Reversion Risk
  Low positioning could quickly become de-risking pressure if markets falter, amplifying any pullbacks.

• 🧠 Fundamental Doubts Persist
  Low exposure may reflect deeper concerns around profit margins, debt sustainability, or sticky inflation, not just short-term caution.

That’s it for today!

Best Regards,

Ultimate Alerts Team

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