Politics, economy, and market have created the "Three-Body Problem" for 2025; investment will be a "roller coaster journey."

The Zhitong Finance APP noted that for traders and investors, the interaction between politics, economics, and markets, akin to a "three-body problem," will make analyzing the trends of stocks, bonds, commodities, and currencies this year more challenging than in previous years.

Trump's election has brought an unpleasant unpredictability to U.S. policymaking, making everything from trade to regulation to cryptocurrency difficult to forecast. While U.S. consumers continue to unexpectedly maintain steady growth in the world's largest economy, performance in other parts of the world has been far less robust. A key takeaway for 2025 is: buckle up, it will be a rollercoaster ride.

Will the Federal Reserve Disappoint the Market Again?

At this time last year, futures traders expected the Federal Reserve to launch a wave of interest rate cuts to combat recession. Monetary easing policies were not implemented on the large scale that was anticipated. The same is true for 2023, as the Federal Reserve focuses on curbing inflation, leading to high hopes for lower borrowing costs. Will this goal be achieved next year?

In the past two years, the futures market's predictions for U.S. interest rates have been incorrect. Will 2025 be better?

The Federal Reserve did not make any significant announcements last year—certainly not as loud as expected—because it did not need to; the economy showed unexpected resilience, and concerns about an economic recession among market forecasters gradually faded. U.S. policymakers may also remain silent this year—or Trump 2.0 could trigger a more aggressive policy response, whichever the case may be.

Bears in the Stock Market Surrender as Market Reaches a Record $128 Trillion

Last month, the global stock market capitalization was slightly below $128 trillion, setting a new historical high, with a projected growth of 12% by 2024. The market capitalizations of U.S. companies such as Apple (AAPL.US), Nvidia (NVDA.US), Microsoft (MSTF.US), Amazon (AMZN.US), and Meta Platforms (META.US) are astonishing, possibly driven by overhyped prospects for artificial intelligence, while benchmark indices in Japan, Spain, and Hong Kong rose by 14% or more. Even the stagnant German DAX index increased by 19%.

Global stock market capitalization reaches nearly $128 trillion.

There are several things that can be called contrarian indicators, as some well-known perpetual bears have surrendered. Last month, David Rosenberg published a "bear's lament," realizing that while the market is indeed thriving, it may not be entirely unreasonable. In November, JP Morgan, which had been bearish on the S&P 500 index for the past two years, made a mistake and is now predicting that the benchmark index will rise; Its Chief Global Market Strategist Marko Kolanovic left the company in July. A month ago, Citigroup pointed out that short sellers succumbed to bearish bets, leading investors to position themselves "completely one-sided" on S&P futures. If a portfolio manager bets this year that the stock market will not rise further, they are a brave portfolio manager—even if it turns out that the promise of artificial intelligence is somewhat exaggerated.

Year of the Dollar

It is difficult to know what the main drivers of the dollar are this year. It may be the fierce struggle between the rhetoric of the Trump administration and how the Federal Reserve responds—this incoming president both condemns the strong dollar and calls for the BRICS countries to maintain their dominance. Further interest rate cuts in the U.S. are not a foregone conclusion; meanwhile, after a 6.5% rise in the dollar index last year, other countries in the world will have to take care of themselves.

The rampant dollar may put particularly great pressure on resource-poor countries, as these countries have to pay for dollar-denominated goods with their own weak currencies, and it is unclear where any relief can come from, especially since future trade tariffs are a big issue. As John Connally said when he served as U.S. Treasury Secretary in 1971: "It's our currency, but it's your problem."

Weak Oil Market

If there is only one indicator to measure the overall state of the global economy, oil prices would be the best choice. They are usually related to the frequency of supply disruptions or demand from China or India. Demand remains very strong, but this is less important at the moment. The overwhelming growth in supply from the Americas is a new determining factor—not only from shale hydraulic fracturing in the Permian Basin but also from additional output from South America (including Brazil, Guyana, and Venezuela). Moreover, China's shift to electric vehicles and increased nuclear and natural gas energy supply seems to be a game changer permanently.

Abundant crude oil supply

The geopolitical situation in the Middle East, Ukraine, and other hotspots remains a long-standing issue. However, OPEC+ has been unable to enforce production limits, meaning there is no defensible bottom line for crude oil production. These production restrictions will particularly trouble Kazakhstan this year, as this Central Asian country seeks to leverage additional extraction capacity from its $45 billion expansion project at its largest oil field, which has been in the works for a decade.

Credit Spreads

Despite the U.S. stock market continually hitting new highs, and both economic growth and the dollar seeming unassailable, participants have a sense that everything cannot go wrong. The market is perfectly priced. This is evident from the yield spread between government bonds and corporate bonds

The spread of junk bonds has returned to the low point before the global financial crisis nearly 20 years ago.

Since 2006, the spread for companies rated BB or lower has never been this narrow. That was indeed a time when people were completely reckless, but this time seems different. Corporate profits are indeed growing rapidly, interest rates may be declining, inflation is somewhat under control, and the economy appears robust. Yes, certain asset classes, especially bank, tobacco, and auto-related debt, show signs of a bubble, but among all the barometers of the real economy, this is by far the most noteworthy one.

The days of zero yields—even borrowing at negative rates and still getting returns—are a distant memory. The average yield on 10-year government bonds from the G7 seems to have stabilized around 3% from 2004 to 2014, which is double the average yield of various countries over the past decade.

Government borrowing costs are resolved at higher levels.

Currently, the yield on 10-year U.S. Treasury bonds is about 4.5%; economists surveyed by Bloomberg generally predict that this benchmark yield will remain relatively unchanged in the coming quarters, slightly dropping to 4.1% by the end of the year. However, both the process and the outcome are equally important, as last year's yield fluctuated between 3.6% and 4.7% after experiencing a 170 basis point swing in 2023. The stable state anticipated by economists seems unlikely to be achieved.

Has the war on inflation ended?

It is easy to say that runaway consumer prices have been suppressed, and central banks should be more concerned about slowing growth. But inflation has not been fully controlled. Looking as far into the future as possible, using market expectation indicators favored by central bank officials, can reveal how successful monetary regulators expect to be in achieving the 2% target.

Major economies show significant differences in the persistence of inflation.

The swap market indicates that the European Central Bank has no inflation issues, but the Bank of England still has some problems to address. However, most notably, despite the U.S. economy continuing to rise unexpectedly, the Federal Reserve does not seem to be facing issues of price rigidity. Whether the collective credibility of policymakers has been irreparably damaged by the surge in prices in recent years remains to be seen.

Manufacturing in a slump post-pandemic

Manufacturing is often seen as the best indicator of economic health. If this is still the case, it is clear that as the effects of pandemic fiscal stimulus gradually fade, the world's five largest economies are struggling

Germany and France are the countries most severely trapped in difficulties, with a significant rise in energy costs being the main reason. Finding a way out of the predicament will be the main task for the European Union in 2025.

Where is Bitcoin headed next?

Last month, after Bitcoin reached an all-time high, breaking the $100,000 mark for the first time, Nobel laureate Paul Krugman wrote: "Bitcoin's price has reached $100,000, but 15 years after its birth, it still has no legitimate use case." Despite the surge in value in recent months, the world of cryptocurrency remains a realm searching for solutions to problems and is largely still a playground for fraudsters, con artists, and money launderers.

The latest surge has at least one clear indication: the Trump administration will be more accommodating to various efforts to gain official recognition of cryptocurrencies as a viable store of value, a hope that is likely to be realized under the leadership of the new U.S. Securities and Exchange Commission Chairman Paul Atkins, who is considered to be more enthusiastic about the market than his predecessor Gary Gensler. Although it is unlikely that the U.S. will store Bitcoin reserves—an idea proposed by the elected president during the campaign, which Bloomberg described as possibly "the biggest cryptocurrency scam to date"—the regulatory environment will almost certainly be less harsh.

However, the connection between digital currencies and anything that typically drives the value of their real counterparts is, at best, tenuous, and at worst, non-existent—making any efforts to predict Bitcoin trading prices futile