This is a preview from our last October G3 Leading Indicator Watch (Published Oct 6).
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Our US growth leading indicator is still trending sideways at just under 2% annualized.

That is well below GDPNow, which reflects a bifurcated economy.

AI-linked activity is lifting headline growth, while our leading indicator is picking up the drag from rising input costs and yields.

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As we previously noted, the first Fed hike is usually a reaction to economic resilience and rarely leads to recession within 12–18 months.

Instead, it signals a late-cycle environment, with narrowing economic strength and narrowing market breadth.

The latest ISM surveys corroborate this.

New orders remain healthy in both services and manufacturing, but they lag the rise in prices.

That implies slowing real volumes, though not yet a recession.

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Hiking Into Weaker Growth

G3 Leading Indicator Watch
(Oct 6)

Central banks are hiking into weakening growth. Inflation impulse is already negative.

US Growth: Steady outlook. Fed hike signals transition to late-cycle environment

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US Inflation breadth is surprisingly muted, while Iran and El Niño remain tail risks.

China Growth LEI weakens further on domestic demand drag, getting closer to policy pivot.

Slowing Eurozone growth outlook, lagged effect of previous yield rises feeding through

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This is a preview from our last October Macro Snapshot (Published Oct 1).
Find out more here.

Equity breadth is starting to weaken after the Fed’s first hike.

The equal-weighted Value Line Arithmetic index is drawing down from its August high, while the Nasdaq 100 is rallying.

The cumulative advance-decline line has also dropped back to its spring lows, even as the S&P 500 holds near the highs.

That means more stocks are falling than rising, even if the index is up.

In our 2025 report, Lessons for today from the 1929, Nifty Fifty and Dotcom bubbles, we laid out that narrowing leadership alongside monetary tightening is the classic combination seen ahead of generational equity tops.

Today is the first time in this cycle we are seeing both.

We flag again our “Juniper Networks” analog.

In the dot-com era, Cisco peaked in March 2000, but Juniper Networks went on to make its high in October 2000 as the late-stage IPOs soaked up liquidity from previous leaders.

CoreWeave is around half its 2025 high and SpaceX is about 25% below its post-IPO peak.

With Anthropic and OpenAI delaying their IPO dates, there are increasing signs that the public equity market is running out of marginal buyers.

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ETFs vs 60/40

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Lower Margin of Safety - October Macro Snapshot
(Oct 1)

Cyclical Asset Allocation: Macro Risk Indicator rolling over, still “Risk On”, but lower margin of safety.

AI Bubble Watch: Equity breadth weakening, watching the Cisco / Sycamore / Juniper analogs.

History of Fed Hikes: Base case for an equity wobble and flatter curves, no immediate recession.

Inflation: Oil and Iran driving narrative, but inflation breadth is muted.

Fixed Income: Tactical signs of capitulation, need Iran progress to buy the dip.

Thoughts on the US Dollar
(Sep 28)

We introduce a new simplified US dollar regime indicator and our upgraded FX edge models.

Takeaway: USD between crosscurrents, mildly bearish outlook anchored on politics

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Housing headwinds to restrain hawkish pricing -
Sep. EM/DM Leading Indicator Watch

(24 Sep)

Our global diffusion indices show a marginally softer growth outlook and a fading inflation impulse.

We like receiving AUD 2y2y as the lagged effects of previous RBA hikes start to hit the housing market.

We stay long SONIA Dec-27 futures (SFIZ7) as the UK housing market struggles against a hawkish BoE

Sweden is still the positive outlier and we like short CHF vs long SEK.

Within EM, idiosyncratic risks dominate. We are waiting on Brazil’s October elections and India’s deficient monsoon rainfall.

South Africa’s outlook is now stagflation-lite.

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This week's charts and research highlights from Variant Perception.

REVISITING OUR TOP 10 SURPRISES FOR 2026 - WEBINAR

with Tian Yang

Fund Manager of VPX ETF

&

CIO of Variant Perception

—

Sep 24, 2026 03:00 PM (BST)

Register here

Top 10 Surprises for 2026

(Dec 2025)

1. Trump’s capex boom arrives a year late, broadens beyond AI

2. US growth surprises to the upside despite muted labor market

3. Housing disinflation breaks sticky inflation narratives

4. US 10y yields go nowhere, trades in a tight range around 4%

5. Value equities outperform growth

6. G10 FX divergence: Apac (AUD & NZD) over Europe (EUR & GBP).

7. EM equities outperform DM, led by Brazil

8. Oil trades below 50 and above 75 at some point during the year

9. China tech stocks outperform US tech stocks

10. Capital Cycle: US regional banks & energy services outperform

Growth softer, tails wider - Sep. G3 Leading Indicator Watch

(Sep 10)

• Steady US growth outlook with balanced risks. Renewed services PMI strength is the upside surprise to watch. Consumer still weak as real incomes flatten and the savings rate turns up.

• US Core inflation trends remain muted, but Iran and El Niño keep the energy and food tails outside policymakers’ control.

• In a reversal of last month’s improvement, China growth LEI fell. Domestic demand are weak, but not yet near conditions before Oct 2024 policy pivot. We stay long EURCNH.

• Our Eurozone growth LEI gave back last month’s improvement. Energy costs and lagged yield rises bite. Sticky services inflation and abnormally low gas storage keep stagflationary tail risks alive into winter.

  ---

DM

• UK: Growth headwinds + fading inflation impulse => Stay long SONIA Futures (SFIZ7)

• Japan: Impossible trinity still not resolved, expect more JPY policy actions

• Australia: Housing headwinds + negative real wage growth => look to fade rise in 2y yields

• Sweden: Positive outlier as growth LEI remains very strong, retain bullish SEK bias

EM

• Brazil: Growth leading indicators remain resilient, waiting for October elections to pass

• S. Korea: Economy remains K-shaped, as semi boom has yet to trickle down

• India: RBI regime model remains hawkish, El Niño food inflation risks remain

• Indonesia: From extremely hated to less hated, take profits on equity

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This week’s charts and research highlights from Variant Perception.

Chart of the Week

The recent rise in US 10y yield has been driven by the real term premium, rather than inflation or rate expectations.

Politics Trumps Economics - Macro Snapshot

(Sep 2)

• Our Macro Risk Indicator remains “risk-on”. Growth, policy and liquidity overcome an inflation component that has now turned “risk-off”.

• US nominal growth is in line with IG yields. Watch for IG yields above projected nominal growth as a warning sign.

• The inflation scare is driven by energy and food, not underlying core trends. The Dallas Fed trimmed mean PCE is still trending down. Watch for 2s5s10s to turn positive as a warning sign that equities are vulnerable to a drawdown.

• Politics remains the dominant variable in fixed income and FX. Fed-Treasury coordination is capping the long end. USD weaponization fuels the bid for gold.

• Cyclical Asset Allocation: Macro Risk Indicator remains “risk-on”, overcoming inflation headwinds

• Inflation (1): Core inflation trends remain moderate, trimmed mean PCE still falling…

• Inflation (2): …but Iran conflict + El Niño tail risks keep markets on edge

• Fed-Treasury Coordination: Politics caps the long end, but stock-bond correlations to remain positive

• AI Bubble Watch: Equity breadth still good, watching Cisco/Sycamore/Juniper analogs

• Equity: Earnings momentum persists, expectations remain very optimistic

• Sector Allocation: OW: Semis, Energy, Financials, Comm. Serv. UW: Consumer, Software

• Fixed Income: Watch 2s5s10s for signs the Fed is offside, real term premium rise is normalization

• FX: Politics trumps economics as the trend towards USD weaponization continues

• Commodities: Cyclical macro regime moderately weaker, but structural gold bid is unchanged

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Politics trumps economics - Sep. Macro Snapshot

(3 Sep)

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

This week's charts and research highlights from Variant Perception.

Chart of the Week

UK growth leading indicators recovered a little this month but still paint growth downside risks.

Benign globally, messy locally - Aug. EM/DM Leading Indicator Watch

(August 26)

• Our global diffusions still point to steady growth and a fading inflation impulse. The calm is visible only in aggregate, as each country varies.

• For DM, UK is the clearest negative growth outlier, so we stay long SONIA Dec-27 futures (SFIZ7).

• We would fade any rise in AUD 2y yields back towards the year’s highs above 4.75%. We are looking to re-establish long JPY after taking profit on our short CHF vs long JPY Aug 3.

• For EM, idiosyncratic risks override good growth LEIs. We take profit on our Indonesian equity long.

  ---

[Video Discussion]

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

DM

• UK: Growth headwinds + fading inflation impulse => Stay long SONIA Futures (SFIZ7)

• Japan: Impossible trinity still not resolved, expect more JPY policy actions

• Australia: Housing headwinds + negative real wage growth => look to fade rise in 2y yields

• Sweden: Positive outlier as growth LEI remains very strong, retain bullish SEK bias

EM

• Brazil: Growth leading indicators remain resilient, waiting for October elections to pass

• S. Korea: Economy remains K-shaped, as semi boom has yet to trickle down

• India: RBI regime model remains hawkish, El Niño food inflation risks remain

• Indonesia: From extremely hated to less hated, take profits on equity

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This week’s charts and research highlights from Variant Perception.

Chart of the Week

Aug 1, our Eurozone growth leading indicator recovered.

The VP Bank Quality Score - A Specialized Approach

(August 19)

Standard factor models don’t work well with financial institutions.

Banks are a spread businesses built on levered balance sheets, so assessing quality needs to account for capital adequacy, liability management, and tail-risk avoidance.

With that, we are pleased to present our new Bank Quality Score - a quality framework specialized for global banks.

We score Bank Quality across three pillars

• Balance-sheet management

• Consistency

• Margin of safety

Our backtest show across North America, EAFE, and EM markets that the lowest-quality banks:

• Structurally underperform

• Show higher downside volatility

The framework outperforms during market crisis, when low-quality banks collapse. And it can underperform in the immediate aftermath of crisis, when market rallies can lead to a “dash-for-trash” frenzy.

Over the full cycle, however, high-quality banks tend to come out and compound steadily.

Crowding Score: Popular Stocks Are Bad, Actually

(21 August)

“Nobody goes there anymore. It’s too crowded.”

Yogi Berra was probably talking about a restaurant when he said that, but he could have been describing many of the stocks in the S&P 500. The price goes up, the story gets better, and investors pile in on the comforting idea that a crowd is a hedge.

If only it was so simple.

With two decades of data, we tested what actually happens when real news hits a crowded stock. What we found was that popular stocks gained less on good news and lost more on bad news, than their less-loved peers.

In other words, crowded stocks capture less of the upside even when the news is good.

Popular stocks, it turns out, are inherently fragile.

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This week’s charts and research highlights from Variant Perception.

Chart of the Week

Low customer inventories relative to manufacturer inventories indicate potential for future orders and inventory builds from customers

Benign, for now - Aug. G3 Leading Indicator Watch

(10 August)

• US growth outlook remains steady with manufacturing strength the key tailwind, while the main headwind is the inflation-induced hit to consumer disposable incomes. The labor market is neither recessionary nor inflationary, despite the noisy NFP data.

• Chinese domestic demand remains weak, with both new orders and new export orders dropping last month. We add a long EUR vs short CNH trade idea.

• Our Eurozone growth LEI recovered this month, while inflation risks remain. We now see upside risks for Eurozone nominal growth, while abnormally low levels of natural gas inventories create stagflationary tail risks for the winter

Chinese export surplus remains the most important factor driving global imbalances.

Section Summary

• Global: Growth steady, already past peak inflation impulse

• US Growth: Steady outlook, manufacturing recovery remains strong

• US Labor: Still not inflationary nor recessionary, ignore the NFP noise

• US Consumer: K-shaped consumer drawing down savings as real incomes decline

• US Inflation: Inflation fears overstated, as core inflation trends remain subdued

• China Economy: Domestic demand remains weak as focus remains on exports

• China FX: Long EUR vs short CNH on growth divergence & mean-reversion

• Eurozone Growth: Growth LEI recovers, fiscal impulse remains positive

• Eurozone Inflation: Upside inflation risks remain, low nat gas inventories a tail risk for winter

Benign, for now - Aug. G3 Leading Indicator Watch [Video Discussion]

(11 August)

Speakers:

• Tian Yang (CEO & Head of Research)

• Hugh Vuillier (Head of Client Relations)

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This week's charts and research highlights from Variant Perception.

Chart of the Week

The overall equity market has weathered the July AI equity crash, with the average US stock still trending higher.

Still risk-on - Aug. Macro Snapshot

(3 August)

• Our Macro Risk Indicator remains “risk-on” with G3 growth LEIs rebounding. US earnings estimate revisions are rising again, while low savings rates continue to sustain spending and profits.

• We believe the Situational Awareness stop-out marks a tradeable low in semis and AI. Semis remain capital scarce on our capital cycle models, while their crowding score has now reset to more neutral levels.

• The consensus reaction to the July Fed hold is that Warsh is going to be tested by markets in the coming months, pressuring him into a September hike. We lean against a hike this close to the mid-terms, as we expect core inflation to remain capped.

  ---

Still risk-on - Aug. Macro Snapshot [Video Discussion]

Speakers: Tian Yang (CEO & Head of Research) & Ben Brodeur (Analyst)

Section Summary

• Cyclical Asset Allocation: Macro Risk Indicator remains “risk-on” as growth stays resilient

• AI Bubble Watch: Buy the dip on semis, seeing some LPPL buy signals, market breadth resilient

• G3 Leading Indicators: Growth LEIs rebound, inflation impulse continues to fade

• Policy shifts: Main risk in 2H26 is lagged effect from policy tightening, but we are not there yet

• Inflation: US core inflation to remain capped, STIR markets already priced for inflation upside

• Equity: Earnings estimate revisions rising again, corroborates macro tailwinds

• Sector Allocation: OW: Semis, Energy, Financials, Materials; UW: Consumer, Healthcare

• Fixed Income: Surging real yields offer great value, watch 2s5s10s for signs Fed is offside

• FX: Politics trumps economics: take profit on short CHF vs long JPY

• Commodities: Neutral cyclical outlook, but upside risks for oil remain

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This week's charts and research highlights from Variant Perception.

Chart of the Week

UK LEIs continue to paint a clear picture of growth downside risks, while inflation fears look overstated.

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Into the Breach Once More - EM/DM Leading Indicator Watch [Video Discussion]

(July 24)

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

• Our global diffusions continue to paint a picture of muted but stable growth, alongside an inflation impulse that has peaked. While uncertainty surrounds the renewed flare-up in Iran, basic incentives should prevent both sides from overplaying their hands.

• Within DM, we buy the dip in SONIA futures (SFIZ7), hold our short CHFJPY and step away from our bullish AUD bias. We are also waiting to sell the rally on EURSEK.

• Within EM, we close our Brazil risk-parity exposure and stick with Indonesian equities that are rebounding after the flood of LPPL crash exhaustion signals in June. USDKRW is testing its 200-day moving average and could be a tactical long.

This week's charts and research highlights from Variant Perception.

Chart of the Week

Since July 2, we have been observing the significant divergence between our Core and Headline US Inflation LEIs.

What We Got Right and What We Got Wrong (2Q26)
[Video Discussion]

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

RIGHT

• “Sell America” reverses

• Long/OW US tech

• Short EURUSD

• Macro Risk Indicator stayed “Risk-On”

• US labor market not inflationary, not recessionary

WRONG

• Stayed moderately bullish gold through drawdown

• Long China Tech

• Mixed results fading hawkish inflation scare pricing

• Manually overriding Macro Risk Indicator in April

Not too hot, Not too cold - July G3 Leading Indicator Watch

[Video Discussion]

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

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This week's charts and research highlights from Variant Perception.

Chart of the Week

Stocks with both very high and very low crowding scores show significantly higher forward downside volatility. Investors should aim to stay in the sweet spot for crowding to maximize portfolio resilience.

Thoughts on Quantifying Equity Crowding - July 8

• The basic mechanics of crowding are straightforward: when a stock is widely owned, universally recommended by sell-side analysts, and actively chased by short-term traders, its shareholder base becomes inherently fragile.

• Asymmetry: Crowded stocks suffer from asymmetric returns. They benefit less from good news (which is already priced in) and suffer disproportionately on bad news.

• Risk Management: Crowding is primarily a risk management mechanism rather than a pure alpha generator. Being contrarian for contrarian’s sake is unprofitable. Instead, tracking crowding allows investors to build portfolio resilience and mitigate catastrophic tail-risk around events.

• Portfolio Construction: It is best to avoid stocks at both extremes (very high and very low crowding). While extremely high crowding exposes you to big drawdowns, extremely low crowding often signals structural problems hidden from standard accounting disclosures.

  ---

  ---

[Video Discussion]

Not too hot, not too cold - July G3 LIW

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

Not too hot, not too cold - G3 Leading Indicator Watch - July 10

• US growth looks set to remain at trend, while US inflation fears are overstated, as core inflation is capped by subdued housing, the K-shaped consumer and muted activity across small businesses.

• Chinese domestic demand remains weak as the economy remains geared towards exports and sovereign-aligned investment. Repatriation flows are providing a tailwind for the RMB, overcoming the negative carry vs the USD.

• Our eurozone growth LEI is still rolling over, but the pace of deterioration has moderated. The fallout from the Iran conflict has been relatively contained so far, with a notable rebound in the ZEW and Sentix expectation surveys.

US

• Growth: Outlook steady, despite some noise around GDPNow estimates

• Consumer: K-shaped consumer & negative real income growth cap inflation upside

• Labor: Still not inflationary, not recessionary

• Inflation: Subdued core inflation LEI vs surging headline CPI

China

• Economy: Muted growth as domestic demand remains weak

• FX: RMB breadth remains very strong, flow tailwinds still intact

Eurozone

• Growth: Marginal improvement in leading data, growth outlook stabilizing at lower levels

• Inflation: Upside risks to service inflation could force the ECB to maintain hawkish stance

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This week's charts and research highlights from Variant Perception.

Chart of the Week

The Iran-induced inflation impulse will likely be transitory.

Keep vigilant and carry on - Macro Snapshot

• Our Macro Risk Indicator remains “risk-on” with limited impact from Iran so far. The risk-on message is corroborated by a rise in insider buys across global equities.

• SpaceX IPO is reminiscent of the Juniper Networks IPO from 1999 that marked the start of the mania phase of the equity rally. Historically, major market tops are characterized by narrowing market breadth, restrictive monetary policy, and mounting liquidity headwinds. We have NOT reached this inflection point yet.

• The inflationary impulse from the conflict in Iran is expected to be transitory. While energy costs are mechanically pushing headline inflation higher, underlying core pressures across housing, labor, and small businesses remain well anchored.

  ---

[Video Discussion]

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

• Cyclical Asset Allocation: Macro Risk Indicator remains “risk-on”, limited impact from Iran

• Equity Market Breadth: Keep an eye on equity breadth as early warning sign in 2H26

• Policy Shifts: Policy tailwinds turning to headwinds, one to watch in 2H26 rather than immediate risk

• Inflation: US core inflation LEI subdued on muted housing and small business activity

• Labor: US labor market still NOT inflationary and NOT recessionary

-

• Equity: Earnings expectations are elevated, seeing some late cycle amber warnings

• Sector Allocation: OW: Semis, Energy, Financials, Healthcare; UW: Consumer, Non-Semi Tech

• Fixed Income: US 10y yield moderately above fair value range of 4-4.25%

• FX: USD rally has room to run, but politics means Liberation Day levels are a ceiling

• Commodities: Neutral cyclical outlook, crack spreads remain large, gold down 25% from highs

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This week's charts and research highlights from Variant Perception.

Chart of the Week

There remains meaningful dispersion across different economies. DM: both UK and Switz continue to have poor growth LEIs, helping our GBP receiver and short CHFJPY.

Post-Iran Stabilization - EM/DM Leading Indicator Watch - Jun 25

• The de-escalation of the Iran conflict has successfully arrested the downside momentum in global growth data and the upward momentum in inflation data.

• Within DM, UK growth risks are more recognized and we take profit on our GBP receivers. We stick with short CHF vs long JPY as BoJ policy is at a breaking point. We shift our short EUR vs long USD into a short EUR vs long AUD given the AUD sell-off.

• Within EM, our Brazil risk-parity position is exposed to election risks and we would look to reduce exposure in the coming weeks. In S. Korea there are signs the Semi/AI boom is relatively narrow and not yet helping other parts of the economy. Indonesia is seeing a large cluster of LPPL crash exhaustion buy signals.

  ---

Post-Iran Stabilization - June EM/DM Leading Indicator Watch - [Video Discussion]

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

• DM

  • UK: Yields at 3-month lows, now more aligned with macro view => take profit on receivers

  • Japan: BoJ still at breaking point in face of fiscal & inflation => stick with short CHF vs long JPY

  • Australia: Growth peaking, but hedging demand for AUD remains => short EUR vs long AUD

  • Canada: Resilient growth LEIs, any USMCA-induced CAD sell-off is a buying opportunity

  EM

  • Brazil: Political/fiscal risks overwhelming cheap valuations into October elections

  • S. Korea: Semi/AI drives growth, but BoK’s hawkishness already well priced

  • India: Low monsoon rainfall remains the tail risk, not yet time to buy Indian assets

  • Indonesia: Equity capitulation likely complete on LPPL signal, MSCI delay and rate hikes

  ---

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This week's charts and research highlights from Variant Perception.

Chart of the Week

Russel 2000 outperformance vs S&P 500 is 2 standard deviations above trend. This is even as supportive liquidity conditions are peaking.

US Small Caps— UW on peaking macro tailwinds - June 16

• Back in Sep 2025, we turned more constructive on US small caps. This was due to better macro tailwinds from improving growth and anticipation of lower interest rates

• Today, those same macro tailwinds are peaking and starting to reverse, while the small-cap equity rally is already stretched.

• We recommend going underweight US small caps again.

  ---

  

• There is also an active LPPL bubble exhaustion signal (i.e. SELL signal) on $IWM. It is present at weekly and daily frequencies.

• When price bubbles or crashes approach exhaustion, a signature wave pattern emerges. We use log periodic power laws (LPPL) to find these patterns of peak euphoria and panic, flagging tactical price reversals.

  ---

Value tailwinds no longer as strong, sector allocation refinement needed - Jun 19

• We previously shifted to overweight value vs growth equities back in October 2025. Back then, there was a rare alignment for value outperformance across market behavior, macro and bottom-up fundamentals.

• Today, these tailwinds have diminished but have NOT turned into headwinds yet.

• On balance, we would stick with value stocks for now, but investors need to be aware of the upcoming Russell Value Index composition shift, which increases the weight of mega cap tech stocks

  ---

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We’re back on Substack —
keep reading for a roundup of our best charts and sharpest work.

Chart of the Week

Positive NFP surprise out of sync with underlying trend of subdued labor activity.

G3 Decoupling — June G3 Leading Indicator Watch

Speakers: Tian Yang (CEO & Head of Research) & Hugh Vuillier (Head of Client Relations)

• Clearest pattern in data remains US resilience in the face of deterioration in global growth, inflation and policy outlooks. US economic surprises remain positive, but European and Chinese economic surprises now negative.

• There are two-sided risks to US growth. Manufacturing and AI tailwinds remain but real disposable incomes are now shrinking. Positive NFP surprise was out of sync with the subdued underlying trend across the breadth of US labor leading indicators.

• Chinese domestic demand conditions remain weak, but our LEI is not yet at the very low levels it hit before the 2024 policy pivot.

• We continue to see meaningful downside risk to eurozone growth, especially if the ECB follows through on market pricing and hikes into an already deteriorating credit cycle.

United States

• Growth: Risks remain balanced, manufacturing recovering, services stabilizing.

• Consumer: More headwinds to K-shaped consumer as real incomes turn negative.

• Labor: Positive NFP surprise out of sync with subdued underlying trend.

• Inflation: Divergent outlooks, rising headline, muted core.

China

• Economy: Domestic demand headwinds + transitory supply-driven inflation.

• FX: Capital leakage is declining, RMB breadth continues to improve.

Eurozone

• Growth: Clear downside risks, leading indicators deteriorate in unison.

• Inflation: ECB trapped by their inflation mandate, hikes likely to be a policy mistake.

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Improving earnings estimate revisions are a cyclical tailwind for the equity rally to broaden out.

What We Got Right and Wrong (4Q25) | Watch

• RIGHT: Staying anchored to the Macro Risk Indicator and the jobless-recovery framework proved correct, allowing us to remain risk-on through Q4 despite labor and housing concerns. EM over DM (especially Brazil), a tactical rebound in yields, selective FX cross trades, and a constructive commodities bias all broadly played out.

• WRONG: We didn’t appreciate the implications of the Takaichi election result in Japan for the JPY and JGBs, so exited our long CADJPY too early.

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US Equity Sectors, Capital Cycle vs Crowding Score. Jan 19, 2026.

The best time to invest is when a sector is uncrowded and capital scarce. Over the past three months, these shifts stand out.

1. Crowded Cyclicals:

Crowding has risen sharply in cyclicals — Banks, Industrials, and Materials. The “reflation” trade has quickly become consensus. This is not itself a reason to sell. But further upside is more reliant on improving economic data.

2. The Tech Anomaly:

Surprisingly, tech remains relatively unloved. Its capital cycle score is till favourable. Marginal returns on investment are holding up and exceed the cost of capital. This keeps tech attractive for growth at reasonable valuations.

Where “push” and “pull” align - Jan. EM/DM Leading Indicator Watch

• Cyclical macro tailwinds are strong, and our Macro Risk Indicator remains in “risk on” territory.

• Ample liquidity conditions still favor EM assets over DM assets, and we see opportunities in ex-US assets that go beyond the “sell America” narrative and are attractive on their own merits.

• This month, we take profit on our short Canadian 10y bonds trade and add a UK SONIA trade to benefit from more cuts being priced in beyond September 2026.

• We retain:

  • long Brazil equities & bonds;

  • long Indonesian equities & long IDR vs short USD;

  • long NZD vs short EUR;

  • and long KRW vs short USD.

Summary by Country:

• UK: Stagflationary again => more cuts later, not priced into SONIA curve

• Japan: “Impossible trinity” back in play => yen weaker before it gets stronger

• France: Stable LEIs, equities are outperformance candidate within DM

• Canada: Take profit on short 10y bond trade as recession risks priced out

• Brazil: Disinflation + signs of growth recovery => stay bullish

• Mexico: Growth headwinds persist, MXN poised for weakness ahead of USMCA

• Indonesia: Political risks vs improving macro set up

• South Korea: Rising growth and inflation to prompt hawkish BoK => long KRW vs short USD

Japan: The “impossible trinity” mechanism + what to watch to buy the yen

The Japan “doom loop” narrative has built momentum over the past six months, as the yen and JGB selloff has become disorderly.

We see some validity to this narrative given Takaichi’s fiscal largesse, the underlying mechanism is that policymakers are being pushed back into Japan’s “impossible trinity” problem.

Basically, Japan cannot have both exchange rate stability and such a slow pace of monetary policy normalization.

Our best guess is that USDJPY goes higher first (i.e., weaker yen) before Japanese policymakers will be forced to take action to exit the “impossible trinity” later this year. There are three key indicators to watch for when to fade the yen selloff.

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