CICC: The "Triple Kill" of U.S. Stocks, Bonds, and Currencies Reappears; Central and Eastern European Stocks May Show Relative Resilience

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that the simultaneous decline of U.S. stocks, bonds, and the dollar reflects significant changes in the inflation environment and the dollar cycle. The essence of this "triple kill" is the declining hedging ability of safe assets (bonds and cash) within dollar assets, making it difficult to hedge against the losses of risk assets (stocks and commodities). Asset allocation within dollar assets cannot effectively diversify risks, and there is a need to be wary of the possibility of the "triple kill" of U.S. stocks, bonds, and the dollar becoming repetitive and prolonged.

Dollar assets are facing a dilemma, with the hedging ability of U.S. Treasuries in dollars declining, leading to a scarcity of safe assets, which helps enhance the allocation value of gold. The uncertainty surrounding the outlook for U.S. stocks increases the relative attractiveness of non-U.S. risk assets, and stocks in Central and Eastern Europe may demonstrate relative resilience.

CICC's main viewpoints are as follows:

From the perspective of asset allocation, looking at the "triple kill" of U.S. stocks, bonds, and the dollar

After the implementation of equivalent tariffs in early April, the S&P 500 experienced a maximum drawdown of 12%, the yield on 10-year U.S. Treasuries surged from 4.0% to 4.5%, and the dollar index fell below 100, drawing significant market attention to the "triple kill" of stocks, bonds, and the dollar.

The "triple kill" of stocks, bonds, and the dollar is not common in the U.S. market, primarily because U.S. stocks have a long bull market and a short bear market, with stocks rising most of the time. When stocks encounter negative shocks and decline, U.S. Treasuries and the dollar, as traditional safe-haven assets, tend to rise, thus avoiding the "triple kill." Long-term and severe "triple kills" of U.S. stocks, bonds, and the dollar concentrated in the "Great Inflation" era of the 1970s and 1980s, such as the "triple kill" that began at the end of 1976, lasted for more than a year.

Chart 1: Historically, severe long-term "triple kills" of U.S. stocks, bonds, and the dollar concentrated in the 1970s-80s

Source: Wind, CICC Research Department

The frequent occurrence of "triple kills" during the "Great Inflation" era was partly due to high inflation eroding asset values, leading to simultaneous declines in stocks and bonds. On the other hand, after the Bretton Woods system, the Federal Reserve had not yet established central bank credibility, and monetary policy was inconsistent, leading to a decline in the credibility of the dollar. Therefore, the risk hedging ability of the dollar was limited, often resulting in simultaneous declines in stocks and bonds. After the "Volcker Tightening" in the 1980s, the Federal Reserve successfully established central bank credibility, enhancing the dollar's hedging function, and the duration of "triple kills" began to shorten. From 2000 to 2022, the U.S. entered a low-inflation period, with long-term negative correlations between stocks and bonds, resulting in shorter durations and lower frequencies of "triple kills," with smaller declines in asset values.

Chart 2: The "triple kills" of U.S. stocks, bonds, and the dollar concentrated in the "Great Inflation" era of the 1970s-80s; during the low-inflation era from 2000 to 2022, the duration of "triple kills" was short, frequency low, and asset declines small; after 2022, "triple kills" returned to the spotlight.

Source: Wind, CICC Research Department

After 2022, the triple kill has returned to the spotlight, with an increased frequency, which we believe is mainly due to the changes in the following two factors. First, the inflation environment has led to a positive correlation between stocks and bonds. In previous research reports, we proposed that the inflation environment determines the stock-bond correlation: high inflation leads to a positive correlation, while low inflation leads to a negative correlation. After the pandemic, the U.S. has re-entered a high-inflation phase, resulting in a positive stock-bond correlation, making simultaneous declines in stocks and bonds more frequent, and the safe-haven ability of U.S. bonds has decreased.

Chart 3: Long-term negative correlation between U.S. stocks and bonds before the pandemic, turning positive after the pandemic

Source: Wind, CICC Research Department

Chart 4: During low inflation periods, the correlation between U.S. stocks and bonds is generally lower; during high inflation periods, the correlation is generally higher

Source: Wind, CICC Research Department *Calculation period from 1960 to present

Secondly, after Trump takes office in 2025, the "American exceptionalism" has somewhat wavered, increasing the attractiveness of non-U.S. economic assets and currencies, leading to a downward trend in the U.S. dollar and a simultaneous weakening of its safe-haven ability. From an asset allocation perspective, the triple kill of U.S. stocks, bonds, and the dollar means that the safe assets (bonds and cash) within dollar assets have decreased in their ability to hedge against the losses of risk assets (stocks), making it difficult to effectively diversify risks through major asset allocation within dollar assets, thus facing a dilemma.

Beware of the long-term and repetitive risks of the triple kill of dollar assets in stocks, bonds, and currency

Since late April, the U.S. has softened its stance on tariffs, and on May 12, significant progress was made in U.S.-China trade negotiations, boosting risk appetite, with both U.S. stocks and the dollar rebounding significantly. However, this has not resolved the issue of the declining safe-haven ability of the dollar and U.S. bonds. If faced with negative shocks again, dollar assets may still be relatively weak.

Looking ahead, we believe the probability of negative shocks re-emerging is not low, and we advise caution regarding the long-term and repetitive risks of the triple kill of dollar assets in stocks, bonds, and currency: In a research report published last November, we warned that the U.S. economy could either lose control of inflation or experience a growth slowdown, with a high threshold for a soft landing. Although tariffs on China have been significantly reduced, the average tariff level of the U.S. remains high. Referring to the trade negotiation process from 2018-2019 and considering the complexity and long-term nature of great power competition, the outlook for tariffs also carries uncertainty. Therefore, a stagflation or recession scenario for the U.S. economy remains our baseline scenario. In this macro context, U.S. stocks, bonds, and currency all face adjustment pressures. First, looking at U.S. stocks, whether the U.S. economy heads towards recession or stagflation, it may exert pressure on U.S. stocks Chart 5: Both Stagflation and Recession Scenarios Are Bearish for U.S. Stocks

Source: CICC Research Department

Currently, the cyclically adjusted price-to-earnings ratio of U.S. stocks is significantly higher than the historical average, indicating a decline in long-term returns for U.S. stocks and a sensitive reaction to negative shocks. Historical reviews show that the turning point for the U.S. stock market often occurs after a clear policy shift.

Chart 6: Historically, Shifts in U.S. Monetary Policy and Easing of Global Political Conflicts Are Catalysts for Stock Market Bottoming and Recovery

Source: Wind, Bloomberg, CICC Research Department

Currently, it is uncertain whether Trump has completely adjusted his economic policies, nor have we seen the Federal Reserve shift to comprehensive easing; therefore, we do not recommend bottom-fishing in U.S. stocks and maintain a low allocation. Although U.S. Treasuries may benefit in a recession scenario, interest rates could rise in a stagflation scenario. Combined with the current tightening liquidity and rising volatility in the U.S. Treasury market, there is significant uncertainty in the short-term trend.

Chart 7: U.S. Treasury Market Liquidity Remains Tight

Source: Bloomberg, CICC Research Department

Additionally, Trump's tax cuts may lead to an accelerated expansion of U.S. debt, which is bearish for U.S. Treasuries and further weakens their safe-haven function. The outlook for U.S. Treasuries is highly uncertain. As for the U.S. dollar, although it has recently rebounded in sync with U.S. stocks, from an asset allocation perspective, this is not a positive signal: the U.S. dollar and U.S. stocks are moving in the same direction, and the correlation between stocks and the dollar has turned positive, indicating that the dollar is not functioning normally as a safe haven. If U.S. stocks decline in the future, the dollar may also decline simultaneously.

The decline in the dollar's safe-haven function is partly due to the beginning of the unraveling of the "American exceptionalism" narrative. In recent years, the U.S. fiscal and trade deficits have expanded, and inflation has remained high. Under normal circumstances, the dollar should depreciate; however, due to the U.S. economic growth outlook and asset performance being significantly better than other economies, the attractiveness of dollar assets has remained strong, leading to a continued strengthening of the dollar, thus forming the "American exceptionalism" narrative.

Chart 8: When U.S. Fiscal and Trade Deficits Expand, the Dollar Tends to Depreciate

Source: Wind, CICC Research Department Chart 9: The growth of the United States is higher than that of other countries, which will drive the depreciation of the dollar. When U.S. growth slows relative to other countries, the dollar's upward cycle may be nearing its end.

Source: Wind, CICC Research Department

Entering 2025, Trump's economic diplomacy has both impacted the U.S. economic outlook and shaken the international trade and monetary system, reducing the attractiveness of dollar assets. Therefore, when facing external shocks and U.S. equity and bond assets come under pressure, some investors are reallocating from dollar assets to non-dollar assets instead of converting U.S. equities and bonds into dollars, leading to a simultaneous decline in the dollar and U.S. equities and bonds. Of course, if systemic risks and liquidity issues arise in the global market, the dollar may indeed strengthen temporarily, but from a broader trend perspective, we believe the dollar may enter a long-term downward cycle, with its safe-haven function likely to continue weakening.

Chart 10: Funds tracked by EPFR have recently begun to flow out of the U.S.

Source: EPFR, CICC Research Department

The "circle of safe assets" is shrinking, overweighting gold and Chinese bonds

The weakening of the dollar and U.S. Treasury's safe-haven function has increased the scarcity of safe assets, benefiting gold performance. Over the past two years, we have used Gold Model 1.0 and 2.0 to demonstrate that gold valuation is not expensive, addressing market concerns about gold being overvalued. However, after a rapid rise in the first quarter of this year, gold once approached $3,500/ounce, exceeding the equilibrium price of Gold Model 2.0 by more than $700.

Chart 11: Gold valuation has exceeded our equilibrium model by more than $700, indicating that gold is overvalued.

Source: Wind, CICC Research Department

From the perspective of model calculations, we update our view: gold valuation is now overvalued, presenting a risk of bubble formation. However, the equilibrium price calculated by the model is merely the long-term center of gold prices, which will fluctuate around this valuation center. In historical gold bull markets (e.g., the 1970s), gold prices have also exceeded the valuation center by more than $1,200. Therefore, we believe that being overvalued only indicates that future fluctuations in gold may increase, and does not mean that the bull market has ended.

Chart 12: Being overvalued does not mean the bull market has ended; it only indicates increased volatility.

Source: Wind, China International Capital Corporation Research Department

We have sorted out three historical bull market cycles for gold: from 1971 to 1980, after the collapse of the Bretton Woods system, gold rose nearly 20 times over about 10 years. From 1999 to 2011, gold rose over 6 times in about 10 years. During the period from 2015 to 2020, gold rose nearly 1 time in 5 years. The current bull market cycle for gold started at the end of 2022, with gold prices rising from USD 1,600/ounce to USD 3,200/ounce, an increase of 1 time over a period of 2.5 years. Considering the current global economy is facing a century of changes, the structural economic changes may be comparable to those of the 1970s and the early 21st century. Compared to the magnitude and duration of historical gold bull markets, the current gold market may still be underperforming, and we may still be in the early stages of a gold bull market.

Chart 13: Compared to the magnitude and duration of historical gold bull markets, the current gold market may still be underperforming, and we may still be in the early stages of a gold bull market.

Source: Wind, China International Capital Corporation Research Department

According to the Gold Model 2.0 calculations, we find that the long-term center for gold is between USD 3,000 and USD 5,000/ounce, and we suggest not to underestimate the possibility of gold reaching USD 5,000 in the next 1-2 years. Recently, gold has corrected about 8% from its peak, and it may gradually enter a tactical accumulation window.

Chart 14: The future 10-year gold center may be in the range of USD 3,000 to USD 5,000/ounce.

Source: Wind, Bloomberg, Haver, China International Capital Corporation Research Department

Apart from gold, Chinese bonds are also a good safe asset. Facing external pressures, our counter-cyclical policies may further strengthen, with monetary easing being the path of least resistance. Reduced overseas demand or lower inflation may also benefit the bond market. We expect that there is still some downward space for Chinese interest rates and recommend maintaining an overweight position in Chinese bonds.

Reallocation of risk assets, Chinese and European assets may show relative resilience

Due to the high valuation and rising risks of U.S. stocks, stocks from other countries have become a natural choice for reallocating risk assets. In previous research reports, we proposed a global asset reassessment, believing that the macro environments of the three major economies—China, the U.S., and Europe—are in a tug-of-war, with severe valuation differentiation in stocks, and the attractiveness of Chinese and European stocks relative to U.S. stocks is rising. Although the tariff shocks since April have led to a correction in Chinese stocks, they have now recovered from the decline, and we remain firmly optimistic about the reassessment of Chinese assets in the medium to long term From the perspective of asset allocation, before the pandemic, the correlation between the Chinese economy and stock performance with the United States was relatively high. After the pandemic, the correlation between Chinese and foreign assets has decreased, and China's export exposure to the U.S. has reduced. Therefore, in addition to valuation advantages, Chinese stocks may also exhibit relative resilience, diversifying risks in global asset allocation.

Chart 15: The correlation between Chinese and foreign stock markets has decreased after the pandemic

Source: Wind, CICC Research Department

Chart 16: The correlation between Chinese and foreign interest rates has decreased after the pandemic

Source: Wind, CICC Research Department

Chart 17: China's trade exposure to the U.S. has significantly decreased

Source: Wind, CICC Research Department

In the short term, considering the complexity and repetitiveness of China-U.S. trade negotiations, we recommend a stable yet progressive allocation to Chinese stocks, focusing on high-dividend and domestic demand policy beneficiaries as a phased bottom position.

Although European assets are also affected by tariff policies, the European market has policy and valuation advantages, which may provide relative returns compared to U.S. stocks. From a policy perspective, Germany passed a €500 billion fiscal stimulus bill in March and supported the EU's €800 billion "rearmament of Europe" plan, restarting the fiscal expansion cycle. In March, European inflation fell to 2.2% year-on-year, very close to the European Central Bank's 2% inflation target, so the ECB does not need to face the dilemma of growth versus inflation, making the path for future interest rate cuts smoother. European stocks are trading at nearly a 30% discount relative to U.S. stocks, significantly higher than the average level of about 17% over the past 20 years. In the past, European investors heavily invested in the U.S. market, but as the safety of U.S. assets declines, long-term European funds are withdrawing from the U.S. market and returning to the European market, supporting the performance of the European market