Once again, the logic of the global market should change!

In the past year, global investors have almost reached a consensus: Trump's tariff policy and fiscal deficit will harm the outlook for the dollar and U.S. stocks, leading European stock markets, emerging markets, and gold to become "safe havens." However, this logic is now facing a severe reversal.

The U.S. economy rebounded unexpectedly in the second quarter, the dollar ended its downward trend in the first half of the year, and is expected to welcome its first monthly increase in 2025, with an increase of up to 3%. U.S. stocks continue to hit historical highs driven by the AI boom.

In contrast, the previously strong European stock markets, emerging market assets, and gold have collectively cooled off. Gold prices are experiencing their first three-month decline since last November, emerging market stock indices have fallen for three consecutive days, the euro has fallen below 1.15 against the dollar, marking the largest monthly decline since May 2023, and the leading advantage of European stock markets over U.S. stocks has disappeared.

Is the turning point for "global asset repricing" here?

Some analysts believe that amid increasing divergence and mixed signals, a core consensus is forming: the logic of "rest of the world trade" (non-U.S. trade) is being reassessed.

Speculative funds that had heavily bet on the depreciation of the dollar are beginning to withdraw, and trend-following hedge funds (CTAs) are closing out their short positions in U.S. Treasuries and reducing their holdings in European stocks.

"Shorting the dollar and U.S. assets is currently one of the most crowded trades in the market," said Shaniel Ramjee, head of multi-assets at Pictet Asset Management, stating that the market had previously "extremely underweighted" the dollar, which is now gradually being replenished. He himself is also preparing to increase his allocation to dollar assets, reasoning that "the U.S. economy and corporate profits will once again outperform Europe."

Barclays analysis shows that investors' previous inclination towards international assets rather than U.S. assets, the so-called "rest of the world trade," was driven by a wave of speculative shorting of the dollar, but this trend has now weakened. In particular, trend-following CTA hedge funds have closed their short bets on U.S. Treasuries and reduced their exposure to European stocks.

The direct catalyst behind this change is the trade agreement framework reached by the U.S. and Europe last weekend. This alleviated some concerns about global trade tensions and undermined the previous premium logic represented by the euro, gold, and emerging markets as "non-U.S. assets."

The Durability of Strong Dollar Assets Remains in Doubt

Michael Nizard, head of multi-assets at Edmond de Rothschild Asset Management, pointed out, "We are seeing a rotation into U.S. stocks, a rotation in the money market, and a rotation in market momentum." However, he expects this trend will not last until the end of the year and stated he would buy euros when the euro to dollar exchange rate is around 1.14.

Monica Defend, head of investment research at Europe’s largest asset management company Amundi, maintains her view that the dollar will decline in the long term, citing Trump's borrowing plans and ongoing attacks on the independence of the Federal Reserve. However, she also mentioned that she is prepared to change her view if "U.S. growth continues to exceed expectations from now on."

Defend expects that U.S. tech stocks and the AI boom will continue to drive U.S. stock performance above other markets. However, she also anticipates that once tariffs begin to push consumer prices higher, U.S. economic growth will stagnate. "The U.S. may continue to perform excellently, but perhaps not in macroeconomic terms, rather in the stock market."

Mark Ellis, CIO of the UK hedge fund Nutshell, takes a more cautious stance. He reminds that historical data shows the S&P 500 typically performs the worst in August and September, with the highest volatility. This week is a good time to reduce positions and adopt a defensive stance.

Emmanuel Cau, head of European equity strategy at Barclays, issued a different warning in a client report on July 30.

Cau pointed out that a more sustained rebound of the dollar will become a "key pain point trade" for global investors. As speculative funds withdraw from European stocks and reduce bearish bets on U.S. Treasuries, market sentiment is undergoing a substantial shift.

If this round of dollar strength continues, it will pose significant challenges for investors who have benefited from non-dollar asset allocations this year, exerting further downward pressure on global stock markets, gold, and emerging market assets