At the start of the year, a season typically marked by market exuberance, the US has surprisingly underperformed the global market. The year's opening trends reveal two distinct characteristics: on one hand, despite volatile international geopolitics, asset prices have surged almost indiscriminately across major global equity markets, with indices in Japan, South Korea, and Singapore hitting record highs, and China's Shanghai Composite Index reaching a 10-year peak; on the other hand, US assets have shown a rare pattern of weakness, with large-cap stocks lagging significantly while small-caps have delivered standout performances. The former trend naturally reflects the initial liquidity surplus and buoyant investor sentiment at the year's outset, whereas the latter indicates that even in such an environment, capital flows exhibit clear preferences and divergence. The critical question then becomes: how will this liquidity-fueled rally differentiate and evolve further, and what signals should investors monitor?

How should we interpret the market's liquidity conditions and sentiment at the beginning of this year? We believe the key lies in distinguishing between "grand" expectations and "small" comforts. First, consider the short-term catalyst—the "small comfort" of a liquidity and sentiment recovery that appears favorable mainly by comparison. Following December's "quadruple witching" day (the third Friday, when a large volume of options and futures expire), market trading activity declined sharply—marking the fastest and most significant drop in the past five years. During this window of subdued activity, liquidity risk events did materialize: The CME Group, aiming to curb market volatility, successively raised margin requirements for precious metals futures, exacerbating the roller-coaster price swings in these commodities. Concurrently, reports increased regarding substantial losses incurred by major international banks in silver trading. Coincidentally, the Fed's intensive operations in overnight repurchase agreements to supplement liquidity during the last week of December also created a perception of intervention to stabilize markets. However, after the year-end holidays, trading activity quickly rebounded, liquidity returned, and markets subsequently experienced a notable rally.

Second, there is the "small comfort" of a relatively loose liquidity environment early in the year. One contributing factor is that the theme of fiscal expansion remains intact; whether in the US during an election year, Japan in the prime minister's inaugural year, or Europe pursuing "revival," the impetus for fiscal stimulus—whether proactive or reactive—is considerable. This dynamic finds some corroboration in the strong correlation observed between gold and silver prices and Japanese long-term government bond yields. Another factor is the minor liquidity ease stemming from subtle adjustments in the Federal Reserve's monetary policy. Regardless of the distant prospect of interest rate cuts, on the liquidity front, the Fed's December 2025 policy meeting already confirmed the initiation of RMP (Reserve Management Purchases): In essence, this represents the Fed's corrective action for prior excessive quantitative tightening. Unlike interest rate tools, the Fed's quantitative easing/tightening framework is relatively new and less refined, with uncertain ultimate scale targets, often relying on trial and error based on money market performance. This increases the likelihood of "overshooting" during quantitative tightening, potentially leading to tighter money market conditions (as seen during the US money market turmoil in October 2025), followed by phased balance sheet expansion to "fine-tune" to an appropriate size. Such expansion measures could include QE (Quantitative Easing) or RMP—the latter being the tool confirmed at the Fed's December meeting. This implies that, at least from January to April this year, the Fed will resume balance sheet expansion, thereby improving liquidity. What is the expected scale? According to Fed surveys, the baseline expectation is net purchases of $220 billion over the next 12 months (equivalent to expanding the balance sheet by $220 billion). What about the pace? Purchases will be concentrated from January to April, followed by a significant slowdown. How should this be assessed? The absolute scale of expansion should not be overestimated; we project average monthly purchases of around $40 billion during January-April (with higher volumes in some months). This level is lower than the QE monthly average exceeding $100 billion in 2021 and also falls short of the $360 billion single-month expansion seen in March 2023 following the Silicon Valley Bank collapse. However, the potential impact should not be underestimated, primarily manifesting in two ways: On one hand, proceeding at a normal pace, the US Treasury's TGA (Treasury General Account) could release nearly $400 billion in liquidity from January to early April, especially considering that the current TGA balance is at its highest for this period in five years (indicating significant room for release), partly due to last year's fourth-quarter government shutdown impacts. Combined with asset-side expansion, this could potentially add at least $600 billion in short-term liquidity ($220 billion from asset purchases + approximately $400 billion from TGA releases). On the other hand, and perhaps more importantly, it would restore the base liquidity (bank reserve balances) to a level comfortable for the market. Reviewing liquidity and market conditions since 2020, the $3 trillion mark appears to be a critical "red line" for base liquidity: the first breach occurred from late 2022 to early 2023, culminating in the Silicon Valley Bank incident in March 2023; the second touchpoint was in early May last year, coinciding with reciprocal tariff tensions; and by late September last year, US base liquidity dipped below $3 trillion again, increasing money market volatility and prompting the Fed to frequently use temporary tools like repos to supplement liquidity, ultimately necessitating the adoption of RMP. Based on this analysis, we consider it highly probable that US base liquidity will return to a comfortable range for the market in the first quarter of this year.

Finally, there is the market's "grand" expectation for easing, which will be a significant source of volatility this year. Similarly, concerning fiscal and monetary aspects: on the fiscal front, markets hold substantial expectations for major fiscal stimulus in developed economies, led by the US, such as election-year speculations—beyond tax cuts, the White House might allocate funds for direct payments to residents. However, given the unpredictable nature of a potential Trump 2.0 administration and legislative hurdles, we remain cautious about the implementation and efficacy of unconventional policies like "helicopter money." A similar caution applies to monetary policy. While markets still harbor hopes for more rate cuts than expected (exceeding two) or even a restart of QE, factors such as uncertainty around the Fed chair candidacy and periodic needs to control inflation (expectations) could lead to significant adjustments in these expectations. Concurrently, there is a broad consensus that the dollar may continue to depreciate this year, based on expectations that US policy will be more accommodative than other major economies (Europe, Japan). However, continued depreciation does not imply a straight-line decline. Building on the above analysis and returning to the complex relationship between liquidity and global assets, we believe the market's macro rhythm for the year should be analyzed through two key "variables": the extent of Fed easing and the strength of the US dollar index. This allows for a basic framework of scenarios: ① "Fed liquidity easing + US dollar depreciation." This represents the "ideal scenario" for global assets, providing a foundation for broad-based market gains. ② "Fed easing + accelerated US dollar appreciation." Under this combination, US assets might benefit more, while some non-US assets could face pressure. Within US assets, if dollar appreciation coincides with declining risk appetite, markets might shift away from highly valued assets toward those with safer valuations, such as small-cap stocks, which have historically traded at lower multiples and are showing improving earnings prospects. ③ "Fed tightening/less easing than expected + US dollar depreciation." This scenario could relatively favor non-US assets, as seen in Q2 2025 when stagflation concerns led to dollar depreciation, boosting performances in Hong Kong stocks, A-shares, and commodities (amid US stagflation risks). ④ "Fed tightening/less easing than expected + US dollar appreciation." This is the least favorable scenario, likely putting pressure on risk assets across the board, reminiscent of much of 2022 (a period of liquidity tightening).

For asset allocation this year, we focus on two main themes: first, identifying the inflection point for a slowdown in capital expenditure for future industries, symbolized by AI (a topic for separate detailed discussion); second, the potential shifts among the liquidity scenarios outlined above: Firstly, in the short term, be wary of the risks associated with scenario ②. The underlying concern is that the current weak dollar narrative is primarily built on expectations of policy divergence, lacking stronger evidence—from economic data or technological breakthroughs—proving that non-US economies are outperforming the US (like the "DeepSeek moment" last year). Furthermore, the dollar's decline has been quite limited despite recent weaker-than-expected US economic data. Secondly, the emergence of scenario ③ would require rising US stagflation concerns, such as a further increase in the unemployment rate and consecutive upside surprises in inflation data, which will take time to materialize and verify. Lastly, the probability of scenario ④ occurring is relatively low, at least for the first three quarters of the year, and even if it does occur, its duration is likely to be brief. This is because the overarching policy基调 remains broadly accommodative; the issue is merely the correction of excessive expectations. Currently, markets do not heavily anticipate a rate cut in January, with the baseline expectation for the year being two cuts.

Risk warnings: Unexpected significant slowing of the US economy could lead to substantial volatility in global asset prices;超预期 Fed tightening could trigger adjustments in global risk assets.