Key Highlights

• Trump calls China’s drills around Taiwan “routine” as exercises enter a second day.
• Ukraine peace deal faces new complications as Ukraine denies attack on Putin’s residence.
• Silver rebounds above $74/oz after the biggest one-day drop in five years.

Chart of the Day

U.S. and Eurozone positioning shares both end year at lower end of recent ranges

^{Source: BNY}

Despite the general recovery in risk appetite toward year end, our data indicate that investors have used the recovery flow as an opportunity to reduce their equity exposures to previously high-performing markets. Compared to the highs seen at the start of the year – when “U.S. exceptionalism” was the consensus view – U.S. positioning at the end of 2025 is more cautious, with its share in global portfolios (including those of U.S. investors) falling from a high of 68% to just above 64%.

As we noted earlier this week, even with the recovery in the AI theme, related sectors and industry groups are not among the best-held, as some ground has been ceded to miners, where the U.S. lacks a strong market-cap-based presence.

For Europe, the strongest period of performance was in late Q1 and early Q2, when a combination of tactical diversification away from the dollar after “Liberation Day” tariffs and the local defense theme pushed holdings to more than 11% of all portfolios. However, this figure has also softened, though it remains above the sub-10% level seen at the start of the year. This suggests that markets still support the European reinvestment theme, though with less conviction than earlier in the year.

As both U.S. and Eurozone markets end the year near the lower end of recent ranges, emerging markets have picked up some of the slack. We expect this momentum to continue into 2026, as total positioning remains very light in absolute terms, and a significant uplift in exposures would not necessarily come at the expense of developed markets. Whether this translates into FX gains is another matter, as yield differentials continue to favor high hedge ratios. Export competitiveness pressures may also limit appreciation potential – a point reinforced by guidance from authorities in Bangkok and Beijing this week.

What's Changed?

Flat-earth society and markets share common ground today, as trading stares more at ranges and the year end. Unlike yesterday, silver and gold are bid, as are stocks in Europe and futures in the U.S. MSCI Asia lost 0.1%.

CNY tested the edge at 7.00 to the USD overnight and then broke below 6.99, starting a new path. For many, this is the final trading day of 2025, marking the end of three years of equity outperformance, more than a reflection of dollar weakness.

There is an edge-of-the-map feel to what big moves could happen next regardless of time, as investors stare directionless into a new year of risks and rewards. A lack of new catalysts leaves momentum sagging. The USD is returning toward the bottom of its recent ranges, while bonds remain stuck – except in the EU, where Spanish inflation has sparked ECB tightening risks.

Listing out the bumps today may help sketch a new path ahead.

Geopolitics remain closely tied to energy costs. Beyond ongoing difficulties in the Ukraine–Russia talks or tensions in Venezuela – where a strike hit a “dock area” – the U.S.–Israel discussions added a twist yesterday, with President Trump warning Iran not to restart its nuclear program. Meanwhile, Saudia Arabia and Yemen airstrikes raise additional concerns. OPEC+ is expected to leave production limits unchanged, keeping Brent crude above $62 bbl, sustaining inflation fears.

Private equity and credit concerns are in focus. Beyond big banks trying to reclaim some market share from private credit, the FT highlights circularity risks in continuation vehicles, where PE funds sell companies to themselves, paying old investors with new money. This practice reached 20% of total deals in 2025. Fears of liquidity squeezes in 2026 will be key.

AI funding and M&A remain key themes. The boom in investment has driven more than just U.S. growth, with data center deals fueling $70bn in M&A in 2025. Yesterday, Meta announced plans to buy Chinese start-up Manus for its AI service. Microsoft’s CEO overhauled leadership as part of a new AI strategy. Focus on credit default swaps and borrowing needs of hyperscalers remains elevated for bubble watchers into 2026.

Bottom Line: The FOMC minutes and ADP weekly employment change are the two key news items to watch in today’s U.S. trading session. Tomorrow is a half day, with most of the world closed before the U.S. opens. Liquidity and funding costs everywhere are driving price discovery. Most rebalancing looks complete, but for those still active, it’s a watch-the-map kind of trading session. Focus will remain on bonds and USD, though few expect the U.S. to break out of recent ranges. 

What You Need to Know

Trump publicly downplayed Beijing’s large-scale military drills around Taiwan, which have entered their second day. He described them as routine activities conducted for decades, saying they raised no concern for him personally. His comments came as the People’s Liberation Army launched “Justice Mission 2025,” surprise live-fire exercises across the Taiwan Strait, which Beijing said were a stern warning to pro-independence forces and external interference. Despite Trump’s remarks, his administration earlier approved a record $11.1 bn arms package for Taiwan, the largest single sale on record. Separately, a Pentagon report reiterated that China aims to be capable of fighting and winning a war over Taiwan by 2027, highlighting contrasting official messaging within Washington. TAIEX –0.36% to 28,707.13, USDTWD –0.194% to 31.381, 10y TGB +0.1bp to 1.35%.

Trump’s push to end the war in Ukraine ran into fresh complications on Monday after Vladimir Putin told him Russia would revise its negotiating position, citing what Moscow claimed was a Ukrainian drone attack on the Russian leader’s residence. The Kremlin said Putin raised the issue during a phone call with Trump, while Kyiv dismissed the allegation as fabricated and warned it could be used to justify further Russian escalation. Speaking in Florida, Trump said he was “very angry” after hearing Putin’s account and criticized any attack on the Russian president’s home. The exchange followed a burst of year-end diplomacy, including Trump’s meeting with President Volodymyr Zelenskyy, but underlined how quickly momentum toward a peace deal has faltered amid renewed accusations, military threats, and unresolved disputes over territory and security guarantees. PFTS 0% to 458.79, USDUAH +0.003% to 42.2512, 10y UGB +0.6bp to 13.317%.

Thailand’s central bank and anti-money laundering authority said on Tuesday they are tightening oversight of gold-related transactions as record-high prices and surging trading volumes put upward pressure on the baht and raise financial stability concerns. The Bank of Thailand (BOT) and the Anti-Money Laundering Office said they will jointly step up scrutiny of customers and transactions, particularly unusually large volumes on online gold trading platforms. This comes after earlier measures failed to curb activity. A new joint task force will integrate data across agencies to identify ultimate beneficial owners, analyze suspicious transaction patterns, and strengthen supervisory and enforcement guidelines under existing laws. Authorities said the effort aims to close regulatory gaps in the gold trading sector, prevent its misuse for illicit activities, enhance transparency and bolster public confidence – supporting overall economic and financial stability. SET +0.269% to 1,257.4, USDTHB +0.207% to 31.513, 10y TGN –0.8bp to 1.645%.

The head of Iran’s central bank resigned after the rial plunged to a record low and protests spread across Tehran and other major cities, underscoring mounting economic pressure on the country’s leadership. State media reported that Mohammad Reza Farzin stepped down as traders and shopkeepers shut businesses and rallied in key commercial districts, prompting police to use tear gas in parts of the capital. The unrest followed the rial’s fall to 1.42mn IRR per dollar, a dramatic slide from around 430,000 when Farzin took office in 2022. The currency collapse has intensified already severe inflation, pushing up food and healthcare costs and fueling fears of hyperinflation. Market anxiety has been compounded by sanctions, geopolitical tensions and reports of possible tax increases ahead of the Iranian new year. Former finance minister Abdolnasser Hemmati has been reappointed governor of the central bank, having served between 2018 and 2021. 

What We're Watching

FOMC December minutes are due, with a focus on future rate cut debate and labor market outlooks.

ADP Weekly Employment forecast: +5,000 after an +11,500 four-week moving average – holiday seasonality is key. 

FHFA House Price Index is expected to show a 0.1% m/m gain for October.

S&P Cotality Case-Shiller 20-City House Price Index is forecast up 0.1% m/m, a 1.1% y/y change.

MNI Chicago PMI is expected to improve to 40 in December from 36.3 in November.

Dallas Fed Services Activity Index is expected to fall further to -4.6 from -2.3.

U.S. Treasury sells $75bn in 6-week bills.

What iFlow is Showing Us

Mood: Year-end risk-on remains in place, though off the highs. Limited fixed income market activity over the holiday period and a lack of strong liquidity preference weigh on sentiment barometers.

FX: Funders find favor during Boxing Day flow, with strong interest in ILS and SGD, while EUR, KRW and CZK are also in the top five. CNY, JPY and HKD perform poorly, indicating a mixed risk environment in FX.

FI: Very light interest across markets as most G7 markets shut due to holidays. Japanese and Singaporean bonds lead performance, while the U.S. saw light outflows.

Equities: Activity concentrated in EM, led by Brazil and Peru. Eurozone markets struggle, with outflows from Italy, France and the Netherlands leading to broader year-end underperformance.

Quotes of the Day

“We’re all pilgrims on the same journey – but some pilgrims have better road maps.” – Nelson DeMille

“The reinvention of daily life means marching off the edge of our maps.” – Bob Black

Economic Details

Spain’s December CPI was estimated at 2.9% y/y, easing from 3.0% in November, according to the INE’s flash indicator, while headline prices rose 0.3% m/m. The moderation in annual inflation was mainly driven by lower fuel and vehicle-lubricant prices compared with the same month last year, alongside leisure and culture prices rising less than a year earlier. Partly offsetting this, food and non-alcoholic beverage prices increased more strongly than in December last year. Core inflation, which excludes unprocessed food and energy, was unchanged at 2.6% y/y. Meanwhile, Spain’s harmonized CPI (HICP) was estimated at 3.0% y/y, down 0.2 percentage points from November, with HICP core inflation at 2.8% y/y and monthly HICP inflation also at 0.3%. IBEX 35 –0.086% to 17,147, EURUSD –0.051% to 1.1767, 10y Bono +1.2bp to 3.262%.

Spain’s Q3 national non-financial sector accounts showed the economy recorded a financing capacity of €19.35bn, equivalent to 4.6% of GDP of the same period, down €0.49bn y/y, according to INE data. The decline reflected a narrower external goods and services surplus, partly offset by an improved balance of current income and transfers. Gross national income rose 6.0% y/y to €416.0bn, while gross disposable national income increased 6.2% y/y to €412.2bn. Household saving fell, with the saving rate declining to 4.6% from 6.0% a year earlier, resulting in a financing need of €7.54bn. By contrast, public administrations recorded a financing capacity of €15.93bn, up sharply y/y, while financial institution financing capacity increased to €9.16bn. In other figures, the October current account came in at €7.2bn, with a goods and services surplus of €7.5bn.

Spain’s November retail sales grew 6.0% y/y in seasonally and calendar-adjusted terms, accelerating by 2.1 percentage points from October, while sales rose 1.0% m/m, according to INE provisional data. In the unadjusted series, retail sales increased 3.7% y/y, slightly below the prior month. By distribution channel, large chains led the monthly gain with a 2.8% m/m increase, while sales excluding service stations also rose 1.0% m/m. By product category, food sales increased 0.4% m/m and non-food items rose 1.6% m/m. Retail employment rose 0.9% y/y, unchanged from October, with job growth strongest at large chains and large-format stores. Regionally, sales rose y/y in 16 autonomous communities, led by Comunidad Valenciana.

Switzerland’s December KOF Economic Barometer increased by 1.7 points m/m to 103.4, moving further above its long-term average and signaling an above-average outlook for the economy at the start of next year. The improvement was driven primarily by production-side indicators, with manufacturing showing particularly strong momentum. Sub-indicators for employment prospects, intermediate goods inventories and the general business situation strengthened, although production activity and order backlogs weakened. Within manufacturing, sentiment improved notably in metals and in the wood, glass, stone and earth segment, while food and beverage producers and the chemical and pharmaceutical industry softened. By contrast, demand-side indicators remained under pressure, with private consumption and foreign demand both detracting from the overall barometer. SMI –0.017% to 13,240.59, EURCHF –0.012% to 0.92875, 10y Swiss GB +0.6bp to 0.306%.

Sweden’s November housing loan data showed diverging interest rate trends, with longer fixed mortgage rates rising while floating rates edged lower, according to Statistics Sweden. The average floating housing loan rate fell slightly m/m to 2.68%, while the average fixed rate on loans with maturities over five years rose by 0.12 percentage points m/m to 3.21%. Housing loan growth was broadly stable y/y at 2.7%, accounting for 83% of household lending, while total household credit expanded 2.8% y/y. Lending to non-financial corporations accelerated to 3.5% y/y. Household deposits at MFIs increased to SEK 2,872bn, with on-demand deposits making up 75%. The money supply M3 grew 3.4% y/y, while average household deposit rates declined to 0.45%. OMX –0.051% to 2,862.19, EURSEK –0.115% to 10.7993, 10y Swedish GB +0.3bp to 2.838%.

Norway’s January foreign exchange operations will see Norges Bank sell a net NOK 776mn per day in the FX market to meet government-related needs. Of this total, NOK 650mn per day will be sold on behalf of the central government to finance the non-oil budget deficit and manage petroleum revenues, with surplus proceeds saved in foreign currency in the Government Pension Fund Global. In addition, Norges Bank will sell NOK 126mn per day in foreign exchange to fund the transfer of dividends to the government. These dividend-related FX sales form part of a fixed NOK 30.1bn program for the 2024 financial year, evenly distributed between March 2025 and February 2026 and unchanged for January. OSE +0.58% to 1,676.17, EURNOK –0.083% to 11.8127, 10y NGB +0.6bp to 4.154%.

Turkey’s November labor force data showed a slight deterioration in employment conditions, with the seasonally adjusted unemployment rate rising m/m to 8.6%, as the number of unemployed increased by 54,000 to 3.10mn, according to TurkStat. Employment rose by 75,000 to 32.74mn, lifting the employment rate by 0.1 percentage point m/m to 49.2%, while labor force participation edged up 0.1 percentage point m/m to 53.8%. Youth unemployment was unchanged at 15.4%. Housing stronger labor supply dynamics, the composite measure of labor underutilization fell by 0.6 percentage points m/m to 29.1%. Average weekly actual working hours increased m/m to 42.3 hours, indicating marginal firming in labor utilization despite higher headline unemployment. BI 100 +0.049% to 11,156.38, USDTRY +0.018% to 42.945, 10y TGB –5bp to 29.05%.

Turkey’s December economic confidence was flat m/m, with the headline economic confidence index unchanged at 99.5, according to TurkStat. Beneath the stable headline, consumer confidence fell 1.8% m/m to 83.5, remaining firmly below the 100 optimism threshold. By contrast, the real sector (manufacturing) confidence index rose 0.5% m/m to 103.7, services confidence increased 0.4% m/m to 112.3, and retail trade confidence climbed 1.1% m/m to 115.4, signaling improved sentiment across most business sectors. Construction confidence was the sole business component to weaken, declining 0.5% m/m to 84.5. Overall, the unchanged headline masked a continued divergence between subdued household sentiment and more resilient confidence among firms at the end of the year.

South Korea’s November 2025 industrial activity showed modest sequential improvement but remained mixed on a y/y basis. The Index of All Industry Production rose 0.9% m/m and 0.3% y/y, supported by services (0.7% m/m, +3% y/y). Industrial production increased 0.6% m/m but fell –1.4% y/y. Manufacturing shipments rose 1.6% m/m but were down –0.5% y/y. Manufacturing inventories edged up 0.6% m/m, yet declined sharply –7.3% y/y, suggesting continued inventory adjustment. Capacity indicators were mixed. The Production Capacity Index declined –0.1% m/m but increased 0.4% y/y. The capacity utilization rate rose 0.1pp m/m to 70.9%. On the demand side, retail sales fell –3.3% m/m but increased 0.8% y/y. Equipment investment rose 1.5% m/m but slipped –0.1% y/y. While domestic machinery orders surged 16.9% y/y, machinery shipments fell –6.3% y/y, implying a pipeline recovery rather than current output strength. Construction activity improved 6.6% m/m but remained deeply negative (–17.0% y/y). Business cycle indicators diverged – the composite coincident index fell 0.2% m/m, while the leading index rose 0.6% m/m, suggesting tentative improvement ahead despite weak current conditions. KOSPI –0.151% to 4,214.17, USDKRW –0.772% to 1,445.15, 10y KTB –2.5bp to 3.355%.

South Korea’s December 2025 Composite Business Sentiment Index (CBSI) for all industries rose to 93.7, up 1.6 points m/m, while the outlook for January 2026 declined by 1.7 points to 89.4. In manufacturing, the CBSI increased 1.7 points to 94.4, with the outlook up 1.9 points to 93.6. Non-manufacturing CBSI rose 1.4 points to 93.2, but its outlook dropped 4.1 points to 86.6. The Economic Sentiment Index (ESI), combining business and consumer surveys, fell 1.0 point m/m to 93.1 in December 2025.

South Korea’s foreign currency deposits rose for the first time in three months in November. Outstanding foreign currency-denominated deposits held by residents stood at $103.55bn as of the end of November, up $1.71bn from a month earlier. The total had reached the highest level in 31 months in August but declined over the following two months, mainly due to increased corporate repayment of foreign-currency borrowings and overseas investments by the national pension fund. November’s increase came as companies received payments for current transactions and parked funds to be converted for repayment of foreign-currency borrowings, among other factors. Corporate foreign currency deposits gained $1.67bn m/m to $88.43bn, while individual holdings rose $40mn to $15.11bn. By currency, U.S. dollar-denominated deposits climbed $1.96bn to $87.59bn, while Japanese yen deposits fell $500mn to $8.13bn. Euro deposits grew $390mn to $5.4bn, while Chinese yuan deposits declined $100mn to $1.14bn.

Fitch Ratings: China’s new home market weakened further in Q4, with 11M25 sales down 11.2% y/y. Gross floor area (GFA) sold decreased 8.1%, and average selling price (ASP) fell 3.3%, worse than Fitch Ratings’ full-year forecasts for declines of 7% in sales, 5% in GFA and 2% in ASP. The softness reflects weak buyer confidence amid a sluggish economy, labor market pressure and expectations of further price cuts. Policy support has offered only temporary relief. CSI 300 +0.257% to 4,651.28, USDCNY –0.212% to 6.9912, 10y CGB –0.4bp to 1.854%.

Thailand’s economy expanded in November, supported by stronger exports and a continued recovery in tourism, the BOT said on Tuesday, even as domestic consumption softened. It also noted that private investment rose 3.3% m/m, driven by higher spending on machinery and equipment, while private consumption slipped 0.3% m/m as spending on non-durable goods weakened amid lower fuel sales and electricity usage. Assistant Governor Chayawadee Chai-Anant said growth ahead will be led by tourism, with consumption underpinned by government stimulus, though risks remain from baht strength, flooding in the south, border tensions with Cambodia and potential U.S. tariffs. The baht’s recent appreciation has hurt confidence, she said, though conditions improved on Tuesday. The current account deficit narrowed to $584.5mn in November from October. SET +0.152% to 1,255.94, USDTHB –0.197% to 31.51, 10y TGN –0.8bp to 1.645%.