The dragon awakens (Weekly summary 22/02/2025)

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• Eurozone stock markets have risen more than 12% this year, nearly quadrupling the performance of the U.S. benchmark index. The German DAX, at all-time highs, has gained 14%, driven in part by expectations of a significant increase in defense spending across Europe. The valuation gap between European and U.S. companies remains vast and has widened in recent years due to the gradual loss of competitiveness among firms on the old continent. If this trend reverses, the potential upside is substantial.

  

   

  Whether this trend continues will largely depend on the outcome of Germany’s elections, set to take place this weekend. The vote points to a challenging governance scenario, with traditional parties losing ground while Alternative for Germany (AfD) continues to gain traction. The moment is particularly sensitive for Europe, with Germany in political transition and a Trump-led United States increasingly inclined to scale back its commitment to the continent and improve relations with Russia.

  It is no longer clear that the West includes the United States.
  — Friedrich Merz

  The issue is that with all major parties refusing to collaborate with AfD, any viable coalition will require three parties. The most likely scenario would be an alliance between CDU/CSU, the Social Democrats (SPD), and the Greens, or alternatively, with the liberal FDP. However, such arrangements have already proven unstable: Olaf Scholz’s coalition, the first three-party government in decades, collapsed in November after just three years in power. The tone of the campaign has softened in recent days, paving the way for future negotiations.

• Donald Trump has escalated his rhetoric against Volodymyr Zelensky, labeling him a dictator without elections and warning that he must act quickly to secure peace or risk losing his country altogether. These statements come after the Ukrainian president accused Trump of being trapped in a bubble of Russian disinformation, following Trump’s suggestion that Ukraine was responsible for Russia’s 2022 invasion.

  Zelensky, whose term was supposed to end in 2024, has justified the absence of elections due to the martial law imposed since the Russian invasion. Meanwhile, Russia continues its slow advance in eastern Ukraine, now controlling nearly 20% of the territory. Trump’s recent moves have alarmed European capitals, which are increasingly concerned that the U.S. may negotiate directly with Russia, sidelining Kyiv. The fact that the first formal meeting between Washington and Moscow to discuss the conflict took place in Riyadh—without Ukraine or the European Union—already speaks volumes.

  For his part, Putin has stated that Ukraine is not excluded from peace negotiations but that the success of any agreement will depend on rebuilding trust between Moscow and Washington. The balance of power has shifted dramatically in just a few weeks. While Ukraine clings to Western support, Europe is trying to assert itself as a relevant player in the negotiations, and the U.S. appears to be moving toward a pragmatic deal with Russia.

  As Washington reconfigures its foreign policy, the EU is pushing forward with a new sanctions package against Russia, including restrictions on aluminum and vessels transporting sanctioned oil. There has been much speculation that the end of the war would lead to an immediate lifting of sanctions and the return of Russian gas to Europe—the only viable path to restoring competitiveness—triggering sharp declines in the TTF. However, the bloc seems determined to continue betting on renewables and LNG, which aligns with Trump’s interests. It wouldn’t be surprising if clauses reinforcing this direction were included in a potential agreement.

• Optimism around Chinese stocks, particularly tech companies, is gaining momentum and could be enough to lure investors back to the Asian market. Major investment banks are starting to shift their view of the Chinese market, moving from seeing it as merely “tradable” (for short-term operations) to “investable” (with attractive long-term fundamentals). The Hang Seng has already risen 14.5% this year, driven by Xi Jinping’s meeting with Jack Ma and other industry leaders—a gesture widely interpreted as a truce in the regulatory crackdown on China’s tech giants.

  

   

  The sector’s resurgence has also been fueled by the emergence of DeepSeek, an AI startup promising a low-cost model, and the absence of new U.S. sanctions. The next major catalyst will be the upcoming Two Sessions of the CCP in just over two weeks, where a significant stimulus package is expected to be announced—one that is crucial for China to meet its 5% growth target for the year (without it, it will be impossible). Besides benefiting local stocks and businesses, such a package would also serve as a strong tailwind for many commodities most sensitive to the economic cycle, even if it focuses primarily on services and consumption. Recent moves in the yuan are already pointing in this direction.

  The dragon awakens.

  

   

• Elon Musk has put forward an explosive proposal: the “DOGE Dividend”, a plan to send $5,000 checks to net taxpayers in the U.S. This would amount to a $400 billion transfer to 79 million households—equivalent to 20% of the projected $2 trillion in DOGE savings by 2026.

  The idea emerged from a post on X (increasingly functioning as a modern agora), where it was suggested that part of DOGE’s savings could be redistributed among taxpayers. The proposal stipulates that only households that pay net federal taxes would be eligible. According to the Tax Policy Center, around 40.1% of U.S. tax filers pay no net taxes, leaving 59.9% of households as potential beneficiaries.

  

   

  If implemented, this plan would provide a massive boost to consumer spending and could have both inflationary and redistributive effects, depending on its execution. A key argument in its favor is that payments would only go to taxpaying households, which tend to have a higher propensity to save—making it structurally different from the COVID stimulus checks. The measure’s impact would extend beyond direct stimulus: on one hand, it could incentivize workforce participation, as only net taxpayers would qualify. On the other, it could boost consumer spending at a time when signs of slowdown are emerging in sectors like restaurants and hospitality.

  What is undeniable is that fiscal deficits are becoming a central issue in the U.S. economic and political debate. The big question is whether this proposal is just another Musk experiment or the first step toward a deeper redesign of the public stimulus and savings system.

  

   

• Implied demand for petroleum products in the U.S. continues to rise, averaging 20.4M bpd over the past four weeks—up 3.7% from the same period last year. Gasoline demand remains stable at 8.4M bpd (+0.4%), while distillates have surged 14.2% to 4.3M bpd, reflecting strength in the industrial and logistics sectors. Meanwhile, jet fuel consumption is up 4.3%, signaling a sustained recovery in air travel.

  On the political front, Trump has announced substantial tax cuts for all domestic oil and gas producers, aiming to stimulate supply-side investment while also committing to rapidly replenishing the Strategic Petroleum Reserve (SPR).

  “The world runs on cheap energy, and producing nations like ours have nothing to apologize for. We have more energy than any other country, and we are going to use it.”
  — Donald Trump

  If the SPR’s refill capacity were maximized, it could technically absorb nearly 700 kbpd for about 15 months—a substantial demand injection into an already tight supply market. With shale production under pressure and geopolitical uncertainty still looming, this new stimulus could push crude prices higher in the coming quarters. In fact, the widely expected surplus for Q1 (and for the full year) is becoming increasingly difficult to justify. HFI Research, which tends to have a bullish bias but is highly accurate in its observations and calculations, now forecasts a deficit of -0.55Mb/d for 2025. Quite the contrast!

  

   

  The EIA, meanwhile, continues to insist on an oil surplus, though it has already revised it downward by 0.5Mb/d in just two months, now estimating a 0.5Mb/d surplus. As more real-world data comes in, we’ll see this forecast decline further—at which point the market will react accordingly.

  

   

  Although the correlation between oil inventories and prices isn’t perfect, it is certainly significant. Right now, it suggests that crude is undervalued by approximately $12/b, a notable discrepancy influenced by the heavy weight of geopolitical news, with Trump still steering the narrative via Twitter.

  

   

  It can be challenging to stay focused and patient when ideas don’t behave as expected, even when fundamentals keep improving (as seen in uranium). But eventually, as always, price and value will converge.