Tesla is losing market share in China because local electric vehicle (EV) makers are creating models that appeal more to Chinese buyers. Competitors are adding features like multiple entertainment screens, built-in refrigerators, and selfie cameras to attract consumers. Elon Musk’s once strong connection with Beijing is fading, partly because of a strained relationship with Donald Trump. Meanwhile, companies like BYD and battery maker CATL have launched fast-charging technologies that can recharge a vehicle in just five minutes, making the competition tougher for Tesla. Tesla’s challenges in China show a change in what consumers want and a shift in the competitive landscape of the electric vehicle market. Features like embedded fridges and multiple screens highlight a desire among younger urban consumers for convenience and innovation over just brand loyalty or technical performance. This shift also reflects changing ideas about what is considered prestigious; what used to be seen as a status symbol now competes with tech that meets local expectations and is available at a lower price. Musk had previously benefited from aligning with Beijing’s rules and priorities, which allowed Tesla to operate without the usual requirement of a local joint venture. However, this political advantage seems less dependable now. The impact of global political tensions can take time to show, but they can significantly affect competition. It seems harder for foreign companies to rely solely on past goodwill. CATL’s advances in battery technology imply that Tesla no longer has the technological edge. Many once believed that battery innovations would stay in the West and be shared unevenly, but that’s changing. With recharging now possible in about five minutes, one of the major barriers to electric vehicle adoption—long wait times—has been greatly reduced. Projections suggested that charging infrastructure wouldn’t catch up until the late 2020s, but these recent breakthroughs may accelerate that timeline. In this evolving market, we must consider the growing loyalty of Chinese buyers, ongoing technological advancements from BYD and CATL, and the geopolitical challenges affecting foreign partnerships in East Asia. These aren’t temporary trends; they represent significant shifts that could put pressure on valuations and investment strategies. As we move through the second quarter and beyond, it’s essential not to view these developments in isolation. Together, they create a compounded disadvantage that will take time to resolve. We’re already noticing this reflected in some implied volatility spreads. Expectations for profits based on past growth rates will need to adapt to account for tougher competition and a lack of strategic options. Support levels for Tesla’s price may not hold as assumptions based on Chinese sales start to adjust. Relying only on North American subsidies won’t be enough to regain lost ground quickly. The impact of equal technology and shifting consumer trends abroad needs to be recognized now instead of being postponed.

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China has set new limits on purchasing expensive medical devices from the European Union (EU) for government use. The finance ministry announced that public sector purchases of EU medical devices worth over 45 million yuan ($6.3 million) will be restricted. Additionally, imports from other countries containing more than 50% EU-made parts will face similar limits. This decision follows the EU’s ban on Chinese companies from participating in public tenders for medical devices, which are valued at €60 billion each year. The EU took this step due to insufficient access for European businesses in China. This was the first use of the EU’s International Procurement Instrument, aimed at creating fair competition in global trade. In response, Beijing accused the EU of creating “protectionist barriers,” despite China’s efforts to show “goodwill.” China stated that the new restrictions will not affect European companies already operating within the country. A leaders’ summit between China and the EU is scheduled for later this month. This situation illustrates the escalating tensions between these two major trading blocs, where trade rules are being sharpened to create friction in procurement processes. China’s new restrictions on high-value medical imports from the EU are not just about the devices; they reflect a larger issue of mistrust, policy control, and the need to protect domestic markets. The precise threshold of 45 million yuan shows that this is a measured response aimed directly at high-end purchases. Brussels initiated this back-and-forth, using the International Procurement Instrument—a tool designed to promote equal access. Their restrictions stem from long-standing complaints that European businesses have been excluded from Chinese government contracts. From China’s perspective, their response is not aggressive but an attempt to level the playing field. Existing European companies in China remain unaffected by these new rules, which may soothe foreign firms already invested in the market. For those observing changes in international procurement and adjusting their risk exposure, these developments signal substantial shifts. They are not mere diplomatic gestures; rather, they bring enforceable changes with significant commercial implications. It’s important to view this as more than just a bilateral dispute—this adjustment could impact margins and cause disruptions in business-to-government (B2G) sectors. The upcoming summit offers both sides a chance to recalibrate their approach. While it is an opportunity for diplomacy, no one expects major agreements to emerge. Traders involved in medical technology, particularly those reliant on Chinese government contracts, should consider adjusting their hedging positions. European firms already established in China may see advantages, pushing values higher and making foreign suppliers vulnerable to regulatory challenges. The use of specific component thresholds—like the 50% EU content rule—will quickly affect supply chains. Companies need to closely examine their assembly sourcing, vendor details, and research-and-development locations. Firms with final assembly in Asia may feel less immediate impact, even if parts originate in Europe. This separation could help maintain eligibility for licensing or bidding in China and provide benefits to those with diversified supply chains. Meanwhile, the €60 billion in EU procurement is significant. Governments are setting tighter market parameters where access is not guaranteed, and trust is lacking. The costs of exposure are being recalibrated not just through tariffs, but also by procedural eligibility and certification challenges. This calls for clear analysis—less guessing, more focus on compliance and thresholds in public bidding across both regions. As we navigate these changes, it’s clear that there’s no room for casual positions—either in sentiment or financial strategies. Strategies relying heavily on one regional tender system may need to retreat or delay. Geopolitical issues and trade policy are now intertwined; each new restriction comes with enforceable details, and the time between announcements and implementation is shrinking. The 45 million yuan threshold creates a clear distinction between what is allowed and what is blocked. In this context, businesses should include this bifurcation in their scenario analysis. Past methods of estimating access probabilities may no longer apply; pricing must account for binary outcomes, especially concerning revenue from procurement. In the coming weeks, keep an eye on regional earnings calls and any updates on procurement backlogs or order certifications—they will indicate near-term trends, particularly for those involved in medical equipment distribution. The pricing trends for credit derivatives on EU-listed medical suppliers, especially those lacking diverse manufacturing locations, may reveal where the next pressure point lies. Ultimately, the origins of products and their approval status will play a critical role in determining flow.

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The People’s Bank of China (PBOC) controls the yuan’s value using a managed floating exchange rate system. This system permits the currency to move within a set range of +/- 2% around a central reference point, which is currently at its strongest level since November 8, 2024. The previous closing rate was 7.1653.

Central Bank Liquidity Management

To manage money supply, the PBOC injected 197.3 billion yuan through 7-day reverse repos at an interest rate of 1.40%. Today, 422.3 billion yuan is maturing, leading to a net drain of 225 billion yuan. In simple terms, the central bank is guiding the yuan toward a slightly stronger position while still allowing some flexibility. They are moderating how quickly the yuan moves to avoid market chaos and long-term pressures from building up too fast. The decision to set the midpoint at a level not seen since early November shows a strong stance in light of money outflows and speculation. From where we stand, this liquidity adjustment—injecting less money than what is maturing—suggests an attempt to tighten conditions, at least for now. With 422.3 billion yuan maturing and only 197.3 billion injected, there’s a net liquidity decrease of 225 billion yuan. This is a significant step; reducing the amount of excess cash can support the yuan and push short-term rates upward. Zhou’s approach seems to be about quiet control—strengthening the yuan while reducing easy money. This is not just talk; it shows in the tools we watch closely. A stronger yuan, coupled with stricter liquidity, alters how we assess future levels, particularly in the options market.

Market Strategy Implications

For the time being, volatility may stay in check. However, short-term funding issues will influence the structure of swaps and the near-end curve. We need to adjust our strategies, focusing on pricing near-term premiums more carefully as signals from monetary policy and currency fixing align. It’s wise to maintain tighter limits on front-end exposure, as tight funding might impact implied rates before spot rates show changes. Liu has followed the usual strategies, but this reduced liquidity alongside a stronger midpoint suggests we’re entering a more controlled phase. We are preparing for scenarios that reflect this new tone: less cash available to chase yield and increased pressure on strategies that rely on carry. Given this situation, yuan options may be more prone to pick up slight skew. We’re predicting paths that account for a larger right tail until we confirm whether this tightening is temporary or part of a bigger shift. As always, we recalibrate weekly, but currently, the data supports this adjustment. While it may not be shocking, it is significant. Each action in reverse repo activity and midpoint fixing now communicates a message. It’s time to pay closer attention to these subtle signals. Create your live VT Markets account and start trading now.

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OPEC+ announced an increase in oil output by 548,000 barrels per day for August, compared to 411,000 barrels per day in July. This change brings back almost 80% of the previous voluntary cuts of 2.2 million barrels per day from eight OPEC members. Most of the extra supply comes from Saudi Arabia. This boost in production occurs as the global economic outlook appears steady, with strong market fundamentals and low oil inventories. Analysts see this production increase as a way to compete for market share. OPEC+ seems willing to face a potential drop in prices and revenue. As a result, oil prices fell by just over 1% when trading opened on Sunday evening. Looking ahead, Goldman Sachs believes a slightly larger increase may be announced at the next meeting on August 3, predicting a final rise of 550,000 barrels per day for September. This supply change shows a strategic move by the producers, especially Saudi Arabia, to reclaim lost volumes while the global market remains stable. The focus appears to be on regaining control over pricing rather than merely limiting production. It indicates a belief that demand can handle a small increase in supply without causing significant price drops. By adjusting daily output to return about 80% of earlier cuts, the alliance aims to prevent perceived gaps in future consumption. However, the main goal here seems to be securing a long-term market presence while accepting a short-term drop in income per barrel. The slight decrease in prices after Sunday’s market opening was expected. When production rises under otherwise stable conditions, prices tend to fall. What we see now may be positioning for a fuller supply recovery in the third quarter, potentially extending into early autumn, depending on the outcome of next month’s meeting. Goldman’s prediction of another increase in September, though slightly larger, reflects their assessment of exporter intentions: not only to test demand but also to establish new price baselines for crude oil as the year progresses. They also believe that existing inventories, which are still relatively low, won’t easily absorb sharp increases in production. Traders should closely monitor one critical metric: stockpile movement, especially in OECD countries, as an indicator of price stability. For those dealing with options or contracts, the key now is not just the production numbers themselves, but how these figures relate to actual usage and storage data. With limited volatility and stable pricing patterns, there’s little reason to expect major shifts—unless unexpected geopolitical events occur. In the week ahead, it’s crucial to pay attention to inventory reports and import flows, especially from Asia-Pacific refiners. These refiners often adjust their purchasing in response to competitive pricing. A significant rise in crude reserves could put downward pressure on prices, especially in later contracts. While it’s easy to anticipate a sell-off when output increases are announced, it’s often the slow reaction in actual demand that sets the future price trends. Keeping long positions without sufficient support from declining inventories or refinery activity could prove risky. We also need to keep an eye on freight rates and shipping activity. An increase in barrel movement typically leads to higher tanker demand. However, if freight rates remain low, it may indicate that demand is lagging behind the production increases. Such data often comes before official consumption statistics, making it a useful early indicator. Overall, the return to higher volumes is not just about the numbers; it challenges us to understand where the balance lies between price strength and quantity. It’s time to reassess strike levels and delta exposure in light of the changing output trends, while broader volatility is still subdued.

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The People’s Bank of China (PBOC) is expected to set the USD/CNY reference rate at 7.1626, according to Reuters. The announcement will likely come around 0115 GMT. The PBOC establishes the daily midpoint for the yuan, also known as renminbi or RMB. It uses a managed floating exchange rate system, allowing the yuan to vary within a set limits around this reference point. Currently, this limit is set at +/- 2%. Every morning, the PBOC determines a midpoint for the yuan against a basket of currencies, primarily focusing on the US dollar. Factors taken into account include market supply and demand, economic indicators, and global currency trends. This midpoint guides trading for the day. The yuan is allowed to move within a +/- 2% trading band from the midpoint. This means it can rise or fall by up to 2% in one trading day. The PBOC may adjust this range based on economic needs and policies. If the yuan nears the edges of this trading band or experiences high volatility, the PBOC can step in to buy or sell yuan to stabilize the currency. This keeps its value changes controlled and steady. Governor Pan Gongsheng oversees this process. What we see here is a typical example of the PBOC managing currency to maintain market expectations. Setting the reference rate at 7.1626 shows a desire to guide the renminbi within a steady range while allowing some market flexibility. The 2% band gives local and offshore traders room to make directional trades, though ongoing signals from the central bank continue to influence sentiment. For those of us monitoring from a derivatives perspective, this midpoint is crucial. It sets the limits within which short-term positioning can occur without risking intervention. When the authorities announce a midpoint close to expectations—like now—it reflects their effort to maintain stability while discouraging speculative betting. If they stray from that consensus, they often send a clear message. Currently, this stable setting and controlled price action create slightly narrower intraday opportunities, which may seem limiting. However, the predictability is valuable. It allows delta hedgers and those structuring options around volatility surfaces to keep tighter parameters. This stability minimizes noise and helps focus on relative movements and value across regional pairs. Pan’s team seems keen to avoid one-sided trades. This can hint that they are closely monitoring for any extremes in positioning, especially as we approach busy periods with regional data and global interest rate changes. Right now, there are no obvious signs of strong intervention, but the market is clearly being managed. This suggests stability may remain unless unexpected developments arise. Trades aimed at sharp yuan depreciation may be less rewarding in the short term—especially if reference rates stay within a tight range and if there’s no significant shift in attitude from the central bank. Strategies that benefit from low realized volatility or spider strategies around tightening bands could find value under these conditions. By keeping the midpoint stable, the central bank may be encouraging traders to avoid testing the lower limits of the currency band. This suggests there are currently no significant risks for upside movements. Traders focused on short-term volatility or gamma strategies should keep an eye out for any slight increases in realized volatility at local peaks—but without extending exposure around the midpoint. We believe policymakers will likely keep pressure on offshore sentiment if the yuan nears concerning levels. While small movements are not a problem, major breakouts won’t be tolerated quietly. This hampers pricing risk premiums beyond 1-month tenors without accounting for possible regulatory changes. The broader implication is clear: making directional bets outside expected ranges may not yield much reward unless linked to a change in reference policy or an economic surprise. This favors relative value traders working within the defined band, particularly when liquidity aids those trades during the day. For now, low dispersions and muted volatility metrics highlight how stable the currency regime remains. Unless an unexpected macro shock occurs, there’s little to indicate a change in reference rate policy is imminent. The next opportunity will likely arise outside the currency fix itself—potentially in how other regional currencies react to pressure and whether that reaction is significant.

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Most analysts expect the Reserve Bank of Australia (RBA) to lower its cash rate. A Reuters poll reveals that 31 out of 37 economists predict a cut of 25 basis points. However, analysts at Bank of America believe the RBA may keep rates steady. This is partly due to ongoing high inflation, with the trimmed mean inflation rate likely to exceed the 2.5% target soon.

Labour Market and Inflation Risks

The unemployment rate is below the RBA’s target of 4.2%, indicating a tight job market. Additionally, unit labour costs are rising because of weak productivity growth. These elements contribute to ongoing inflation risks. As a result, the RBA might choose to pause and reconsider its approach before making any changes to monetary policy. In summary, the central bank is facing competing pressures. On one side, the expectation for a rate cut is strong, with many economists supporting this view. They are likely considering sluggish consumer activity and a slowdown in housing and lending as reasons for a change. From a macro demand standpoint, it makes sense that easing might be appropriate. On the flip side, Bank of America’s arguments also hold weight. Inflation, particularly the trimmed mean, isn’t decreasing as hoped. Rising labour costs, combined with slow productivity, could lead to persistent price pressures. This is concerning. High employment rates add to it; when people have stable jobs and income, their spending habits often remain strong. This can keep pressure on inflation, especially in services.

Market Considerations and Positioning

We believe these mixed signals limit the potential for aggressive trading strategies in the short term. Monetary policy does not work in isolation, and even minor rate changes impact valuations across the board. In an environment where one side suggests easing and the other warns of caution, it’s smart to keep options flexible. Derivative exposure, particularly near-term rate contracts, may be sensitive to sudden changes if expectations shift after the next inflation report. The market could quickly readjust, especially if new data deviates from the current consensus. Significant changes or surprises in real wage growth could lead to revised expectations for terminal rates. We recommend monitoring implied volatility in short-dated futures. If this measure starts to widen, it could indicate growing market uncertainty as the monetary decision date approaches. For now, staying nimble is crucial, rather than making large trades based solely on dominant views. Biases can lead to rapid corrections when forward guidance shifts. If wage pressures continue and the next Consumer Price Index (CPI) report shows unexpected increases, it’s unlikely that a swift loosening cycle will follow. Traders who think early easing is guaranteed might need to adjust quickly, which carries significant risk. It’s important to pay attention to the language used in the statements following the meeting. A change in how upside risks, particularly concerning wage movements, are communicated could significantly affect short-term rates. Until then, it may be wiser to engage in shorter-term transactions rather than holding positions influenced too heavily by uncertain predictions. Create your live VT Markets account and start trading now.

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In May, Japan saw real wages fall by 2.9% compared to a year ago. This is the largest drop in almost two years and marks the fifth straight month of decline. Nominal wages increased only by 1.0%, the slowest growth since March 2024. This slowdown is mainly due to an 18.7% drop in special bonus payments, and regular base pay and overtime earnings are also rising more slowly. The wage data has not yet reflected the record salary increases agreed to in this year’s spring labor negotiations. Smaller companies, which often don’t have unions, are slower to raise wages. On a positive note, household spending jumped by 4.7% year-on-year in May, much higher than the expected 1.2% increase and rebounding from a previous 0.1% decline. However, there are worries that upcoming U.S. tariffs on Japanese exports may hurt company profits and future wage growth. This adds pressure on the Bank of Japan as it tries to normalize interest rates. What we see highlights a growing gap between agreed wage increases and what people are actually receiving in their paychecks. The year-on-year decline in real wages, the steepest in nearly two years, shows how inflation is outpacing most workers’ earnings. Special bonuses, usually a cushion during tough times, have decreased sharply by 18.7%. This isn’t just seasonal; base pay and overtime are also increasing slowly when we need stronger earnings the most. It’s essential to recognize that changes at larger firms don’t always happen quickly across the board. Wage agreements from the spring, though record-setting, aren’t immediately applied everywhere. Many smaller businesses, without formal unions, are delaying or reducing raises. This creates uncertainty about domestic demand, even with the recent increase in consumer spending. Speaking of that spending surge, the 4.7% annual rise in household expenditures surprised many. After several weak months, this level of spending indicates more resilience than expected. It may be due to pent-up demand or delayed support measures. However, we shouldn’t rush to see it as a turning point, especially when real incomes are flat or falling. On top of domestic issues, there are rising concerns about external trade pressures. Upcoming tariffs could hit corporate profits so hard that companies may rethink their pay plans. This risk is very real now. When profit margins shrink, wage growth usually slows or even reverses. The Bank of Japan, aiming to gradually raise interest rates, is navigating a complicated situation. The softness in wages combined with increased spending makes it tough to gauge demand-driven inflation. We might see more caution in policy moves, despite some calls for urgency. If tightening hesitates further, it could widen yield differentials, intensifying currency pressures. Some of this widening has already begun. Thus, we should expect volatility in rates and spreads to stay high. Understanding the changing wage landscape and slower-than-expected earnings growth is crucial for framing future policy reactions. We need patience but not passivity; we should remain attentive to the data and not just follow trends.

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Japan’s main trade negotiator, Ryosei Akazawa, had two phone discussions with U.S. Commerce Secretary Howard Lutnick on Thursday and Saturday. They were preparing for a July 9 deadline, which could lead to a 24% reciprocal tariff on Japanese imports. President Trump hinted that the final tariff could be even higher. Japanese Prime Minister Shigeru Ishiba emphasized that Japan would not compromise on its national interests. He described the negotiations as “extremely vigorous.” Japan continues to work closely with the U.S. as discussions progress, and these talks will likely last until the deadline.

Rising Tensions in Trade Negotiations

This article highlights an escalating trade dispute between Japan and the United States. A potential 24% tariff on Japanese goods is approaching. The two high-level calls between Akazawa and Lutnick show that although officials are communicating, tensions are increasing. President Trump’s comment about possibly raising the tariff suggests that the U.S. may be using shock tactics in the negotiations. Ishiba’s comments show that Japan is firm and aware of what’s at stake. The term “extremely vigorous” reflects the intensity of the discussions. We are on the brink of a policy decision that could change trade balances quickly. The July 9 deadline is a pressure point for both governments and the broader financial system, particularly in areas like transport, manufacturing, and currency. For those involved in derivative strategies, it’s crucial to adjust timelines now. Changing positions too early could lead to losses if negotiations gain momentum later. Waiting too long can be risky if one side makes unexpected moves. The uncertainty around this deadline often leads to significant shifts in trading strategies. What we need now is less focus on directional trades and more on implied volatility spreads to prepare for sudden market changes. We should not overlook the risk of an announcement before markets open in Tokyo or New York. This could lead to liquidity issues, particularly if a sudden policy change occurs.

Market Reactions and Strategy Adjustments

We are already seeing increased hedging in JPY pairs and auto manufacturing indexes. It’s unlikely that this is just slow money entering the market. Given the consistent messages from Ishiba’s administration, a total reversal seems unlikely. Leading up to July 9, markets won’t just wait for news—they will also begin to factor in different scenarios, and they will do so quickly. Traders need to adjust their exposure based on their confidence in reaching a deal. With the prime minister standing firm and Washington staying tough, expectations for a gentle resolution may be unrealistic. Lutnick has not hinted at a change in approach, and this silence may indicate internal disagreements rather than a solid strategy. This type of uncertainty can lead to increased risk. Regardless of the outcome, the path taken will be crucial. Both the result and the manner in which it’s achieved will impact our pricing models, especially those based on steady policies and global growth. Therefore, rebalancing portfolios appears to be essential right now. Many desks are reporting a rise in short-term gamma risk, yet few are fully unwinding. Instead, spreads are being widened and monitored more closely. This trend shows a mix of anxiety and sensible decision-making. Create your live VT Markets account and start trading now.

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Gabriel Makhlouf, the head of the Irish central bank and a member of the ECB governing council, spoke at a conference in France. He discussed why the euro isn’t ready to replace the US dollar as the world’s main reserve currency. The problem lies in Europe’s incomplete economic and financial integration. Makhlouf pointed out that the eurozone does not have a single fiscal structure or a safe asset like US Treasuries. He mentioned that recent gains in the euro compared to the dollar are more about concerns over U.S. governance than any shift in currency dominance. He urged the European Union to take advantage of current global uncertainties to strengthen its internal market. He also suggested enhancing collective financing and increasing strategic independence within the EU. In short, Makhlouf emphasizes that even though the euro may temporarily gain strength against the dollar, it does not mean it is close to overtaking the dollar as the leading reserve currency. The core issue is structural. The eurozone is still divided in significant ways, such as lacking a unified budget across member countries and a shared government bond that serves the same purpose as US Treasuries. Because of this, large institutions—like foreign central banks or sovereign wealth funds—have little incentive to shift away from dollar-denominated assets for a long time. This observation is crucial. Currency fluctuations can lead to quick changes in various derivatives like options and futures. However, here we have a senior policymaker cautioning against getting too excited about temporary euro gains. The euro might be rising now, but this is partly due to worries about American governance, not a sign of European strength. This situation also implies that the current ups and downs in euro-related contracts might not truly represent structural changes; rather, they may be driven by events and not by lasting shifts in capital flows. This perspective should guide how we manage exposure in the coming weeks. Risking too much based solely on euro appreciation overlooks ongoing uncertainties. Makhlouf also highlights what Europe should do in the current situation. He argues that policymakers should view instability in other areas as an opportunity to strengthen Europe. This means enhancing financial integration within the bloc and rethinking how Europe’s capital resources are pooled and utilized. He advocates for greater independence in economic strategy, reducing dependence on external partners for supply chains and financial systems. From a positioning standpoint, these ideas won’t have immediate effects. However, they will influence the future currency risk environment. If Europe moves toward stronger fiscal coordination or common borrowing instruments, we can expect longer-term volatility and rate products to adjust accordingly. For now, the FX market seems to respond to external events rather than underlying policy fundamentals. At this moment, positioning should be based on observable trends rather than speculation. Keep exposure durations brief and focus risk strategies on known short-term catalysts. Even if the euro continues to rise, it’s essential to look deeper; this uptick is not driven by robust demand but by waning confidence in other areas.

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