Is it Liberation Day or Day of Reckoning?
Macro assets have plummeted across the board. The Nasdaq index has fallen nearly 25% from its high, the US stock market has fallen 4%, and the Chinese and Hong Kong stock markets have plunged 9% this morning. The market is showing signs of a modern version of Black Monday. The fuse of this recent wave of selling came from Chinas retaliatory measures against the United States (such as rare earth export restrictions), but it did not introduce domestic stimulus measures to hedge the impact. China announced that it would impose a 34% tariff on all US imports from April 10, and included 11 US companies in the unreliable entity list, as well as other targeted countermeasures.
Is the situation now turning into a competition of who can endure more pain without giving in first? Have all parties bet too deeply and cannot easily exit?
The US stock market is heading for its biggest loss in market value in history, with more than $5 trillion lost in the past few days and more than $10 trillion lost since Inauguration Day. There is little hiding from this turmoil, with the USDCNH (USDCNH) rising sharply as concerns about a devaluation of the Chinese yuan grow; Japanese government bond yields have fallen sharply by 20 basis points, a historic rebound; US bond market pricing has begun to reflect 4.5 rate cuts by the end of this year (despite Chairman Powell’s rebuttal to market expectations); and the market pricing also expects the European Central Bank to cut interest rates in succession.
Investors reacted as expected, selling their long positions. Wall Street reports that hedge funds are seeing the most aggressive selling and de-risking in history. According to JPMorgan Chase, U.S. retail investors sold more than $1.5 billion in net stock positions last Friday alone. From a market sentiment perspective, we may be transitioning from a stage of denial and anger to a stage of acceptance.
Funding pressure has also begun to spread. Citis key interest rate indicator is close to breaking through the SVB pre-crisis high, credit spreads have begun to widen, and Japanese and European bank stocks plummeted by more than 10% in a single day last Friday.
So what to watch in this sell-off? Our base position is that this administration is one of the most coordinated in history, and they have made it clear from the beginning that they want to reset the globalization landscape. We believe that Wall Street has been unwilling to truly face and understand the determination of the Trump administration (just like they misjudged the Feds rate hikes), and now they are finally beginning to accept this new era of bilateral relations.
“Mr. President, my philosophy is that all foreigners want to take advantage of us, so our responsibility is to take advantage of them before they do.”
-- John Connally, Nixon government finance minister, 1971. Quoted by Yanis Varoufakis.
Younger readers in the cryptocurrency world might think that this is the first time that the U.S. government has been so unreasonable and tried to intervene in the global order to seek advantages for itself, but the truth is far from that. History has repeatedly proved that the United States will not hesitate to disrupt traditional allies to expand its hegemony, or endure short-term fiscal pain for the sake of long-term economic strength.
“An orderly unwinding of the global economy was a legitimate goal in the 1980s.”
-- Paul Volcker, Chairman of the Federal Reserve during the 1982 Volcker Shock, when the Feds aggressive rate hikes led to a recession. Quote from: Yanis Varoufakis.
Do you remember how the Federal Reserve raised interest rates aggressively, dragging the world into recession and indirectly causing Japan to fall into the lost decade in the 1990s? Or do you remember that Trump expressed strong dissatisfaction with the decline of the US manufacturing industry when he published The Art of the Deal in the late 1980s?
We are a debtor nation and something is bound to happen in the next few years because you cant keep losing $200 billion (the U.S. trade deficit at the time) forever.
Donald Trump said on The Oprah Winfrey Show in April 1988.
We firmly believe that the Trump administration is very serious about this reset, and the so-called Trump put option has never been targeted at the stock market, but placed on the US Treasury market. The first priority is to reduce the pressure on long-term yields through economic slowdown and DOGE spending to reduce the debt refinancing burden of the US government. With the Fed not yet clearly turning dovish, the 10-year US Treasury yield has fallen by more than 80 basis points. So far, everything has gone according to the script.
With U.S. financing conditions under control, the administration can now engage in more aggressive geopolitical maneuvers to weaken the dollar and buy time to start the long process of repatriating some manufacturing to the United States.
At this stage, the plan is in the so-called deterrence phase. The focus is not on the actual size of the trade deficit, but on Trumps use of tariffs to force countries to return to the negotiating table one by one. We have already seen Vietnam, South Korea and Japan seeking new bilateral trade arrangements with the Trump administration, and Trump is confident in his ability to gain structural advantages in one-on-one negotiations.
This has never been about the trade deficit. Everyone knows that the United States cannot reshoring tomorrow (or perhaps ever), but the real core of all this is to re-negotiate more favorable terms in a new global order.
At the same time, the economic impact on trading partners will force the central banks of these countries to devalue their currencies or implement loose policies to support their economies, thereby easing the inflationary pressure on import prices in the U.S. As a condition for lifting tariffs, we expect the U.S. to require that important key components must be manufactured in the United States, that allies must purchase more U.S. military exports, or that they increase their allocation to long-term U.S. Treasuries as bargaining chips in negotiations.
For unfriendly trading partners, these tariffs can create additional revenue for the U.S. Treasury, further providing the U.S. with greater fiscal flexibility to maintain its tough negotiating stance.
Of course, all this is not without risk. The current administration is effectively betting that they can make the dollar weaker as financing costs fall, and strike a balance between a slowing economy and manageable stagflation without losing the dollars global dominance. There will be economic pain, but this is a gamble that will bring structural advantages to the United States over an 18-24 month time horizon. Unexpected retaliation from trading partners will also pose additional risks to this strategic framework.
This uncertainty is extremely challenging for the market.
Given the above risk combination, the Fed is unlikely to make aggressive rate cuts or implement a new round of quantitative easing unless these policies are consistent with the strategic actions and timing of the executive branch, and this policy interdependence is the reality we are in. Therefore, all signs show that the macro market has now entered a bear market mode, selling highs, and investors will be forced to accept this new pattern and long-term layout under the policy orientation. This is actually exactly the same as the strategy of other countries advocating short-term hardship in exchange for long-term benefits. The road ahead is destined to be difficult.
What about cryptocurrencies? For a brief moment, BTC seemed to be decoupled from the global market sell-off. On Friday, BTC was able to hold the key level of $81k as global stock markets plunged, but this decoupling only stopped there.
Cryptocurrency prices eventually catch up and return to the rhythm of the stock market. BTC fell below the $80k support level, down about 9% for the week, closing at $75k, while ETH collapsed by 18%. Low market liquidity on Sunday triggered a wave of liquidations, and any hope for BTCs value storage narrative had to be put on hold.
From a long-term perspective, technical charts may show that BTC has already broken through relative to global stock markets, and may even have room to catch up with spot gold performance, but the market currently lacks obvious catalysts, and risk management (that is, prices continue to fall) may continue to dominate the market until global markets stop collapsing, but it is not known when that will be.
The current negotiating positions of leaders of various countries have gone too far, and there is almost no room for easing. Therefore, the market can only survive on its own in uncertainty and pain, which also means that the market is likely to continue to disrupt and shake investor confidence for some time.
What if things continue to spiral out of control, and leaders of various countries continue to escalate trade conflicts, causing asset prices to become innocent victims? If things get worse, who in the market can come up with enough liquidity to save the day? Interestingly, the legend doesn’t seem to be gone yet…
This week looks like it will be very difficult. I wish all readers smooth operations, take care of your capital, and survive the fluctuations!
You can use the SignalPlus trading vane function for free at t.signalplus.com/news , which integrates market information through AI and makes market sentiment clear at a glance. If you want to receive our updates in real time, please follow our Twitter account @SignalPlusCN, or join our WeChat group (add the assistant WeChat, please delete the space between English and numbers: SignalPlus 123), Telegram group and Discord community to communicate and interact with more friends.
SignalPlus Official Website: https://www.signalplus.com
