Long positions are at extreme levels, coupled with market concerns about rising yields (the 10-year nominal yield is around 4.45%, real yield > 2.15%), the U.S. stock market has given back some recent gains (last Friday SPX -1.3%, Nasdaq -2.3%). Additionally, Chairman Powell stated in his talk last week that, considering the strong economic situation, the Federal Reserve is contemplating slowing down the pace of interest rate cuts, causing the market to price in the possibility of a rate cut in December dropping from nearly 2 basis points in September to just 61%.
"Currently, there are no signs in the economic situation indicating an urgent need for interest rate cuts," Powell stated during a talk in Dallas on Thursday. "The strong performance of the current economy allows us to make decisions more cautiously." -- Jerome Powell
Before the significant sell-off in the stock market last Friday, the stock market volatility index (VIX) had already fallen from 23 to 14 after the election, plummeting nearly 40% in two weeks. Although market trends are becoming increasingly rapid, as seen in the rebound of the stock market and cryptocurrencies (memecoins), we believe the 'easy part' of trading is over, and the market will face more volatility and challenges in the future.
President Biden and Trump have clearly committed to a smooth transition of power, and now the market focus has shifted from the election to policies. The market is closely watching the upcoming cabinet appointments, with several key positions already clarified, particularly leaning hawkish in trade and national security. One of the remaining key positions is Secretary of the Treasury, with current popular candidates being Scott Bessent (long-term investor and partner of Soros) and Howard Lutnick (CEO of Cantor Fitzgerald).
Bessent is considered a 'safe bet' with rich experience in capital markets, while Lutnick's company is one of the custodians of Tether, thus attracting particular attention from the cryptocurrency community. Regardless of who enters the cabinet, both candidates are seen as 'supportive of cryptocurrencies', providing the cryptocurrency industry with an opportunity for continued political support and promoting the long-term development of Bitcoin as a reserve asset.
In terms of policy, while the market is excited about the various initiatives that Trump is about to launch, not all policies will have the same impact, and even with the Republican control of Congress, implementing policies will still require addressing many details.
1. Currently, we are in a relatively relaxed phase, with the market rebounding purely out of hope and expectations. Investors are optimistic about the positive impact of stimulus plans while temporarily ignoring the negative effects of tightening tariffs and immigration policies. Essentially, this is an ideal scenario that satisfies both sides, resulting in a significant rise in risk assets.
2. Next, the most likely action for the incoming president will be deregulation, which can be directly implemented through executive orders, such as various energy projects and withdrawing from the Paris Climate Agreement. Essentially, deregulation of banks and cryptocurrencies also falls under this category, although the latter may take some time and require greater regulatory clarity to support the current bull market.
3. Next are the more controversial issues of immigration and tariffs. In terms of immigration policy, strengthening border controls and mass deportations will face severe challenges from the media and courts, but the Trump administration may push these as core campaign policies. These measures could lead to a reduction in labor supply, especially in blue-collar jobs, further exacerbating inflation, making the Federal Reserve's job more difficult in the second half of 2025.
4. In terms of tariffs, the market expects significant heavyweight news as early as the first quarter, with Trump likely targeting China based on his previous term's experience. Broader tariff measures against Europe and other trade partners may require Congressional support and could necessitate Trump proposing compromises as motivation, potentially delaying until the second quarter, while the negative impact of rising costs pushing up inflation is expected to start manifesting in the second half of 2025.
5. Finally, given the soaring U.S. debt balance and the newly established 'DOGE' department's focus on government efficiency and cost-cutting, the large-scale fiscal spending plan will be the most difficult initiative for the Trump administration to implement. Any tax cuts and spending plans will need to be negotiated with the Treasury and Congress, and the market is expected to ultimately feel disappointed in this regard.
Since Trump's election, cryptocurrencies have been the hottest asset class, with BTC breaking above $90,000, outpacing the leveraged Nasdaq index. The surge in BTC is mainly driven by U.S. trading hours, with increasing mainstream participation, leading to significant inflows into spot ETFs, with BTC ETFs seeing $1.7 billion inflow last week and ETH ETFs seeing $500 million inflow.
Another positive sign of mainstream participation is the continuous growth of the stablecoin market cap, which has surpassed $160 billion, approaching the historical high of 2022. Stablecoins are an important indicator of mainstream participation, as the first step of almost all on-chain activities is to convert fiat currency into stablecoins. Additionally, the supply of stablecoins roughly grows in sync with M2. If the U.S. government returns to a net expansionary monetary policy, it will be a good sign for the market in the long term.
Overall, we believe that the 'easy' part of the market rebound is over, and the next phase will be more challenging with increased price volatility and potential pullbacks. Additionally, although the memecoin frenzy has revived and ETH shows some signs of life, BTC's dominance continues to rise, similar to the situation with large-cap stocks dominating the SPX index, which is not particularly ideal for the current cryptocurrency ecosystem. Regardless, as market sentiment reaches a highly euphoric level, we will closely monitor potential market top pullbacks in the short term, and please ensure proper risk management, staying alert for more volatility in the future!
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