Bullish positions are at extreme levels, coupled with market worries about rising yields (with the 10-year nominal yield around 4.45% and real yield > 2.15%), leading to a pullback in the U.S. stock market's recent gains (last Friday SPX -1.3%, Nasdaq -2.3%). Furthermore, Chairman Powell indicated in last week's remarks that given the strong economic conditions, the Federal Reserve is considering slowing the pace of interest rate cuts, causing the market to price the likelihood of a rate cut in December down from nearly 2% in September to only 61%.
"Currently, the economic situation has not signaled any urgent need for interest rate cuts," Powell said in a talk in Dallas on Thursday. "The strong performance of the current economy allows us to make decisions more cautiously." — Jerome Powell
Before last Friday's significant stock market sell-off, the stock market volatility index (VIX) had fallen from 23 to 14 after the election, plummeting nearly 40% within two weeks. Although market trends have become increasingly rapid as seen in the rebounds of both the stock market and cryptocurrencies (memecoins), we believe the 'easy part' of trading has ended, and the market will face more volatility and challenges in the future.
President Biden and Trump have explicitly committed to a smooth transition of power, and the market's focus has shifted from the election to policy. The market is closely watching the upcoming cabinet layout, with several key positions already becoming clear, particularly those leaning hawkish on trade and national security. One of the remaining key positions is the Treasury Secretary, with current leading candidates being Scott Bessent (long-term investor and partner of Soros) and Howard Lutnick (CEO of Cantor Fitzgerald).
Bessent is seen as a 'safe choice' with extensive experience in capital markets, but Lutnick's company is one of the custodians of Tether, making him particularly noteworthy in the cryptocurrency community. Regardless of who enters the cabinet, both candidates are viewed as 'supporters of cryptocurrency', and the cryptocurrency industry has the opportunity to continue receiving political support and promote Bitcoin's long-term development as a reserve asset.
In terms of policy, although the market is excited about the various measures Trump is expected to introduce, not all policies will have the same impact, and even with the Republican control of Congress, implementing policies will still require resolving many detailed issues.
1. Currently, we are in a relatively easy phase, with the market rebounding purely out of hope and expectations. Investors are optimistic about the positive impact of stimulus plans while temporarily overlooking the negative effects of tightening tariffs and immigration policies. Essentially, this is an ideal scenario of having it both ways, leading to a significant rise in risk assets.
2. Next, the most straightforward action for the incoming president will be to relax regulations, which can be directly implemented through executive orders, such as various energy projects and exiting the Paris Climate Agreement. Essentially, the relaxation of regulations for banks and cryptocurrencies also falls into this category, though the latter may take some time and require more regulatory clarity to support the current bull market.
3. Next are the more controversial issues of immigration and tariffs. On immigration policy, strengthening border control and mass deportations will likely 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, particularly in blue-collar jobs, further exacerbating inflation and making the Federal Reserve's job more difficult in the second half of 2025.
4. Regarding tariffs, the market expects significant news to emerge as early as the first quarter, with Trump possibly targeting China based on his previous term's experience. Broader tariff measures against Europe and other trading partners may require Congressional support and could necessitate Trump proposing reconciliation as motivation, potentially delaying until the second quarter, while the negative impact of rising costs on inflation is expected to start becoming evident 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, large-scale fiscal spending plans will be the most challenging measures 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 be disappointed in this regard.
Since Trump's election, cryptocurrencies have been the hottest asset class, with BTC breaking $90,000, outpacing even the leveraged Nasdaq index. The rise in BTC is primarily driven by U.S. trading hours, with mainstream participation continuously increasing, significant fund inflows into spot ETFs, and BTC ETFs seeing inflows of $1.7 billion last week, while ETH ETFs saw $500 million inflow.
Another positive sign of mainstream participation is the continued growth of the stablecoin market capitalization, which has surpassed $160 billion, approaching historical highs from 2022. Stablecoins are an important indicator of mainstream participation, as nearly all on-chain activities begin with converting fiat into stablecoins. Additionally, the supply of stablecoins has roughly increased in sync with M2. If the U.S. government returns to a net expansion monetary supply policy, it bodes well for the market in the long run.
Overall, we believe the 'easy' part of the market rebound has ended, and the next phase will be more challenging, with prices becoming more volatile and potential pullbacks. Additionally, although the memecoin frenzy has resurfaced and ETH is showing some signs of life, BTC's dominance continues to rise unidirectionally, similar to the dominance of large stocks in the SPX index, which is not particularly ideal for the current cryptocurrency ecosystem. Regardless, as market sentiment reaches a heightened level of excitement, we will closely monitor the potential for a market peak and subsequent pullback in the short term, and it's crucial to manage risks and be alert for more volatility in the future!
