US equity markets gave back some of its recent gains (SPX -1.3%, Nasdaq -2.3% on Friday) on the back of extreme long positioning and worries over the continued climb in yield (10y nominals ~4.45%, real yields >2.15%). Furthermore, a late-week appearance by Chairman Powell suggested that the Fed is looking to slow down the pace rate cuts given the underlying strength in the economy, causing December rate-cut odds to drop to just 61%, versus a peak of nearly 2-cuts priced in during September.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said at a talk in Dallas on Thursday. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” — Jerome Powell
Prior to Friday’s large equity sell-off, the post-Trump window saw equity VIX fall from 23 down to 14, a nearly 40% drop over 2 weeks, a 99% percentile vol crush as reported by Citi. While the speed & pace of market moves continue to move faster and faster as seen in the historic equity and crypto (memecoin) rallies, though we feel that the easy part of the trade is over and markets are going to be in much choppier waters going forward from here.
With President Biden explicitly looking to seek a ‘smooth transitiion’ with Trump, policies have now replaced elections as the major risk and focus on the market, with the market eyeing the President-elect’s cabinent selection like a professional sports draft. A number of key positions have already been filled, with a particularly ‘hawkish’ tilt, in particular on trade, big pharma, and national intelligence. One of the key remaining picks to be filled is the Treasury position, where we are seeing split support from the incoming Republican base on Mr. Scott Bessent (long time investor & Soros partner) and Mr. Lutnick (CEO of brokerage firm Cantor Fitzgerald).
While the Mr. Bessent is seen as a ‘safe’ pair of hands with tremendous capital markets experience, the latter’s close relationship with Tether as one of their asset custodians is seens as a particularly interesting selection for the crypto community. Nevertheless, both candidates are generally seen as ‘pro-crypto’ as the industry continues to see headwinds with senior political supporters and a longer-term push of Bitcoin as a reserve asset class.
In the same vein, while the market is understandably excited about the market impacts from Trump’s upcoming initiatives, not all policies are created equal and there will be various nuances to enact them even with a Republican controlled congress.
1. Currently, we are in the ‘easy’ stage where markets are rallying purely on hope and expectations, where investors are looking forward to the positive impacts of stimulus promises with a dovish Fed, while avoiding the negative fallouts of tariffs and tighter immigration in the meantime. Basically, the ‘having your cake and eating it’ scenario, hence the dramatic risk rally.
2. Next, the President-Elect’s easiest actions will be on the deregulation side, where he will be able to enact a number of changes via executive action alone, such as on the various energy projects and Paris Climate accords. Banking & crypto deregulation will technically fall here as well, though the latter will likely take sometime and will require more clarity on crypto regulators to sustain the current bull market.
3. The next steps will be more controversial and will deal with the thorny issues of immigration and tariffs. On the immigration side, tighter border controls and mass deportations will see bitter media and court challenges, but it is something that the Trump administration will likely push through as a cornerstone campaign policy. Deportations will likely lead to lower labour supply, particularly in blue collar roles, and could have an unwelcome impact on inflation that would make the Fed’s job a lot more difficult in the latter half of 2025.
4. On the tariffs side, markets expect to see a lot of hard hitting headlines as early as Q1, where Trump has the benefit of experience from his 1st term, with China likely to be the main target following the completion of the Section 301 review. A broader tariff against Europe and other trade partners will require congressional support and will likely require a reconciliation package from Trump as incentives. Timing will likely be towards Q2 and the negative impacts of cost-push inflation will be felt starting in 2H2025.
5. Finally, the fiscal spending bazooka will actually be the most difficult initiative for Trump to implement, given the realities of the skyrocketing US debt balance and the recent focus on government efficiency & cost-cutting from the newly formed ‘DOGE’ department. A big govt spending holiday would fly in the face of this fiscal discipline, and any tax cuts jump in spending plans would need to be carefully consulted with the treasury and negotiated with congress as part of another tricky reconciliation bill. We would expect to see some eventual market disappointment on this front.
Crypto has by far been the hottest asset class following Trump’s election, with BTC rocketing to record highs above $90k and outpacing even its levered Nasdaq brethren. Gains have been led primarily in the US hours as mainstream participation has been increasing from the US, with spot ETF seeing dramatic inflows with BTC gaining +1.7B, and ETH adding +500M on a weekly basis.
Another positive sign of mainstream participation is seen in the continued rise in stablecoin marketcap, where the total market cap has breached $160B and approaching the ATHs in 2022. Stablecoin is an important gateway for mainstream adoption as almost all on-ramp activities are probably done via fiat-to-stables as the first step. Furthermore, stablecoin supply has been largely growing in line with the pace of M2, which bodes well in the long-run if the US government were to return to net expansionary money supply policies.
Overall, as similar to the policy views above, we feel that the ‘easy’ part of the rally has been done and the next stage will be much trickier with more price choppiness and potential for drawdowns. Despite the resurgence of memecoin mania ($PNUT!) and some signs of life in ETH, Bitcoin dominance remains on a one-way trend higher reminisence of the mega-cap dominance in SPX, and is not particularly desirable for this stage of the crypto ecosystem. Nevertheless, we’ll be on the look-out for a potential blow-off top in the near term with market sentiment at highly frothy levels. Be sure to manage your leverage well and be wary of more choppiness ahead!
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