SignalPlus Macro Analysis Special Edition: Red Light, Green Light

After a whole week of intense geopolitical offensives by the United States against other countries, the market finally welcomed a good ending. President Trump seems to have made significant concessions, announcing that smartphones, computers, and other electronic devices will be excluded from reciprocal tariffs. The U.S. Customs and Border Protection also stated that these goods will be excluded from the 10% global tariff imposed on most countries.

The Chinese government responded positively, stating that this move is "a small step towards correcting Washington's erroneous actions and canceling the remaining tariffs."

Risk assets reacted enthusiastically, with the Nasdaq index rising by 1.5%, and the Chinese stock market soaring over 3% in early Asian trading. Even though Commerce Secretary Lutnick and the Trump administration later retracted some statements, it did not dampen risk appetite, as investors cautiously anticipated that the worst of the tariff storm had temporarily passed.

Despite a decent rebound in risk markets, U.S. assets have already suffered significant impacts throughout the tariff storm, with the dollar dropping about 3% last week and the 10-year Treasury yield soaring nearly 60 basis points. According to a report from Citigroup, there have been about 13 similar instances in history where the dollar depreciated over 2% while the 10-year yield rose over 30 basis points, including the stagflation crisis of the late 1970s, the Volcker shock of the early 1980s, and the Eurozone crisis of the early 2010s. Historically, the SPX index has mostly seen double-digit rebounds afterward, but will this time be different? Only time will tell.

In the past month, the net demand for U.S. stocks from international official institutions has significantly declined, as central banks have reduced their holdings of dollar assets in response to U.S. tariff policies. However, retail investors' demand for U.S. and Chinese stocks remains robust, with investors generally in a "buying on dips" mode, which has somewhat offset the aggressive selling from hedge funds that pushed the U.S. stock market into deep oversold territory.

Aside from tariffs, the most critical issue for the stock market is whether the U.S. economy is heading towards a recession. Notable financial figures have begun to issue warnings, suggesting that the U.S. economy may fall into recession in the short term, with bets on a recession occurring in 2025 predicted at 40% to 60%. Is this merely a scare tactic by Wall Street to persuade the president to soften his trade hardline stance? Or is it a genuine concern for the economic outlook? Our view is that the distinction between the two is not particularly important, as market sentiment often shapes reality rather than the other way around.

As the U.S. earnings season gradually heats up, market focus will shift to valuations, and any consideration of reasonable valuations will ultimately depend on whether the U.S. economy falls into recession. Currently, the forward P/E ratio of the SPX is around 19 times, which is within historical ranges, but if it were to be further revised down to around 15 times, it would imply a potential further decline of 25% to 30%.

However, if the economy does indeed fall into recession and corporate earnings decline further by 15% to 20%, then the SPX valuation could drop below 4000 points, and market estimates for corporate EPS have already begun to be revised downward before the earnings season starts.

Beyond the stock market, the biggest concern in the market last week actually stemmed from the sharp sell-off in the fixed income market, which has led to questions about whether the Trump administration's aggressive measures have already harmed the status of U.S. Treasuries as a global safe-haven asset. There are concerns that foreign central banks may sell U.S. Treasuries in response to tariff issues, leading to the largest weekly increase in U.S. Treasury yields in over 20 years. It is rumored that the sell-off of U.S. Treasuries led by Japan last Wednesday was the catalyst for Trump's first concession on tariffs.

Despite various speculations and concerns about China massively selling U.S. Treasuries, we remain cautious about this claim. First, China's holdings of U.S. Treasuries have been declining over the past decade. Second, most of the recent losses have been concentrated in long-term bonds (20-30 year bonds), and in fact, central banks hold a very low proportion of these.

Regardless of who sold off first (we speculate it may be Japanese life insurance companies and pension funds), the weakening dollar and soaring 10-year Treasury yields are indeed concerning and send potential warning signals. The capital account surplus and current account deficit should complement each other, so once the latter begins to normalize, it means that fewer dollars will flow back into the debt financing market.

To make matters worse, consumer inflation expectations from the University of Michigan have surged, creating a divergence with recent fundamental data, making the situation more challenging for the Federal Reserve and bond market participants. The market has begun to question whether the Federal Reserve still has room to maintain a dovish stance in the face of inflationary pressures brought about by a new round of tariffs, and as a result, short-term interest rate pricing has risen in the past week (less likelihood of rate cuts).

This wave of market turmoil has unexpectedly made cryptocurrencies the beneficiaries, as the volatility in the stock market has surpassed that of BTC during this risk-averse sentiment. Additionally, the "beggar-thy-neighbor" tariff policies among countries have pushed spot gold to reach historic highs, and BTC has also taken the opportunity to regain its long-lost "store of value" narrative.

From a technical perspective, BTC has successfully broken through the trend line established this year and is expected to further challenge the $90,000 to $95,000 range. Moreover, this is the first time in months that memecoins and altcoins have regained momentum, with several memecoins beloved by native communities seeing increases of over 100% in the past week.

Finally, from a long-term structural fundamental perspective, the market still has reasons to believe that cryptocurrency asset prices will continue to rise. According to a report from The Wall Street Journal, Binance is actively seeking to negotiate with the U.S. government and Trump's cryptocurrency companies for a more lenient regulatory environment. Meanwhile, Bloomberg reports that expectations for perpetual contracts to be listed on U.S. exchanges are rapidly heating up, with launches expected in the coming quarters, aligning them with products offered by existing offshore platforms, significantly enhancing the leverage tools and secondary liquidity available in regulated U.S. venues, and accelerating the overall process of mainstream adoption.