FAFO -- Geopolitics

For readers unfamiliar with the term, "FAFO" stands for "F--- around and find out," which may be the most fitting description of the current global situation.

President Trump's second term has begun tumultuously, perhaps even beyond the expectations of his most loyal supporters. Investor sentiment is influenced by his extreme tariff and military negotiation strategies with former and current U.S. allies, leading to continued volatility in U.S. asset markets. Wall Street is starting to accept reality as the government attempts to re-privatize some major sectors of the economy, and an economic slowdown may be on the horizon.

From the major news headlines of the past week, Trump's actions in geopolitics remain quite chaotic:

Trump cuts tariffs on Canada and Mexico -- WSJ

Trump's erratic tariff policy confuses markets -- Bloomberg

China imposes retaliatory tariffs on Canadian canola oil and pork -- Bloomberg

Fed Chair Powell states there is no rush to adjust interest rates -- Bloomberg

While markets are typically good at ignoring bad news, they are not adept at handling uncertainty. Wall Street has begun to struggle with the Trump administration's inconsistent policy statements and is actively seeking relief.

FAFO -- Stock Market

Since hitting a year-to-date high in mid-February, the MSCI World Index has fallen by 4.6%, and the SPX has dropped over 6%, currently approaching the 200-day moving average that has been maintained since the end of 2023. The tech-heavy Nasdaq index has declined nearly 10%, with Nvidia down almost 20%, while emerging market stocks have significantly outperformed U.S. stocks, achieving the largest advantage in a decade. Does this mean that the exceptional performance of the U.S. market is about to end?

We discussed the often-misunderstood "Trump put" in detail last week, and recently Trump reiterated this point, claiming he is "not paying attention to the market at all" and attributing the recent downturn to jealous "globalists."

"I think this is caused by those globalists who see America getting rich and don’t like it."

"This has nothing to do with the market; I’m not paying attention to the market at all," President Trump stated. -- CNBC

In response, U.S. investors quickly withdrew from crowded momentum trades, leading to widespread liquidations and systematic strategies de-leveraging, triggering a rapid factor collapse. The dispersion of stock returns has surged to its highest level since the pandemic, while cross-asset portfolios have suffered their largest losses since 2023 due to slowing economic growth, tariff uncertainty, and significant shifts in European fiscal policy.

FAFO -- U.S. Economy

Beyond capital markets, investors are now realizing that the Trump administration is attempting some unconventional adjustments to the U.S. economy. The impacts of increased tariffs, tightened immigration policies, and DOGE cuts to government spending have surpassed the positive effects of tax cuts and deregulation. As economic growth forecasts continue to be downgraded, the market consensus is gradually shifting to believe that the government will only begin to implement more growth-stimulating policies after the midterm elections in 2026, while currently enduring short-term pain and waiting for these radical policies to take effect.

The trajectory of the economic slowdown has already begun to reflect in recent data. Last Friday's non-farm payroll report revealed clear signs of weakness, with the underemployment rate surging to a five-year high, exacerbating market fears of a recession, and rate cut expectations being brought forward to this summer, leading to further declines in U.S. Treasury yields.

Despite Chair Powell's attempts to project confidence at last Friday's Chicago Monetary Forum:

*POWELL: The Fed doesn't need to rush; we can wait for more clear signals

*POWELL: Despite uncertainties, the U.S. economy is still in good shape

*POWELL: Tariffs are pushing up short-term inflation expectations

--Bloomberg

Treasury Secretary Bessent, however, took a completely different tone, bluntly stating that the economy currently being managed by the government is beginning to cool down and warning: "As we shift from public spending to private spending, the market will experience a natural adjustment."

If that wasn't clear enough, he further added:

"The market and the economy have become accustomed to the government's massive spending, but now must go through a detox period." -- CNBC

Regarding the "Trump put," Bessent firmly stated:

"There is no put," he said. "If we have good policies, the market will naturally rise."

"This is a necessary course correction," Bessent said of Trump's economic policies, "We will see if there is pain," "I believe that if we set the right policies, this will be a very smooth transition." -- CNBC

Essentially, the government claims they are adjusting the economy away from the model of the Democratic era, and this process will bring pain, so the market should be prepared.

FAFO -- European Rearmament

The Trump administration's stance on the Russia-Ukraine conflict has shifted, suspending military aid, leading to a change in Europe's attitude towards defense and fiscal spending. Investors are shocked by Europe's rearmament plans and fiscal spending proposals, with European and German bonds experiencing the most severe sell-off since the euro's inception, and German government bond yields rising by 30 basis points in a single day, breaking previous records.

The EU's rearmament plan is expected to invest €800 billion in European defense over the next few years, with €650 billion borne by individual member states. Following the announcement, Germany further declared a significant shift in its fiscal policy, including the establishment of a €500 billion special fund for infrastructure spending over the next decade, exempting defense spending from the GDP limit of 1%, and other measures to raise the debt ceiling in the coming years.

As for the impact of Germany's rearmament on the European continent? This is a highly sensitive topic, and we won't delve into it further. However, bond issuance and supply will certainly increase.

FAFO -- Cryptocurrency Strategic Reserves

Cryptocurrency assets experienced a tumultuous week, ultimately ending in disappointment. The previous statements regarding cryptocurrency strategic reserves and the highly anticipated White House cryptocurrency summit did not yield any substantial purchasing plans.

In simple terms, the "Strategic Bitcoin Reserve" merely counts the BTC seized by the government as reserves without directly selling them on the market. This is akin to viewing "slower weight gain" as "successful weight loss," which is far from the bullish news the cryptocurrency market was hoping for.

"The capital for the Strategic Bitcoin Reserve will come from BTC obtained by the U.S. government through criminal or civil asset forfeiture." -- David Sachs via X

The government is trying to retain a glimmer of hope for the market, suggesting that there may still be future purchases of Bitcoin (and other tokens), but market confidence has already been shaken. From a legislative perspective, pushing for any additional cryptocurrency purchases still faces extremely complex procedures and obstacles, which is not something the current government is capable of advancing.

The U.S. Department of Commerce and the Treasury Secretary "are authorized to develop a budget-neutral strategy to acquire additional Bitcoin, provided that the strategy does not impose additional costs on U.S. taxpayers." - White House Additionally, this executive order establishes a "U.S. Digital Asset Stockpile," consisting of digital assets obtained by the government through criminal or civil asset forfeiture, aside from Bitcoin.

The primary purpose of the reserves is to ensure responsible management of the digital assets held by the Treasury. -- David Sacks via X

A series of unfortunate events has dampened the sentiment across the entire ecosystem, with token prices dropping 10-20% last week. From a technical perspective, price movements have turned very negative, and the increase in actual volatility has further worsened the risk-adjusted BTC return metrics, with almost no short-term bullish factors in the market to support a price rebound.

At the same time, due to widespread liquidations in the overall risk market, retail investors are beginning to reduce their risk exposure, and the fund flows into BTC ETFs are expected to remain weak.

As the strategic reserve topic comes to a close, the Trump administration is now shifting its focus to rebuilding the digital dollar (Digital USD) and institutional dominance through stablecoin policies.

"I want to express strong support for the efforts of congressional legislators who are drafting legislation to provide regulatory certainty for dollar stablecoins and the digital asset market. They are putting in tremendous effort," Trump stated at a cryptocurrency executive meeting at the White House.

"We will ensure the global reserve currency dominance of the dollar through stablecoins," Bessent stated. -- CNBC

FAFO -- U.S. Government Shutdown Crisis?

So, what can we expect next? Can we catch a breath and escape this FAFO situation?

Risk assets should be nearing conditions for a short-term rebound, as the Fear & Greed Index of the stock market has fallen to extreme lows, and most U.S. stock indices are showing signs of technical overselling.

Additionally, some creative market analysts have compared the launch of ChatGPT to the birth of the Netscape browser, suggesting that the former has driven the popularity of AI and LLMs, with both having similarly profound impacts.

We don't have strong opinions on this analogy, but this method of data analysis is indeed quite interesting.

Moreover, as U.S. Treasury yields retreat, the financial situation remains quite loose. If it weren't for the market's significant concerns about the impending economic slowdown, this would typically be favorable for cryptocurrencies, gold, and risk assets.

So, is it time to buy the dip? Will the Trump administration temporarily pause and refrain from making shocking statements?

Unfortunately, the market is about to face the U.S. Congress's debt ceiling deadlock, and considering the White House's recent extreme decision-making style, this negotiation is likely to encounter even higher uncertainty. Will it really lead to a temporary government shutdown due to posturing at the negotiation table by both parties? Or will it reach an agreement after repeated tug-of-war like the U.S.-Canada/U.S.-Mexico tariff issues?

From a rational perspective, it shouldn't escalate into a full-blown crisis. The market may consider tentatively re-establishing risk positions in the short term… but who can be completely certain? This may be the ultimate FAFO.

Wishing everyone successful trading this week!