SignalPlus Macro Analysis Special Edition: He Said..., Xi Said

The United States continues to engage in tariff edge policy confrontations globally. Trump recently claimed to have conducted "over 200" trade negotiations and stated that he had a recent call with China. However, this claim was quickly refuted by the Chinese Embassy in Washington, which stated that "there have been no consultations or negotiations on tariff issues between China and the U.S." and emphasized that "the U.S. should stop creating confusion."

Political analysts believe that low-level communications may continue, but whether any substantial agreements can be reached is questionable. The currently effective trade embargo has already dragged down economic growth in the first half of the year, and we do not expect any clear solutions to emerge from U.S.-China trade negotiations in the foreseeable future.

The market has stabilized in the absence of further negative news, with U.S. stocks recording the second-largest weekly gain of the year last week, and most non-U.S. dollar macro assets have recovered most of their losses since "Liberation Day."

Volatility and credit spreads have also shown a similar recovery, with expensive tail hedges expiring one after another, and the worst-case scenario (at least for now) has not yet occurred. We expect that risk markets may first rise further to "illogical" levels before entering a more pronounced bear market phase in the second half of this year.

As countries cut their dependencies on each other's supply chains, the breakdown of trade relations and the damage to economic growth are indeed present. If the U.S. current account deficit begins to reverse in the coming years, global portfolios will also reassess their reliance on the dollar.

Interestingly, historical models suggest that the current credit spread pricing implies only about a 20% chance of a U.S. economic recession, while the weak performance of small-cap stocks reflects about a 70% chance of recession. Meanwhile, U.S. Treasuries and the SPX index essentially show a "fifty-fifty" split, with different assets providing different answers.

At present, the market is gradually returning to normal, with U.S. Treasuries experiencing the largest four-week inflow of funds in nearly two years, as investors are buying bonds heavily before the economy is set to slow down and amid ongoing cooling inflation pressures.

As our long-term readers know, concerns about an imminent collapse of U.S. Treasuries are always greatly exaggerated. In fact, the amount of U.S. Treasuries held by the private sector continues to increase in 2024, offsetting the impact of official (central bank) reductions, and the level held by non-U.S. investors remains relatively high.

The latest weekly official activity data shows that there has been no large-scale selling of U.S. Treasuries, even amid market concerns, and Japan's cumulative bond purchases remain stable.

On the other hand, as market risk sentiment improves, the gold market saw the largest single-day outflow of funds in over 14 years last Tuesday, with traders reporting net sales exceeding $1.3 billion on that day.

Similarly, the U.S. dollar index has performed poorly in the first 100 days of the current president's term, experiencing the worst start in history, with a decline of over 10% against major currencies, even worse than during the collapse of the Bretton Woods system in 1973.

To make matters worse, even if oil prices reach $80 per barrel, Saudi Arabia's financial situation may shift from being a lender to a borrower, causing one of the world's largest sources of surplus capital to disappear, raising concerns about how the U.S.'s massive debt will continue to receive funding support in the future.

Bitcoin has become a major beneficiary in the context of a weak dollar, outperforming the Nasdaq index and gold in April, achieving one of its best weekly performances since Trump's election.

The narrative of BTC as an alternative safe-haven asset continues to grow, as evidenced by its steadily rising dominance since 2023, reflecting a complete shift in investment narratives rather than merely being driven by market FOMO.

As market risk sentiment improves, ETF inflows have also shown signs of recovery, recording net inflows for six consecutive trading days, bouncing back from the sluggishness of the first quarter, with prices breaking through the downward trend line near 88k.

Recently, there has been a popular narrative in the market suggesting that BTC is about to rise due to a delayed response to the increase in M2 money supply. Although we do not fully agree with this view, as there are more complex details behind the data, we remain optimistic about BTC's medium-term trend, expecting monetary and fiscal policies to loosen in response to the economic slowdown caused by tariffs.

At the same time, we also expect a return of FOMO behavior, but it may not necessarily appear in the native DeFi space. Recently, the Bitcoin SPAC in collaboration with Cantor, SoftBank, and Tether has attracted significant attention from traditional finance investors.

It is important to note that FOMO sentiment is more likely to flow back from the traditional finance market to the cryptocurrency market, rather than the other way around. As products linked to cryptocurrencies become increasingly popular on traditional trading platforms, future market trends may be driven by mainstream investor behavior.

Looking ahead to this week, the U.S. and Europe will release the latest GDP data, and other inflation indicators will also be released in Europe. The U.S. non-farm payroll report is scheduled for release on Friday. The Bank of Japan is expected to maintain interest rates at 0.5% during its meeting on Thursday, while the Federal Reserve has entered its blackout period ahead of the May 7 meeting.

In the stock market, more than half of the Mag-7 members (Microsoft, Meta, Amazon, Apple) will report earnings this week, and corporate EPS forecasts have been significantly downgraded.

This week, the market is expected to focus on economic data and corporate earnings reports, ignoring trade-related noise. Wishing everyone successful trading!