Long positions are at extreme levels, coupled with market concerns about the continued rise in yields (the 10-year nominal yield is around 4.45%, and the real yield is >2.15%), the US stock market has given back some of its recent gains (SPX -1.3%, Nasdaq -2.3% last Friday). In addition, Chairman Powell said in his speech last week that, given the strong economic conditions, the Fed is considering slowing the pace of rate cuts, causing the market's pricing of a rate cut in December to drop from the September high of nearly 2 percentage points to only 61%.
"The current economic situation does not signal any urgent need for a rate cut," Powell said in a speech in Dallas on Thursday, "The strong performance of the current economy allows us to make decisions more cautiously."-- Jerome Powell
Before the sharp sell-off in the stock market last Friday, the stock market volatility index (VIX) had fallen from 23 to 14 after the election, a nearly 40% plunge in two weeks, although the market trend has become increasingly rapid as we have seen in the stock and Bit market (memecoin) rebound, we believe the "easy part" of the trade is over, and the market will face more volatility and challenges going forward.
President Biden and Trump have clearly promised a smooth transition of power, and the market's focus has now shifted from the election to policy, with the market closely watching the composition of the upcoming cabinet, with several key positions already clear, particularly more hawkish on trade and national security, one of the remaining key positions is the Treasury Secretary, with the current frontrunners being Scott Bessent (a long-term investor and partner of Soros) and Howard Lutnick (CEO of Cantor Fitzgerald).
Bessent is seen as the "safe bet" with rich capital market experience, but Lutnick's company is one of the Tether custodians, so he is of particular interest to the Bit community, and whichever one joins the cabinet, both candidates are seen as "Bit-friendly", giving the Bit industry a chance to continue to receive political support and drive the long-term development of Bit as a reserve asset.
In terms of policy, while the market is excited about the various initiatives that Trump is about to launch, not all policies will have the same impact, and even with a Republican-controlled Congress, implementing policies will still require resolving many details.
1. We are currently in a relatively relaxed stage, with the market rebounding purely on hope and expectation, investors are optimistic about the positive impact of the stimulus plan, while temporarily ignoring the negative impact of tighter tariff and immigration policies. Basically, this is an ideal scenario where both sides win, so risk assets have risen sharply.
2. Next, the easiest actions for the incoming president to take will be to relax regulations, which can be implemented directly through executive orders, such as various energy projects and withdrawal from the Paris climate agreement. Basically, relaxation of regulations on banks and Bit also falls into this category, but 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 deportation will face fierce challenges from the media and the courts, but the Trump administration may push it as a core campaign policy. These measures could lead to a reduction in the labor supply, especially in blue-collar jobs, further exacerbating inflation and making the Fed's job more difficult in the second half of 2025.
4. On tariffs, the market expects a lot of major news as early as the first quarter, with Trump, based on his previous term's experience, likely to target China as the main focus. Broader tariff measures against Europe and other trading partners may require Congressional support and Trump may need to offer a reconciliation proposal as an incentive, which could be delayed until the second quarter, and the negative impact of rising costs on inflation is expected to start to emerge in the second half of 2025.
5. Finally, given the ever-increasing US debt balance and the new "Doge" department's focus on government efficiency and cost reduction, large-scale fiscal spending plans will be the most difficult for the Trump administration to implement, any tax cuts and spending plans will require negotiation with the Treasury Department and Congress, and the market is ultimately expected to be disappointed in this area.
After Trump's election, Bit has been the hottest asset class, with BTC breaking $90,000, even outperforming the leveraged Nasdaq index. The BTC rally has been mainly driven by the US trading session, with increasing mainstream participation in the US, with significant inflows into spot ETFs, with $1.7 billion flowing into BTC ETFs and $500 million into ETH ETFs last week.
Another positive sign of mainstream participation is the continued growth in stablecoin market capitalization, which has surpassed $160 billion, approaching the 2022 all-time high. Stablecoins are an important indicator of mainstream participation, as almost all on-chain activity starts with converting fiat to stablecoins, and the stablecoin supply growth is roughly in sync with M2, which, if the US government returns to an expansionary monetary supply policy, is a good sign for the market in the long run.
Overall, we believe the "easy" part of the market rebound is over, and the next stage will be more challenging, with more volatile prices and potential pullbacks. Also, while the meme coin frenzy has resurfaced and ETH has shown some signs of life, BTC's dominance continues to rise unilaterally, similar to the large-cap dominance in the SPX index, which is not particularly ideal for the current Bit ecosystem. Nevertheless, as the market sentiment reaches a highly excited level, we will closely monitor the possibility of a short-term market top and pullback, please be sure to do a good job of risk management and be alert to more volatility in the future!
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