Bitcoin Drops Below $78K as Recession Risks Surge—Is This the Pullback Investors Were Waiting For?
Digital Asset Market: Bitcoin's price fell below $78,000 on Monday due to ongoing selling pressure in the broader markets on tariff-driven recession concerns, reaching its lowest level since November. The decline also affected crypto-related companies, with Coinbase, Robinhood, and Strategy (formerly MicroStrategy) experiencing significant drops. Bitcoin exchange-traded funds saw their fourth consecutive week of outflows, totaling $4.75 billion. President Trump's recent executive order on a U.S. bitcoin reserve and increased macro uncertainty have contributed to the downturn. Despite this, investor optimism remains, with a shift in popular Bitcoin options bets from $120,000 to $100,000, reflecting a reassessment of bullish expectations. The $100,000 call holds the highest notional open interest at $1.55 billion, indicating ongoing bullish sentiment for the year driven by regulatory tailwinds.
Macro Economics: President Donald Trump announced an increase in tariffs on Canadian steel and aluminum imports to 50% in response to Ontario's decision to impose a 25% tax on electricity exports to the U.S. This move by Ontario's Premier Doug Ford was initially a reaction to Trump's earlier 25% tariffs on Canadian imports. The tariffs have negatively impacted financial markets, with major indices falling. Ford stated he would maintain Ontario's tax and warned of the potential to cut energy supplies to the U.S. Trump has also demanded that Canada remove tariffs on U.S. dairy and threatened to increase tariffs on Canadian auto imports. Additionally, Trump reiterated his desire for Canada to join the U.S. as the "Fifty First State," suggesting it would eliminate trade issues. Former Canadian Prime Minister Justin Trudeau criticized Trump's actions, suggesting they aim to weaken Canada for easier annexation. The situation has heightened tensions between the U.S. and Canada.
Equities: The stock market stays under pressure with major indices down after President Donald Trump announced a 50% tariff increase on Canadian steel and aluminum, alongside threats to increase duties on Canadian car imports, warning that these tariffs could severely impact Canada's automobile manufacturing sector. The Nasdaq Composite fell by approximately 0.3%, while the S&P 500 and Dow Jones Industrial Average also experienced declines of about 0.8% and 1.2%, respectively, with Verizon shares dropping around 7%. Following a significant sell-off on Monday, which led to the Nasdaq's worst daily loss since 2022, the broader market outlook remains clouded with fears of stagflation. Notably, highfliers, including Netflix, AMD, Micron, Dell, and Palantir, have been affected, experiencing a decline amid the latest market turmoil, indicating a widespread retreat from equities. Investors are now closely monitoring upcoming inflation indicators, focusing on February's CPI and PPI reports.
The Fed and US Treasury: U.S. Treasury yields remained relatively stable on Tuesday amid ongoing concerns about the U.S. economy's health. The benchmark 10-year Treasury yield saw a minor increase, while the 2-year yield remained flat. Investors are worried about a potential recession following comments by President Donald Trump, who mentioned the economy's "transition" phase amid his tariff policies and possible GDP contraction. Treasury Secretary Scott Bessent hinted at a "detox period" due to federal spending cuts, with investment strategist Ross Mayfield suggesting the possibility of an economic slowdown rather than a full-blown recession. Key economic indicators, such as the consumer price index and producer price index reports, are expected later this week, with a particular focus on inflation rates and the Federal Reserve’s capacity to adjust rates to stimulate demand if necessary.
Geopolitical: President Trump is considering visiting China as early as next month, focusing on negotiating a trade deal with President Xi Jinping. Discussions are ongoing for a potential April trip and a "birthday summit" in June, as both leaders share similar birthdays. These discussions occur amid increasing trade tensions, with the Trump administration imposing tariffs on China and considering further trade measures to leverage negotiations. Despite the tensions, Trump believes in his rapport with Xi to mitigate trade shocks. China, experiencing economic pressure and deflation, seeks negotiation to deter further American tariffs while projecting economic resilience with a steady growth target. China retaliated to recent tariffs with measured responses, avoiding escalation. Other actions being considered by Trump’s trade team include restricting Chinese investment in the U.S. and U.S. investment in China; targeting industries dominated by China, such as shipbuilding; and further limiting the sale of high-tech products to Chinese companies
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The President’s executive order to establish a Bitcoin strategic reserve, sourced from criminal and civil forfeitures rather than market purchases, has been met with mixed reactions. While many view this as disappointing, the long-term implications could be more positive. Bitcoin’s value should ultimately stand on its own merit rather than being influenced by government reserves. However, establishing a strategic reserve could push institutional investors to take crypto more seriously, potentially improving liquidity and stabilizing the market. Near-term expectations for Bitcoin prices have already adjusted downward by approximately $20,000 compared to a month ago. Still, in the long run, this decision reinforces Bitcoin’s legitimacy as a reserve asset. Investors anticipating a post-election pullback may find their opportunity now.
At the same time, Trump’s erratic approach to tariffs—particularly his shifting stance on Mexico and Canada—suggests a potential restructuring of USMCA agreements. If this is indeed the case, clear communication would be far more effective than leaving traders and international partners to decipher policy shifts. Markets crave stability, and ambiguous trade policies only serve to increase volatility. A more transparent approach could mitigate equity market swings and contribute to rising Treasury yields—an essential factor as the U.S. Treasury is set to roll over $7 trillion in debt over the next six months. Bessent faces a tricky balancing act: securing lower refinancing rates without destabilizing equities. Given recent actions, it appears the administration is prioritizing Treasury yields over equity returns, signaling where their true priorities lie.
More broadly, Trump’s economic policies are driving up the probability of a recession, largely due to their unpredictability. There is little discernible strategy beyond a pattern of economic brinkmanship, which may have worked in isolated instances—such as with Colombia—but is unlikely to succeed with major economies like the EU, China, and Canada. Retaliatory tariffs and aggressive trade threats have diminishing returns and could backfire on the U.S. economy just as much as on its trading partners. If the goal with China is to carve out investment advantages for firms like BlackRock and KKR while using tariffs as leverage, there is at least some strategic logic. However, the approach appears chaotic at best when it comes to Mexico and Canada. Without a coherent long-term trade strategy, global economic stability and U.S. growth risks continue to mount.
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