Tariffs, Tariffs as Far as the Eye Can See – Markets Brace for Impact
Digital Asset Market: Bitcoin's price surged to $92,000 after U.S. President Trump announced plans for a strategic crypto reserve but swiftly retraced to $83,500, filling a significant CME futures gap from Friday's close of $84,500. This movement led to over $900 million in bullish futures bets being liquidated in the past 24 hours, totaling over $1.5 billion in losses over three days. Liquidations occur when exchanges close leveraged trades due to insufficient margins. Despite filling the gap, bearish pressures persist, with another CME gap under $80,000 now in focus. Since bitcoin futures began in 2017, all but one of 80 CME gaps have eventually been filled. Macroeconomic concerns, including slower U.S. growth and potential higher inflation, add to the uncertain outlook.
Strategic Crypto Reserve: President Trump's proposal for a U.S. "Strategic Crypto Reserve" including Bitcoin and other crypto assets is met with skepticism by some, who argue it would be detrimental for both Bitcoin and the U.S. government. Concerns include the potential for the policy to be easily reversed by future administrations, the risk of destabilizing the U.S. dollar, and the lack of any real strategic need for such a reserve since the U.S. already benefits from Bitcoin through individual investments and taxes. Critics argue that Trump's proposal to invest U.S. taxpayer money in risky and unproven assets beyond Bitcoin could disproportionately benefit a small group of investors who hold these coins. This is particularly concerning for those advocating for significant reductions in government spending, aligning with Elon Musk's cost-cutting goals at the Department of Government Efficiency. Critics also feel that a crypto reserve could dilute Bitcoin's unique value, undermine its independence, spark public backlash due to perceived government favoritism towards crypto owners, and appear self-serving, given Trump's direct crypto interests. They contend that Bitcoin doesn't require government backing to thrive and that the proposal could transform it into a politically entangled asset.Macro Economics: President Donald Trump imposed sweeping tariffs on imports from Canada, Mexico, and China, affecting a range of goods and causing economic tensions. In retaliation, Canadian Prime Minister Justin Trudeau announced a 25% tariff on C$30 billion of U.S. imports, with further duties on C$125 billion to follow. Ontario's leader, Doug Ford, also announced a 25% tax on electricity exports to the U.S. and warned against further tariffs. Meanwhile, Mexico's president indicated that retaliatory tariffs would begin on Sunday. These moves have sparked concern among economists about potential global repercussions, including inflation. The global stock market reacted negatively, with major indices declining significantly. For the automotive sector, the long-term tariffs could reduce the cash flow by up to 60%, requiring companies to explore strategies like building inventory and reducing Mexican imports to alleviate the burden.
More analysts are now warning that the global economy could face a significant downturn akin to the Great Depression if the U.S. continues its tariff plans. The measures recently applied to Canadian, Mexican, and Chinese imports could lead to a global trade war and severely affect the economy, reminiscent of the damaging tariffs of the 1930s. As President Trump pushes these tariffs to protect U.S. manufacturers, concerns mount over potential retaliations from other countries and the impact on American domestic inflation and trade-sensitive stocks.
Equities: U.S. stocks plunged as President Trump’s tariffs on Canada, Mexico, and China took effect, sparking fears of a global trade war and negatively impacting the national economy. The Dow Jones dropped by 820 points, the S&P 500 saw a 1.9% decline, and the Nasdaq Composite fell by 1.7%, close to correction territory. In retaliation, China, Canada, and Mexico announced their own tariffs on U.S. goods. Shares of major companies like GM, Ford, and Chipotle dropped, while tech stocks also suffered, with Nvidia experiencing a significant decline. The tariffs have increased concerns about the U.S. economy, as investors hoped for a last-minute deal to avoid them. The S&P 500 and Dow have been negatively affected for the year, with the market closely watching Trump's upcoming address to Congress for further announcements on trade policy.
The Fed and US Treasury: In January, inflation eased slightly, with the personal consumption expenditures price index, a key Federal Reserve metric, rising 0.3% for the month and 2.5% annually. Excluding food and energy, core inflation rose 0.3% monthly and 2.6% yearly, decreasing from December's 2.9%. Despite higher personal incomes rising 0.9%, consumer spending fell 0.2%, increasing the savings rate to 4.6%. However, all that does not matter with the return of the tariff man. The Federal Reserve remains cautious on interest rates, seeking more evidence before adjusting further. The GDPNow tracker from the Federal Reserve Bank of Atlanta signals a potential 1.5% GDP contraction in Q1 2025 due to weak spending and exports. Meanwhile, net exports, inflation concerns, and labor market data hint at an economic slowdown, with the bond market predicting a potential recession. This has led to volatile stock markets and increasing chances of rate cuts in 2025, starting in the June cycle or maybe even earlier.
Corporate Transparency Act (CTA): The U.S. Treasury Department has suspended fines associated with the Corporate Transparency Act (CTA), which aimed to enhance transparency in business ownership to combat financial crimes. The decision has been praised by former President Donald Trump as beneficial for small businesses, deeming the reporting requirements under the Beneficial Ownership Information (BOI) as "outrageous and invasive." Secretary of the Treasury Scott Bessent heralded it as a "victory for common sense." At the same time, critics like the Financial Accountability & Corporate Transparency (FACT) Coalition argue that it allows shell companies to be misused. The CTA, faced with legal challenges, was ruled unconstitutional by an Alabama court in March 2024, with arguments that it overreaches Congressional powers. The Treasury plans to propose a new law that applies reporting rules mainly to foreign companies.Geopolitical: The hero that was is no more. Ukrainian President Volodymyr Zelensky's diplomatic relationship with the United States took a severe hit after a contentious Oval Office meeting with President Trump and Vice President Vance, where Zelensky publicly questioned their understanding of the Ukraine- Russia conflict. This defiance led to a breakdown in negotiations for a U.S. mining deal in Ukraine and a backlash from U.S. officials. Trump, seeking a peace deal involving concessions from both Ukraine and Russia, considered Zelensky's approach disrespectful, highlighting a shift in U.S. Ukraine policy post-Trump's election. Zelensky's misreading of American political dynamics, his perceived preference for Democrats, and a lack of flattery towards Trump undermined his standing, risking his country's alliance with the U.S. Despite attempts to mend relations, including expressions of gratitude, Zelensky stopped short of offering the apology Trump seemed to desire, focusing instead on the longstanding U.S.-Ukraine relationship beyond just Presidential interactions. The EU is trying to step up, but it will be hard without US backing.
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CME liquidity demonstrated its dominance over Asian markets as Bitcoin’s price action gravitated back toward Friday’s close following a surge fueled by U.S. President Trump’s announcement of a strategic crypto reserve. The broader macroeconomic environment, particularly the impact of tariffs, supported this pullback. However, historical patterns suggest that CME price gaps tend to close over time, with 80% of past gaps eventually being filled. This underscores the influence of institutional trading flows on Bitcoin’s market structure, reinforcing CME’s role as a critical anchor for price discovery.
The escalating U.S. trade war with Canada and Mexico, driven by President Trump's 25% tariffs on over $900 billion in annual imports, has placed significant pressure on U.S. businesses, particularly in the automotive, retail, and raw materials sectors. With rising uncertainty, companies are halting new orders, while incoming tariffs are set to drive consumer prices higher. Automakers like General Motors and Ford are bracing for substantial cost increases, with S&P Global warning of profitability declines due to higher steel and aluminum prices. The broader impact extends across industries, from homebuilders to aerospace suppliers, as raw material costs surge. Consequently, stocks in these sectors, including airlines and banks, have suffered, with the S&P 500 recently experiencing its worst day of the year. Retaliatory tariffs from China, Canada, and Mexico further compound the economic strain, tightening margins for U.S. businesses and amplifying financial volatility.
Just days ago, the Fed Funds futures market did not anticipate a single rate cut, yet now, expectations have shifted toward the likelihood of three cuts, reflecting mounting recessionary fears. The global economic system appears far more fragile than many acknowledge, and while Trump continues to apply his ‘art of deal-making’ approach, the potential for unintended economic fallout remains high. The combination of trade tensions, market instability, and shifting monetary policy could create a perfect storm, pushing the global economy toward an uncertain and potentially catastrophic trajectory.
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