SignalPlus Macroeconomic Analysis Special Edition: Tariffs 2.0

The new government has imposed a 50% tariff on Brazil, a 35% tariff on Canada, and a 25% tariff on Japan and South Korea, and has promised to uniformly levy a 15-20% tariff on all trading partners. This undoubtedly exceeds market expectations. So, is the market anticipating another "TACO-style" policy reversal soon? Or will the current strong momentum in the stock market force the president to take more aggressive actions? We will know the answer soon... The new government has imposed a 50% tariff on Brazil, a 35% tariff on Canada, and a 25% tariff on Japan and South Korea, and has promised to uniformly levy a 15-20% tariff on all trading partners. This undoubtedly exceeds market expectations. So, does the market anticipate another "TACO-style" policy reversal soon? Or will the current strong momentum of the stock market force the president to take more aggressive action? We will know the answer soon...

Economic data aligns with the recent "Goldilocks" narrative (indicating that the economy is neither too hot nor too cold), causing no ripples, and the minutes from the June FOMC meeting did not provide any new insights. The FOMC "dot plot" remains unchanged, still anticipating two rate cuts this year, despite disagreements among Federal Reserve members. Some notable quotes include: "Several participants pointed out that tariffs would lead to a one-time increase in prices." "Most participants noted the risk of [producing] more lasting effects." "Most participants believe that it may be appropriate to lower the federal funds rate target range this year." "Several participants indicated that they would be willing to consider a rate cut at the next meeting." The weakening labor market has replaced inflation as the primary concern. Members noted that higher tariffs and policy uncertainty will weigh on employment and acknowledged that some indicators have shown "signs of weakness."

This week, both the stock market and Bitcoin soared to new highs, with all funding channels for the former showing positive inflows. Long-short hedge funds have maintained full investment positions almost all year, including during the fluctuations on Liberation Day; meanwhile, discretionary macro funds have increased their long equity exposure for the first time this year, with the pace of accumulation reaching the highest level since Trump's election victory.

In light of the extremely positive signals from the recent market rally, momentum funds and CTA funds (Commodity Trading Advisors) are also likely to hold long positions, as reflected in the bullish positioning levels of U.S. stock index futures approaching historic highs.

Reluctant to fall behind, we fearless retail investors have also been flooding into stock longs this year. According to Vanda Research, retail investors' cumulative net purchases of stocks and ETFs have reached $155 billion so far this year, the fastest pace in over a decade.

This is not enough; JPMorgan estimates that the total demand for retail stock purchases will reach $500 billion in 2025. According to their calculations, this will drive the market up by "5-10%". This will make them the largest source of demand among all major investor groups—who exactly is the "smart money"?

Cryptocurrency prices benefit from the overall market's frenzy, with BTC trading at around $118,000, squeezing out over $1 billion in crypto short positions, marking the most intense short squeeze in recent memory.

Interestingly, volatility has not surged significantly and remains near the cycle lows. This suggests that there has not been a noticeable FOMO buying in the market, except for the understandable skew in volatility caused by shorts eager to seek protection. The space (cryptocurrency) still gives a sense of underpositioning, with difficulty in position rebuilding after the fluctuations in April; meanwhile, the buying of traditional finance (TradFi) ETFs continues unabated and is insensitive to price, reinforcing the mainstream narrative.

Some observers have pointed out that the recent change in attitude of Chinese regulators has acted as a catalyst for the market's rise, but we believe this is more of a symbolic gesture, and substantial changes will take time. Fundamental capital control restrictions remain an unresolved issue, while the recent passage of the stablecoin bill in Hong Kong indicates that pilot projects may be prioritized in Hong Kong.

Looking ahead, although it may sound like a cliché, market sentiment is likely to remain exuberant throughout the summer. The only real risk catalyst is a complete breakdown in tariff negotiations, but the ball is now in the president's court; it depends on how aggressively he wants to play. At the same time, enjoy the market, and try not to go against it, as calm and dull markets are often the most dangerous targets for short selling! Wishing you smooth trading.