China and US made massive headways towards a deal
The US-China trade war just flipped upside down-but instead of surging, BTC popped 1.1% and then gave it all back. Why? Because the market may have already priced in the best-case scenario... and the next move could be brutal.
- Trade War De-escalation and Its Effects.
- The US2Y Yield and Interest Rate Cut Projections.
- Potential Scenarios & What We're Looking At.
- Game Plan & Cryptonary's Take.
Disclaimer: This is not financial or investment advice. You are responsible for any capital-related decisions you make, and only you are accountable for the results.
Trade war de-escalation and its effects:
Over the weekend, we saw trade war talks between the US and China go positively than we had expected, with China reducing their tariff on the US to just 10% (down from 125%) and the US reducing their tariff on the Chinese to just 30% (down from 145%). This has opened the door for a 90-day pause, and it allows both sides to negotiate further whilst the situation has meaningfully de-escalated.Ultimately, this is basically a full reversal from the Trump administration, even though tariffs are likely to settle much higher than the market expected at the start of the year. But this big de-escalation likely removes the left-tail event of a recession/significant economic slowdown, and you're seeing risk assets re-price due to that.
The question here is, is this now close to fully priced or is there more room for risk assets to move higher in the short term? We saw this morning that the deal (or the initial outline of a deal) between the US and China resulted in BTC moving up 1.1%, only for the gains to be given back.
It's therefore possible that in the short term, the best-case scenario is close to fully priced, meaning we probably see a relatively meaningful pullback in risk assets.
But, as we said, this is a serious de-escalation and as long as it continues (no big hiccups along the way), then the left-tail (recession) event has likely been avoided, and therefore, there are scenarios where we would look to begin risking back on again on more substantial pull backs. We'll cover this below.
What's next?
This trade war truce isn't what it seems. One overlooked shift could change the entire playbook. Don't get caught flat-footed.The US2Y yield and interest rate cut projections
Since Friday, the US2Y Yield is up by 22bps, and the market is now pricing 56bps of Interest Rate cuts in 2025 rather than the 75bps it was pricing back on Friday.What does this mean?
It means that the market is now saying: "ok, because Trump has as good as fully reversed on tariffs, that removes the left-tail event (recession) and therefore growth might be less of a problem, and therefore fewer Interest Rate cuts will be needed to stimulate growth".
So, the market has essentially priced back to just 2 Interest Rate cuts for 2025, rather than 3, but it's for a more positive reason. It's also more likely that Interest Rate cuts are now further pushed out and likely don't come until September at the earliest, however, risk assets can still perform, because we've (seemingly) had the removal and a resolution of the trade war.
Potential scenarios & what we're looking at:
As we mentioned above, a trade deal resolution with China likely removes the left-tail event of a recession over the coming months, and that likely rules out the potential for a retest of the lows or a break below the lows. What would undo this is if the macro data materially weakens (although that's likely been avoided now with this full trade war unwind) or if trade negotiations break down and we see tariff rates go up again.
Two key metrics we're now watching are BTC.D (Bitcoin Dominance) and TOTAL3.BTC.D remains in its two-and-a-half-year-long uptrend for now, although it's pressing into the uptrend line.
A break below the uptrend, and especially a convincing break below 60.0%, would likely be a full-blown Alt Season.
BTC.D 3D Timeframe:
TOTAL3 is a good measure of the Alt/Meme coin space to see if there is risk appetite in those sectors, and looking at the below chart, we can see that there absolutely has been, particularly over the last 6 days.
One thing we are wary of is that the breakout we're seeing in TOTAL3 now is similar to that of 2022, which was just a relief rally, especially as we now see that this chart is moving into a key horizontal resistance.
TOTAL3 3D timeframe:
Ultimately, here, we do expect a pullback for prices, considering how overbought everything is, and the market does now feel fully priced for the best outcome on the tariffs/trade war.
From here, we see a few potential scenarios playing out:
- Yellow: a pull back to the $95k to $98k area before a more meaningful bounce higher to potentially significant new all-time highs.
- Purple: a slightly deeper pull back to the $86k to $95k range (this could even be adjusted to the $86k to $93k zone) before a move back into $106k to $110k. We'll then see further beyond that.
- Green (follows Purple): So then a breakout of the highs and price moves substantially higher to new all-time highs, or we end up ranging between $93k and the all-time highs ($106k) during the summer months.
BTC scenarios:
Game plan + Cryptonary's take
This is a full unwind of the Trump tariffs, and therefore, we do have to reconsider our positioning here as it does look like the left-tail event (a recession) has been removed. And with that, that might mean we avoid a meaningful deterioration in the data. Therefore, pullbacks are likely to be just corrections rather than new bear market lows.So, our game plan is this: we'll look to re-buy into Majors (BTC, ETH, SOL, and HYPE) that look attractive on pullbacks, whilst we really push to find new plays/gems that we can take advantage of that are at the far end of the risk curve.
For:
The situation has changed, and therefore we'll be much more proactive going forward as we look to get more majorly positioned. Plus, there will now be a big focus internally now on finding new small-cap plays. If BTC.D does break down, and TOTAL3 can break out, then new small-cap plays (new picks) will be where we see the bigger multiples/gains.
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