Early Morning Financial News Analysis
Introduction
Good morning, investors. This is Yu Ting-hao, and it's 8:31 AM on Thursday, April 10, 2025, Taipei time. For the next half hour, we'll be dissecting the latest international financial news and market changes, including Trump's decision to postpone tariffs.
Trump's Tariff Postponement and Market Reaction
Relief Rally: The market is experiencing a relief rally, similar to what people experience when they finally go home after a long day of work. Tariff Delay: Trump has temporarily suspended overall tariffs on 75 countries for 90 days. However, tariffs on China have increased to 125%, signaling continued pressure. Market Surge: This announcement triggered a significant market surge on Wall Street. The Dow Jones Industrial Average soared by 2,332 points (6.2%) to reach 39,978, marking its largest gain since March 2020. The S&P 500 Index climbed 7% to 5,329, the most significant single-day increase since the dot-com bubble. The Nasdaq Composite Index surged by 8.6%, also the biggest gain since the dot-com era. The Philadelphia Semiconductor Index (SOX) experienced an impressive 12% increase, with Taiwan Semiconductor Manufacturing (TSMC) ADR rising by 7%.
Uncertainty Remains
Trump has postponed the uncertainty of tariffs by 90 days. Is this an indication that this uncertainty is truly over? Will the market recover all ground lost since the implementation of reciprocal tariffs?
Trump's Twitter Announcement and IEEPA
Trump authorized a 10% tariff suspension for 90 days, accompanied by a substantial reduction in existing reciprocal tariffs, effective immediately. He based this decision on the International Emergency Economic Powers Act (IEEPA). The flexibility granted by this act enables tariff imposition without the need for a Commerce Department investigation.
China's Response
Despite the temporary reprieve for other nations, tariffs on China continue to rise, reaching 125%. In retaliation, the Chinese Ministry of Commerce raised its tariffs to 84%. Once tariffs exceed 50%, the impact is similar to a 500% tariff.
Short-Term Outlook
The next 90 days will be crucial for negotiations. US-China relations may continue to deteriorate. The recent market decline was driven by uncertainty, which is expected to diminish in the near term.
Investment Strategies and Market Philosophy
Short-Term Gains: Investors may try to profit from short-term emotional market swings. Strategic Accumulation: Others may choose to add to their portfolios strategically. Waiting for Recession: Some prefer to wait for clearer recessionary signals (a “blue light”). Key Point: Having a well-defined investment strategy is paramount.
Avoiding Common Pitfalls
Do not gamble: Avoid trying to predict Trump's actions hourly or daily; you may be dead wrong. Beware Leverage: Do not amplify risk through excessive leverage or margin accounts.
Impact of Margin Calls
Margin balances have declined sharply, highlighting the potential for forced liquidation. Margin balances have dropped almost 1 trillion NTD in a few weeks. This has resulted in a huge amount of margin calls. An increase in personal loan applications indicates widespread liquidity issues.
Assessing Market Correction
The margin maintenance ratio, a key indicator of market health, plummeted to below 120%, surpassing the severity seen in 2020. Those betting on short-term market movements and employing high leverage faced significant setbacks.
Long-Term Perspective
For long-term investors, trying to predict these sorts of short term movement is often not productive. These external shocks, if the damage is deep enough, provide opportunities to buy.
National Stabilization Fund
It is time for the National Stabilization Fund to withdraw from the market after a one-day intervention. The sooner the fund withdraws, the better. The fund may need to intervene again in 90 days.
US Treasury Secretary's Remarks
US Treasury Secretary, Bicent, said that over 75 nations have agreed to negotiations as a result of Trump's successful strategies. The US expects further trade negotiations to create more free trade opportunities.
Current Market Conditions
The stock market is poised to realign with underlying economic fundamentals. Despite the rebound, it is important to recognize that we remain in a period of economic expansion.
Investment Approach
Value Investing: Consider buying low ("catching knives") rather than chasing high-momentum stocks. Monitor Sentiment: Be aware of the level of fear and greed in the market.
CNN Fear & Greed Index
The CNN Fear & Greed Index is extremely low, lower than levels during the Covid-19 pandemic. Based on past behavior, the markets are oversold at this level. Short positions should be covered.
VIX Volatility Index
The Volatility Index (VIX) has plummeted from nearly 60 to 30, a 50% decrease. A rapid decline in volatility suggests that it might be time to exit short positions.
Investor Caution
As the market rebounds, investors should be cautious about establishing new long positions or increasing existing ones.
Deep Water Bomb Investment
Some investors follow a "deep water bomb" strategy, deploying capital gradually as the VIX remains low to profit from future market uncertainty.
Trump's Impact on Market Cycles
Trump has disrupted the anticipated market cycle. Whether this will end the cycle prematurely or is simply an external conflict during a period of economic expansion remains uncertain.
Tariffs as a Negotiation Tool
Tariffs serve as a negotiation tool rather than a revenue source. Excessively high tariffs can negatively impact liquidity, prices, and economic growth in the U.S. By creating short-term pressure, the U.S. aims to secure concessions from other nations.
Trump's Negotiation Strategy
Trump is effectively using political friction to prioritize U.S. interests and bring trade partners to the negotiating table. However, excessive friction can be counterproductive. It is crucial to capitalize on successes and seek long-term benefits.
Future Analysis Points
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US-China Trade: Has the trade war shifted to focus solely on containing China? Will the U.S. pressure other nations to impose retaliatory tariffs on China, potentially leading to an "either-or" scenario?
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Motivations for Trump's Actions: What prompted Trump's decision to de-escalate? Did liquidity concerns in the U.S. bond market, potentially stemming from hedge fund basis trades, play a role?
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Targets for Future Action: Which nations that have conceded or resisted will become targets for future action?
Analysis of China's Retaliatory Tariffs
Following China's retaliatory tariffs, the U.S. became the primary target of global tariffs. China raised tariffs on U.S. goods from 34% to 84%, effective April 10. However, the dollar was not negatively affected by US treasury selloffs.
Limited Options for China
China's ability to retaliate through currency devaluation is constrained by its need to maintain a stable and valuable currency. The best hedge agains treasury sales would be gold, but gold prices are too high.
Speed of Tariff Increases
The rapid escalation of tariffs, from 10% to over 100%, points to a possible future increase to 500% by June. If the US treasury selloff is not led by the PBOC, then hedge fund clearinghouses are to blame.
Hedge Fund Basis Trade
The primary driver behind the U.S. Treasury sell-off is likely deleveraging in hedge fund basis trades.
Government Bond Yields
Government bond yields briefly jumped to 4.5%, with 30-year bond yields approaching 5%, signaling significant global pressure.
Liquidity Concerns
Stock market declines forced investors to sell bond assets to raise capital and meet margin calls.
Basis Trades Explained
Hedge funds use basis trades, a strategy that usually combines low risk with low return, to profit from the small differences between the real-world price of the 10 year treasury and its future value. This can involve 5-20x leverage. They buy up treasuries and sell futures for a relatively risk-free arbitrage. If the market is collapsing, this forces them to sell off their assets quickly.
Market Instability
Similar events occurred during the 2019 repo market collapse and the 2020 COVID-19 pandemic. US Fed intervention in those cases steadied the markets. In 2025, US basis trade is estimated to be $1 trillion, and international trade is estimated to be $1.5 trillion. Leveraged trades can involve as much as 56x leverage.
Outcome
The large amount of trades and the fast pace of market movements led to high rates of deleveraging.
Market Performance
The Dow Jones surged by 2,962 points (7.87%) to 40,608, the S&P 500 climbed 474 points (9.52%) to 5,456, the Nasdaq rose 1,857 points (12.16%) to 17,124, and the Philadelphia Semiconductor Index soared 667 points (18%) to 4,230. Trading volume will likely be reduced on the next trading day.
Historical Presidential Trends
New presidents often face systemic external shocks. The COVID-19 pandemic coincided with Biden's inauguration, the Shanghai stock market crash occurred before Trump's election in 2016, and the global financial crisis occurred with Obama's election in 2008.
Long-Term Investment Strategies
- Index Participation: Consider participating in broad market indexes for long-term growth.
- Cyclical Investing: Invest heavily during periods of economic downturn and uncertainty.
- Cash Reserve: Maintain a cash reserve, particularly during economic expansions, to capitalize on future opportunities.
Program Inspiration
This has been a long-running program. It helps those that have been washed out of the markets to regroup and return.
Market Volatility
Market volatility can test investors' convictions. Maintaining discipline and a clear understanding of risk is crucial. Always adhere to your investment strategy.
Advice
Do not forget the thoughts and beliefs that lie behind your investing. You know what to do, stick to it.
Trump's Trade Negotiation Achievements
Trump's negotiation outcomes are significant. Investment into the US remains at a 20-year high. These investments include the Star Gate Project, Apple's $500B investment, Nvidia's $500B investment, softbank's investment, TSMC's expansions, and investments from Hyundai, Toyota, and Mercedes. The Alaska gas pipeline is nearly finalized, with South Korea and Japan committed to record imports.
Trump's Negotiation Tactics
Trump's approach, exemplified in his book "The Art of the Deal," involves "thinking big" and pushing for maximum advantage.
Trump's Remarks
Trump has stated his pleasure at how countries are calling, begging and kissing up to him to try to make a deal.
Reaction from other nations
- South Korea: Relaxing automobile emission standards. Also, removing unfair pharmaceutical pricing and lifting the import ban on US beef products.
- Japan: Maintaining currency appreciation and resisting loose monetary policy.
- EU: Balancing resistance against the US and the potential for retaliation. They will consider adjustments to the value-added tax (VAT) system.
- Vietnam: Reducing domestic trade barriers. Addressing concerns about serving as a transit point for Chinese goods circumventing tariffs.
- India: Opening its markets by reducing trade barriers.
- Taiwan: Offering significant incentives, with the focus now on the Alaska natural gas pipeline.
The Next 90 Days
Predicting Trump's actions is nearly impossible. The "Book of Answers" is recommended. Create multiple scenarios and be prepared for a range of outcomes.
Market Sentiment
The elimination of market uncertainty should prompt a reassessment of economic expectations. Despite external conflicts, positive non-farm payroll data suggests continued economic expansion.
Opportunities and Challenges
View the current situation as a buying opportunity. Remember that we remain in a period of economic expansion. Major capital deployments should be reserved for recessionary periods.
Advice
Investors should consider reducing their lent stock positions. The increase in buy pressure can cause the stock price to surge.
Investor Questions
Market Focus
Pay attention to short-term inventory stockpiles and trends in global supply chain shifts.
Trade with China
The recent tariff war has caused the support for trade with China to decline in polls. These polls mostly indicate that people are worried that it could increase inflation. Some analysts think that this is possible, as much of the supply chain cannot be moved quickly.
Pew Center Polls
52% of Americans believe that tariffs on China negatively affect the US. The number is high.
iPhone Production
Even with a decline, most of the global iPhones are still produced in China.
Loan Changes
The recent decline in loan issuance has lead to the banks offering more loans. They are particularly interested in collateralizing stocks.
Recommendation
Consider securing new debt while the stock prices are low. While there has been an increase in collateralized loans and home mortgages, be cautious when taking on leverage during an economic boom.
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