SignalPlus Macro Analysis Special Edition: Tariffs 2.0

As geopolitical conflicts fade from view, the most striking development over the past week has not been the new tariff levels set by Trump's "2.0 version" revisions, but rather how the market has completely ignored this escalation.

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

Economic data aligns with the recent "Goldilocks" narrative (indicating the economy is neither too hot nor too cold), remaining uneventful, and the minutes from the June FOMC meeting did not provide further insights. The FOMC "dot plot" remains unchanged, still expecting two rate cuts this year, despite disagreements among Federal Reserve members. Some notable quotes include:

"Several participants noted that tariffs would lead to a one-time increase in prices."

"Most participants pointed to the risks of [creating] more lasting effects."

"Most participants believed that lowering the federal funds rate target range this year might be appropriate."

"Several participants indicated they would be willing to consider a rate cut at the next meeting."

A weakening labor market has replaced inflation as the primary concern. Members noted that higher tariffs and policy uncertainty would 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 throughout the 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 since Trump's election.

Given 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 near-historic high levels of long positions in U.S. stock index futures.

Not to be outdone, our fearless retail investors have also been flooding into long equities this year. Data from Vanda Research shows that retail investors have accumulated a net purchase of stocks and ETFs totaling $155 billion so far this year, the fastest pace in over a decade.

Moreover, JPMorgan estimates that retail stock buying demand will total $500 billion for the entire year of 2025. According to their calculations, this will drive the market up by "5-10%." This would make them the largest source of demand among all major investor groups—who is the "smart money" again?

Cryptocurrency prices have benefited from the overall market frenzy, with BTC trading as high as $118,000, forcing over $1 billion in crypto short positions to be squeezed, marking one of the most intense short squeezes in recent memory.

Interestingly, volatility has not surged significantly and remains near cyclical lows. This indicates that there has not been a noticeable fear of missing out (FOMO) buying in the market, aside from shorts rushing to seek protection, leading to understandable skewness in volatility (vol skews). The cryptocurrency space still feels under-positioned, with difficulties in rebuilding positions after the April fluctuations; meanwhile, buying in traditional finance (TradFi) ETFs remains relentless and price-insensitive, continuously reinforcing the mainstream narrative.

Some observers point out that the recent shift in attitude from Chinese regulators has acted as a catalyst for the market rally, but we believe this is more of a symbolic gesture, with substantial changes still needing time. Fundamental capital control restrictions remain an unresolved issue, and the recent passage of the stablecoin bill in Hong Kong indicates that pilot projects may be prioritized there.

Looking ahead, while 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 to see how aggressively he wants to play.

In the meantime, enjoy the rally, and try not to go against the market, as calm and boring markets are often the most dangerous targets for shorting! Wishing you successful trading.