[Source/Author: Guancha Observer Columnist Zhong Jin]

Swift and fierce operations, yet profits or losses entirely depend on Trump.

This is the most accurate description of the U.S. financial market over the past few weeks. The economic policies of the U.S. government have changed drastically every day. By the time I submit this article, the economic statements from the U.S. government that I am aware of may have already undergone a 180-degree turn by the time readers see its publication.

The biggest news recently has been the "three-pronged assault" in U.S. stocks, bonds, and currency, causing Trump to gradually go back on his promises and continuously soften his originally very tough stance.

What is referred to as the "three-pronged assault" is the simultaneous decline in U.S. stock prices, U.S. government bond prices, and the U.S. dollar exchange rate. This situation of a "three-pronged assault" is not common, because when U.S. stock prices fall sharply, funds typically flow out of stocks into the U.S. bond market, leading to an increase in U.S. government bond prices and the U.S. dollar exchange rate.

When the "three-pronged assault" occurs, the most logical explanation is that large amounts of capital are leaving the U.S. market. The appreciation of other developed countries' currencies such as the euro, yen, and pound against the U.S. dollar over the past week also proves this cross-border capital flow.

Between 1971 and now, there have only been six months where U.S. stocks, bonds, and the exchange rate have all fallen significantly. Source: Wind, CICC Research Department

From a rather dry economic perspective, the stock market crash is the easiest to explain. The comprehensive trade war between China and the U.S. disrupts existing supply chains for enterprises and loses markets, these factors will lead to a decrease in future profits, thus causing stock prices to fall.

There are many reasons behind the decline in U.S. Treasury bond prices, which were traditionally considered safe-haven assets. First, the significant increase in U.S. tariffs will lead to rising inflation in the future, slowing down the pace of the Federal Reserve's interest rate cuts. Second, Trump's tariff announcements have caused hedge funds with high leverage trading in the U.S. bond market to suffer massive losses due to sudden sharp fluctuations in bond prices, forcing them to close their positions, which has also caused a short-term surge in selling U.S. Treasuries (the panic in the market on April 7 mentioned in previous articles originated from this).

In addition, rumors circulating in the market suggest that a large number of American companies borrowed bonds at ultra-low interest rates during the pandemic, which will mature between 2025 and 2028. These companies need to borrow at higher interest rates to repay old debts. However, contrary to rumors suggesting that several trillion U.S. Treasury bonds will all mature in the summer, this process will actually span the next two to three years.

Finally, the deadline for the U.S. government to reach the debt ceiling is May this year. Under Trump's leadership, the Republican Party controls both the government and Congress. After the debt ceiling is raised again, the U.S. government will inevitably issue large-scale debt, significantly increasing the market supply of U.S. Treasury bonds.

These factors combined have overwhelmed the traditional risk-averse funds fleeing stock market declines, leading to a simultaneous decline in U.S. Treasury bond prices.

When both U.S. stocks and U.S. Treasury bonds are declining, hot money that has been investing in the U.S. financial market through arbitrage transactions (carry trade) in recent years begins to liquidate its positions. The outflow of hot money from the U.S. causes the U.S. dollar exchange rate to fall sharply.

Through this framework, we can understand the phenomenon of the "three-pronged assault" in the U.S. stock, bond, and currency markets, and it also helps us analyze and predict the general direction of the U.S. financial market. Since the financial market is currently the most direct and potentially constraining force on Trump's actions, we can also analyze potential changes in Trump's policies from this perspective.

In my previous articles, I discussed that the short-term panic moment in the U.S. stock market has passed. The next step is to observe the specific impact of the trade war on corporate operations and the real economy. Due to the lag in policy transmission, the depletion of merchant inventories, and the replenishment of goods transferred through third-party countries, although we can see many media reports about individual cases of negative impacts of tariffs, the tariffs have not yet affected most people, nor have they been reflected in most macroeconomic data.

According to media reports, in the latest earnings releases of major U.S. companies, many large companies have estimated the losses caused by tariffs. For example, PepsiCo expects its profit to drop by around 5% compared to before the tariffs, one of the four largest U.S. homebuilders, Pulte Homes, estimates that tariffs will increase the cost of new U.S. homes by 1%, and even Raytheon Company, a fortress of American manufacturing in the defense industry, predicts that tariffs will increase annual costs by more than $800 million.

However, these listed companies, as large enterprises, already have sufficient means to mitigate the impact of tariffs. For example, PepsiCo has factories all over the world, while the supply chains of U.S. homebuilders and defense companies are mostly domestic, making them industries less directly impacted by tariffs.

We will know the extent of the impact on the largest U.S. retail and consumer goods industries in May, and we still need to exclude the short-term performance improvement brought about by panic buying ahead of tariffs by consumers.

More importantly, many small and medium-sized U.S. enterprises lack the resources and risk diversification capabilities of these listed companies. It remains unclear how much they will be affected in this round of tariff hikes. Ultimately, over the next two to three months, we need to observe the extent to which third-party transshipment, or even smuggling, can offset the negative impact of a significant reduction in direct imports from China on the U.S. economy.

The outlook for the U.S. bond market is relatively clearer. Financial markets had already anticipated the increased demand for U.S. Treasury issuance after raising the debt ceiling and the rollover of low-interest debt during the pandemic. Without the rise in inflation caused by the tariff war and the departure of hot money, the U.S. bond market might have been able to cope with the financing peak arriving this summer. Now, the biggest hope for the U.S. bond market is that the Federal Reserve will cut interest rates in June. However, the Fed's interest rate cut can only directly affect the short-term Treasury market. Unless the Fed implements another large-scale long-term Treasury purchase plan, the concentrated financing of the bond market this summer will create a greater pressure on the U.S. financial market.

Based on experiences over the past few weeks, the current greatest constraint on Trump is the bond market. If the Fed does not implement a large-scale Treasury purchase plan, he can rely only on foreign investors. Therefore, negotiating trade with Japan, which holds the most U.S. debt, is Trump's top priority in the short term.

On April 16, U.S. President Trump met with Japanese Minister of Economic Revitalization Akira Akazawa who came to the U.S. for the first round of tariff negotiations. They exchanged gifts.

Japan's main demands, apart from reducing tariffs, have always been to expand its own government power politically. We can boldly speculate that beyond tariff rates and trade barriers, Trump may request short-term financial support and long-term exchange rate regulation from Japan, while Japan may request the U.S. to cede some political power. Faced with the summer financing peak, Trump's urgent need to reach an agreement may lead him to make concessions that previous U.S. presidents have not agreed to, giving more autonomy to the Japanese government.

Returning to the standoff situation of the Sino-U.S. trade war, it is actually somewhat like the Liberation War period. Trump's first wave of comprehensive tariffs targeting the entire world was akin to the Nationalists' first wave of full-scale offensive, but this plan failed soon after. In the second phase, the focus shifted from a full-scale offensive to a key offensive. Trump increased tariffs specifically on China while formulating industry-specific tariffs and non-tariff measures for several key sectors, such as automobiles, shipping, photovoltaics, medical devices, and possibly semiconductors and pharmaceuticals in the future.

In this stage, some of Trump's policies are no longer his unilateral decisions but could be the consensus of the American elite class. Jamie Dimon, CEO of JPMorgan Chase, mentioned in a recent interview that although Trump's approach of imposing comprehensive tariffs is wrong, increasing tariffs on key industries and bringing key manufacturing back to the U.S. is the right direction. He particularly highlighted the severe reliance of the U.S. defense industry on foreign supply chains, stating that the U.S. government must address this issue, and other issues such as trade deficits, fiscal deficits, short-term employment, and even the risk of economic recession are not as important compared to this.

As I mentioned previously, reindustrializing America is a consistent opinion among both parties. For example, the trade investigation of China's shipbuilding industry began under the Biden administration, and the initially proposed port fees standards were also part of the draft from the Democratic government. However, due to strong opposition from the shipping sector, the Trump administration revised it and issued the current version.

Of course, given the current state of the U.S. education system and labor market, the cost and time required for the U.S. to achieve reindustrialization far exceed the expectations of these American elites. This does not mean that the pressure exerted by U.S. policies on China will ease, especially the U.S.'s dominance in the dollar, which is the biggest support for its trade war.

For China, the significant decline in direct trade with the U.S. represents a substantial reduction in China's new demand for dollars, but historically accumulated foreign investments in China are mostly dollar investments. Therefore, China faces a critical issue of balancing the establishment of an international payment system outside the dollar and maintaining a certain level of dollar reserves. During the exploration of establishing a new international payment system, including promoting the application of digital RMB, researching the infrastructure role of other virtual currencies and virtual currency exchanges in international settlements, learning from each other's strengths and weaknesses, has also become an urgent task.

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