ALTERNATIVE MARKETS UPDATE – MID FEBRUARY 2025 & February market update from macro eagle

​Since stepping into office in January 2025, President Donald Trump has been highly active in reshaping US domestic and foreign policies, implementing a range of executive orders with a focus on national security, the revitalisation of the economy, and immigration. While he announced potential tariffs, the pace at which he planned to impose these tariffs is surprising. In February 2025, he announced a 25% tariff on all imports from Canada and Mexico, citing border security and drug trafficking concerns, with Canadian energy exports facing a lower 10% tariff. However, these tariffs are currently suspended for 30 days, and it will be vital to observe whether they will be predominantly used as a tool for negotiations or are intended to be fully implemented. For Canada and Mexico, it could have devastating effects on their currency, as the Chinese Yuan declined significantly. Importantly, China is much less reliant on the US for exports than Canada or Mexico are. Trump also imposed a 10% tariff on all Chinese imports. In retaliation, China announced tariffs on US energy and specific machinery, such as agricultural machinery and large-engine vehicles. Lastly, Trump reinstated prior tariffs of 25% on steel and aluminum imports, bolstering the country’s own industry. Unlike during his first tenure, he also imposed these tariffs on allied nations.

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RESEARCH PERSPECTIVE VOL. 245 February 2025 Alternative Markets Update Since stepping into office in January 2025, President Donald Trump has been highly active in reshaping US domestic and foreign policies, implementing a range of executive orders with a focus on national security, the revitalisation of the economy, and immigration. While he announced potential tariffs, the pace at which he planned to impose these tariffs is surprising. In February 2025, he announced a 25% tariff on all imports from Canada and Mexico, citing border security and drug trafficking concerns, with Canadian energy exports facing a lower 10% tariff. However, these tariffs are currently suspended for 30 days, and it will be vital to observe whether they will be predominantly used as a tool for negotiations or are intended to be fully implemented. For Canada and Mexico, it could have devastating effects on their currency, as the Chinese Yuan declined significantly. Importantly, China is much less reliant on the US for exports than Canada or Mexico are. Trump also imposed a 10% tariff on all Chinese imports. In retaliation, China announced tariffs on US energy and specific machinery, such as agricultural machinery and large-engine vehicles. Lastly, Trump reinstated prior tariffs of 25% on steel and aluminum imports, bolstering the country’s own industry. Unlike during his first tenure, he also imposed these tariffs on allied nations. Gold has been another commodity that caught investors’ eyes in the past weeks. Gold has also been increasing in value, despite its stellar gains in 2024. While general geopolitical uncertainty – notably the ongoing wars – are expected to decrease under Trump, the US administration adds other uncertainty with its current tariff agenda. This inflationary practice could result in soaring inflation, increasing the value of gold. Additionally, China’s regulator has initiated a pilot program to allow insurers to invest in gold to further diversify assets, especially as the purchase of US Treasuries has been halted more recently. Figure 1 shows the growth in gold over the past months. While Trump has been affecting markets to a significant degree, artificial intelligence (AI) is not getting quiet. Ever since DeepSeek’s report about its efficient model and the little hardware and capital it needed to succeed, AI companies trembled. Even large companies were not safe from the huge implications it suggested. Nvidia - the largest company on the globe - lost as much as $600bn in a single day - a new record. Since this collapse, markets rebounded and have recovered part of the losses since DeepSeek’s astronomical rise. To date, Nvidia is down 5% in 2025, due to the challenges that arose from the report. Figure 1 shows the steep drop in Nvidia’s stock price. Other AI-based companies suffered similarly. OpenAI - the most dominant AI app in the West - reacted quickly by releasing their next upgrade earlier than planned. Following the announcement of the Stargate project in the US, which plans to pour $500bn into AI infrastructure in the coming year, OpenAI is in talks for another round of funding. Latest news places OpenAI’s valuation between $300bn and $340bn with huge companies as potential backers, such as SoftBank. Further tension was added by an investor conglomerate headed by Musk. The conglomerate is offering nearly $100bn for a controlling stake in the company - very much to the dislike of OpenAI CEO Sam Altman. Figure 1: Price Development of Gold and Nvidia from July 2024 to February 2025, Source: Investing, February 2025 I – January RECAP January was extraordinary. While it is easy to be stunned by the sheer speed and scale of Trump’s policy blitz, five themes things stood: First, reducing the US fiscal deficit seems to be Trump’s unifying threat: more growth (Stargate), more revenues (tariffs, External Revenue Service) or less costs (spending freeze, “deferred resignation” offers, DEI-bazooka, USAID). Second, the “break things and move fast” approach has come to government. Everything hiding behind “old” rules (birthright) or “slow” processes (diplomacy), will likely feel the heat (Greenland, Canada, Panama, Gaza). Third, MAGA might trigger MEGA (Make Europe Great Again). The mood at Davos was one-sided: US mojo is back, while Europe feels depressed, underinvested, overregulated … and (finally) in a panic to do something about it.  Fourth, just before you get too high on US exceptionalism, China launched a computational missile (“DeepSeek”) on US Inauguration Day, wiping out $1trn in market cap for the cost of $6m. Boom!  Fifth, the LA fires have become a showcase of government incompetence blaming climate change. The risk was perfectly predictable, as many insurers did. Woke is out. Accountability is back. II – January TOP 10 (1) LA Fires: the costliest natural catastrophe in US history – left graph. (2) NVDA on “DeepSeek” day: biggest one-day USD market cap drop ever – middle graph. (3) UK fiscal panic: 10 year government yields reach a high since the GFC, while 30y reach their highest since 1998. (4) Trump easily breaks the record for EOs issued per day in office. (5) China’s 2024 trade surplus reached a record $1trn on pre-Trump exports. (6) In 2024 US companies changed their CEOs at the highest rate since 1991. (7) In Japan, wages rise at most in 32 years, supporting higher yields. (8) A test aircraft by US start-up Boom broke the sound barrier, the first supersonic commercial travel since Concorde was grounded in 2003. (9) The CIA concluded that, on the balance of probabilities, the Covid virus was incubated in a Wuhan lab. (10) First deadly airline crash in Washington DC in over 40 years.  III – February PREVIEW Pretty straightforward month ahead. First of all, this weekend: Superbowl (GO EAGLES!). Next week: inflation, Powell and the Munich Security Conference (I will be there in case you are). Ah, and in case you don’t have my “I’m travelling”-excuse, don’t forget “Valentine’s Day”. Third week: German elections. Fourth week: NVDA results.  But then … none of that really matters. The news cycle will be shaped by Trump’s machine-gun approach of executive orders, memos, vows and musings. IV – TRUMP: METHOD or MADNESS?  If looked from a stock market perspective, DJT’s policy seem inconsistent (e.g. lower taxes = good, while tariffs = bad). But if, as mentioned above, the focus is to bring the deficit (and government yields) under control, then it is all consistent.  In fact, in the last 3 weeks, the S&P500 has been down 2 out of 3 weeks. But bonds have been up 3 out of 3 times. Point made.   Why? Simple: (1) Biden/Yellen have left him with a deficit time bomb, as Bessent will have to figure out how to roll $6trn+ in government debt this year without spooking the market. (2) High mortgage rates mean housing is at record unaffordability. If Republicans want to get re-elected, they have to bring them down. (3) Domestic politics: while the Republican far-right are some of DJT’s fiercest supporters, many of them, especially the Freedom Caucus, are fiscal purist. With a House majority of only two, the narrowest since the 1930s, Trump will have to show savings, before extending tax breaks. (4) External demand for Treasuries is falling away, as China is not buying and Japan yields are rising. (5) Sentiment: US10y yields above 5% is a dangerous technical level for markets. 6) His growth policies are inflationary. If he doesn’t want a repeat of the 1970s – he will have to address the deficit first. V – DEEPSEEK, MONEY and MOATs Much has been written about DeepSeek, so I won’t repeat it here. But it certainly raises many questions: (1) Unlike what we have been told over the last 2 years, it turns out that money is no “moat” in AI: R1 is a formidable model built for ~$6m, roughly the salary of a single American AI executive. As Eric Schmidt said: “To get to AGI first, we’ll need to … out-innovate, not outspend our competitors”. (2) Cisco moment? This of course raises questions about US BigTech’s AI Capex ROIC and therefore valuations – as the $1trn market rout made clear. (3) DeepSeek’s breakthrough got announced on Inauguration Day, but most talking heads were too busy celebrating “Stargate” and overall US exceptionalism. It took the market one full week to notice. (4) Geopolitics: I wonder if the announcement on Inauguration Day was a coincidence? It certainly changes the narrative that China is incapable of creativity because of its political regime or that sanctions work. (5) A future where AI is cheap, commodities and widely available could spark a shift from hardware to software.  Plus. what is bad for hyperscalers, might be a windfall for everybody else. (6) Guess who is not part of the discussion? Europe! Firmly stuck in the digital dark age. VI – On CHINA There is a striking disconnect, between what financial markets are saying about China versus the news headlines. Equities and bond yields are implying deflation/stagnation (see left and middle graph), on the back of the widely reported real estate crisis, local government finances and geopolitical hurdles (investment restrictions and tariffs).  At the same time, China dominates the climate change agenda from a manufacturing perspective (2/3 of global EV sales, 90% of consumer drones, 90% of solar panels, 70% of batteries) and has recently shown that Chinese engineers are capable of delivering breakthrough innovation despite sanctions and restrictions. And I’m not just talking about DeepSeek. Think about the new 6th generation stealth-fighter spotted in December (J-36) or the 7-nano Huawai chip or BYD’s progress in autonomous driving.  If China ends up overtaking the US, geopolitically this is going to get spicy. VII – On Europe: will MAGA force MEGA (Make Europe Great Again)? Another interesting discrepancy is the disconnect between European pessimism (left pic) and market outperformance (middle pic).  There are various explanations: (1) lack of EU Tech, so there was nothing to sell off; (2) lack of domestic exposure, e.g. 80% of the DAX’s revenues comes from outside Germany; (3) lower valuations – right graph; and (4) Trump and DeepSeek being a “Sputnik moment” for Europe. Notice that Von Der Leyen is now busy unwinding her very own “Green Deal” while promoting her new “Competitive Compass” with focus on an “unprecedented simplification effort”. Markets rally when policy makers panic. The big question is: are incumbents able to deliver change? The UK is a case in point. The Kingdom is technically in an good situation: (1) a clear government majority, Germany and France can only dream of. (2) No trade surplus with the US. (3) The opportunity of a “narrative reset” after 14 years of Tory rule. Instead, Starmer/Reeves have talked the country down, while implementing economically illiterate policies (NI and IHT, labour market reform, generous public sector wage increases without reform, etc). The result: tax-payers are leaving and investors are staying away. Labour will soon have to decide between radical reform and/or calling the IMF.  As for Germany, the upcoming election will be critical. Reform is unavoidable and there is a deal to be cut between the Centre-Left (accepts welfare cuts) and the Centre-Right (accepts to drop the debt brake for infrastructure investments). If not, the Austrian scenario (Right + AfD) is just a question of time. VIII – My BRO (= binocular of Risks & Opportunities) Not much to add to what has already been mentioned above: (1) Keep an eye on the bird flu pandemic in the US as egg prices have gone through the roof. (2) Watch Iran’s rush for a nuclear bomb, now that the Ayatollahs are largely defenceless and Israeli all-out attack to prevent that. (3) In the mineral-rich DRC, the main Eastern city of Goma fell to Rwanda-backed M23. If this has wider implications remains to be seen.  Otherwise, as frequently mentioned in the past, watch the “3M”: Milei’s “afuera” philosophy, Musk’s “efficiency” drive and Meloni  – who might become the driving force for reform in Europe (she was the only European head of state invite to Trump’s inauguration).  IX – PORTFOLIO In my last note, I recommended to underweight US Tech and stick to Europe. That has worked well YTD, and I expect it to continue. Why? When everybody is long “US exceptionalism”, who is left to buy?  Also, Gold is up 17% YTD. My pleasure. Stick to “real” assets, i.e. equities, commods, real estate, and anything the government can’t print. As mentioned above, I think Trump’s immediate focus are bond yields, not the stock market. Given the maths in Congress, cutting the deficit has priority. But sharp deficit cuts could affect the consumer (middle graph). In which case this could get ugly first. Anyways, my equity portfolio is defensively positioned while enjoying the Trump Show: low concentration, value/quality focused, biased towards Europe/Japan. I wish you all a great FEBRUARY and as always: MAY THE MARKET BE WITH YOU! Bobby The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.   Bobby Vedral MacroEagle E : [email protected] M : +447899996595 Bobby is a macro-political analyst who runs his own fund MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. 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