"The era of 'Trump 2.0' has begun! Frenzied trading faces a major test, where will the stock market, the US dollar, and Bitcoin go from here?"

Trump's victory in last November's US presidential election immediately triggered a market rebound, with the US stock market, the dollar, and bitcoin all soaring. As Trump returns to the White House on January 20, these trades face a test. The reversal first appeared in the stock market. As investors began to question the prospects of rate cuts by the Federal Reserve and the impact of policy proposals by the new US government on the stock market, the S&P 500 index gave back most of the gains brought by the "Trump effect." The US Treasury yield curve, after initially flattening, has also steepened sharply since late November. Meanwhile, bitcoin and the dollar have maintained their upward momentum. With Trump taking office, the true test of these bets is now at hand. Tariffs are the biggest risk, as people are concerned that these policies could lead to a more prolonged and unpredictable trade war than during Trump's first term as president. Wall Street professionals are worried that actions to crack down on illegal immigration will impact the US economy. Experts are also concerned about escalating geopolitical tensions, as Trump has turned his sights on some of the US's traditional allies such as Canada, Mexico, and Europe. Andrew Hollenhorst, Chief US Economist at Citigroup, said at a 2025 outlook conference, "Forecasting is a euphemism for guessing, but we have to make assumptions about these policies because they will impact economic prospects." Here are the popular trades that traders are watching: US Stocks Investors' enthusiasm for Trump's victory quickly appeared in some of the lagging areas of the stock market, such as small-cap companies. The Russell 2000 index rose 5.8% on the second day after the election, marking the biggest single-day gain in two years. The logic is simple: the trade protectionism policies of the new Trump administration will be most favorable for groups that typically generate a large portion of their income domestically in the US. However, the enthusiasm quickly faded. From November 5 to November 25, the index surged 8%, then gave back most of the gains in the following weeks. Steve Sosnick, Chief Strategist at Interactive Brokers, said, "Many of these companies are marginally profitable or entirely unprofitable, relying on financing to sustain operations, and higher rates would hurt this situation." The Russell 2000 index has risen only about 1% since November 5 Bank stocks also experienced a frenzy after the election, as Trump promised to relax regulations on banks. From November 5 to November 25, the KBW Bank Index rose nearly 14%, hitting a 52-week high. However, the index lost momentum thereafter. Energy companies' stocks were also popular after the election due to Trump's positive stance on oil and gas production. The S&P 500 energy index rose 3.5% on November 6, marking the biggest single-day gain in a year, and gained 6.5% from election day to November 22. However, since then, the index has been in turmoil due to concerns about oversupply, tariffs, and economic growth, falling 3.2%. However, stocks related to cryptocurrencies have mostly maintained their upward momentum. Tesla, for example, has seen its stock price rise 70% since Trump's victory, as investors bet that CEO Elon Musk's close relationship with Trump will help the company achieve its ambition of manufacturing fully autonomous vehicles. Dollar Perhaps the most straightforward Trump trade before the election was to bet on the dollar, as high tariffs and loose fiscal policies could lead to inflation. In the 10 weeks since election day, the Bloomberg Dollar Index has risen 5%, similar to the increase after Trump's victory in 2016. Meanwhile, global currencies, including the euro and the Canadian dollar, are seen as facing risks from Trump's economic policies. The rise in the dollar after Trump's victory is similar to 2016 Wall Street had largely anticipated this. Analysts at J.P. Morgan led by Meera Chandan predicted that if Trump won, the euro could fall to parity, while Barclays Capital forex strategist Skylar Montgomery Koning said the Canadian dollar could fall to its lowest level since the pandemic. Chandan and her team now predict that the euro will fall below parity with the dollar this quarter. Chandan recently said, "I don't think tariffs are fully priced in yet." Most emerging market currencies weakened after Trump's victory. Since election day, the MSCI index has fallen by 2.2%, with the South African rand and European currencies leading the way. The Mexican peso was the favorite currency for traders to short before the election, and since then, the exchange rate of the Mexican peso against the dollar has fallen by 3.4%, actually outperforming most of the 31 major currencies tracked by Bloomberg. The peso has remained relatively strong because traders have delayed the timetable for Fed rate cuts, which has also made policymakers in Mexico more cautious. Steepening yield curve Trump's victory not to mention the Republicans' sweeping victory was expected to steepen the yield curve, as the market believed that Trump's policy proposals would exacerbate inflation and put pressure on long-term US treasuries. In fact, this has largely been the case, as the spread between the yields of 10-year and 2-year US treasuries has widened to about 34 basis points, close to its highest level since early 2022, with long-term US treasuries plummeting on the eve of Trump's inauguration. The US bond 2/10-year yield spread hit a two-year high after Trump's victory Neil Sutherland, Portfolio Manager at Schroders Global Investment Management, said, "We are starting to see a steepening curve. The Fed has cut rates by 100 basis points, and long bond yields are rising." The resilience of the US economy and the uncertainty surrounding Trump's policies have also put pressure on short-term yields. Swaps traders currently expect the Fed to cut rates by less than twice this year, at 25 basis points each time. Before the election, they expected about six rate cuts. Sutherland said, "Currently, the sentiment in the US bond market is very negative, and there is actually a risk of declining yields." Cryptocurrencies Trump has been skeptical of cryptocurrencies, calling bitcoin " shady.""He used to see it as a scam, but now he has completely changed his views and has received strong support from the cryptocurrency industry. It is reported that Trump plans to issue an executive order prioritizing cryptocurrency as a policy and allowing industry professionals to have a voice in the new administration. Additionally, Trump may also relax regulations and establish a strategic reserve of Bitcoin."After Trump's victory, Bitcoin soared. Since the election, the price of cryptocurrencies has been rising, with Bitcoin reaching a historic high in mid-December last year, rising by about 50% compared to November 5th. The Bloomberg Galaxy Crypto Index rose by 11% the day after the election, and then rose by 29% thereafter. At the time of writing, Bitcoin has fallen to $101,381.7 per coin, down 3.40% on the day.