Q2 Market Report - How Fundamentals Are Shaping FX, Gold & Global Indices

It has been one hectic start to Trump’s presidency and it seems like we are just getting started. From the early optimistic mania to the current pessimistic and doubtful environment. Nobody can say it has not been volatile.

Looking back at the first quarter, the 10Y Bond Yields fell, the US Dollar devalued and foreign currencies strengthened. On the other side, Crude Oil prices fell together with the stock and crypto markets which have aggressively dropped lower. The question is why?

It seems like we may have overestimated Trump's administration abilities and speed at making their trading partners fall in line under his order and underestimated their retaliation. At first it seemed as if the tariffs issue was more or less resolved as countries seemed to unwillingly submit and negotiate with the US.

However, this task has since proven to be tougher than first expected which has caused growth and inflation fears within the US economy as negotiations stall and tensions rise. In addition, there hasn’t been any significant breakthrough in the Russia — Ukraine war that Trump promised to end immediately after his inauguration causing further doubt in the administration’s capabilities to deliver their promises.

Lastly, the economic data has shown slowed growth and sticky inflation further fuelling the pessimistic sentiment in the marketplace. Overall as Q1 comes to a close it seems like investors have sobered up from the post election euphoria and are questioning the effectiveness of Trump’s policies and his ability to apply them.The start of Trump's presidency has been tumultuous, marked by a shift from initial optimism to pessimism and doubt. The first quarter saw falling 10Y Bond Yields, a devalued US Dollar, strengthened foreign currencies, and a drop in Crude Oil prices, stock, and crypto markets.

This downturn can be attributed to an overestimation of the Trump administration's ability to swiftly align trading partners and an underestimation of their retaliation. Initial submission to US tariff demands was short-lived, and stalled negotiations have fueled fears of slowed growth and inflation. The administration's failure to deliver on promises, such as ending the Russia-Ukraine war, and the economic data indicating slowed growth and sticky inflation have furthered pessimistic market sentiment.

As Q1 closes, investors are questioning the effectiveness of Trump's policies and his ability to implement them, marking a stark contrast from the post-election euphoria.

With that being said, let's dive deeper into what potentially awaits us in Q2, as we all know, nothing is ever straightforward, especially the financial markets.

In recent weeks, uncertainty has dominated the financial markets as the post-election optimism fades. Investors and analysts are now grappling with critical questions: Are we on the brink of a recession? Will markets rebound? Amid the confusion, it’s essential to take a step back and analyze the situation objectively.

A major focus of current market discussions is Trump’s tariff policies. What is his administration’s broader strategy?

The Trump administration is pursuing an ambitious economic agenda aimed at reshaping the global financial landscape to serve U.S. interests. The goal is to reclaim economic and geopolitical influence, which they believe was weakened under Biden’s leadership.

A key component of this strategy may be what some are calling the "Mar-a-Lago Accord"—a combination of foreign policy maneuvers, financial engineering, and debt restructuring. The overarching objective is to strengthen American manufacturing, weaken the U.S. dollar, and reduce national debt while ensuring the dollar retains its status as the world’s reserve currency. This could involve working with trade partners to coordinate a controlled devaluation of the dollar in exchange for security guarantees and tariff relief.

The origins of this idea trace back to November 2024, when Stephen Miran—now a key economic advisor to Trump—published a report highlighting the negative impact of an overvalued dollar on American manufacturing and trade deficits. He proposed strategies to weaken the currency, restructure debt, and shift economic burdens onto U.S. allies. Treasury Secretary Scott Bessent has also spoken of an impending “grand economic reordering.”

Whether formally coordinated or naturally evolving, this approach is built on three fundamental pillars:

At first glance, Trump’s tariff policies may seem like a conventional trade war strategy. However, Miran suggests they serve a dual purpose: protecting U.S. industries and generating government revenue. Instead of raising domestic taxes or cutting social programs, tariffs are being used as a funding mechanism. They also provide leverage in negotiations—Mexico, for example, deployed 10,000 troops to its border after Trump previously threatened tariffs.

Yet, this approach comes with risks. Higher import taxes increase costs for U.S. businesses and consumers, which could trigger another inflationary cycle and slow economic growth. The Federal Reserve is still dealing with the aftereffects of past inflation and may be forced to keep interest rates elevated longer than expected—something Wall Street is already factoring in.

A radical idea circulating within Trump’s economic team is the creation of a U.S. sovereign wealth fund. In February, Scott Bessent suggested that the government could "monetize the U.S. balance sheet for the American people."

One way to achieve this could be by revaluing America's gold reserves. Currently, these reserves are valued at $42.22 per ounce, far below the market price of around $2,900. Adjusting the valuation could instantly create nearly $900 billion in new equity. This would provide the government with a financial cushion without resorting to borrowing or printing more money.

Additionally, other federal assets—including land, real estate, infrastructure, and even confiscated cryptocurrencies—could be leveraged to generate capital. The logic is straightforward: the U.S. government controls trillions in untapped assets while continuing to run significant deficits. Unlocking these resources could provide alternative funding options without worsening inflation or increasing taxes.

However, this strategy also carries risks. Financial restructuring does not eliminate actual debt, and investors may interpret these moves as a sign of fiscal distress rather than strength. If confidence in U.S. financial stability erodes, Treasury yields could rise instead of fall, complicating economic recovery efforts.

Another possible component of this strategy involves restructuring U.S. debt by pressuring allied nations to absorb some of America's financial obligations. In exchange for continued military protection and tariff relief, allies could be encouraged—or forced—to accept portions of U.S. debt.

One proposed mechanism is the issuance of new "Century Bonds"—100-year, zero-interest, non-marketable debt instruments. These bonds would be locked into foreign central bank reserves and removed from global markets, reducing the supply of U.S. Treasuries and helping to lower interest rates.

However, this approach is fraught with challenges. If allies refuse to comply, Trump could respond by withdrawing military support or imposing additional tariffs, straining diplomatic relationships and potentially pushing them to seek alternatives to the U.S. dollar. Moreover, China is unlikely to participate, given its ongoing efforts to challenge American financial dominance.

On a broader scale, any indication that Washington is manipulating debt markets could shake investor confidence in Treasuries. The U.S. bond market—worth $29 trillion—is the foundation of global finance. If faith in its stability wavers, the consequences could be severe.

What was once a theoretical concept is now unfolding in real time. Tariffs are being implemented, NATO allies are under pressure, and new financial tools are being openly discussed in Washington. If successful, this strategy could strengthen U.S. manufacturing, reduce debt burdens, and enhance economic flexibility.

However, the risks are considerable. Higher tariffs could drive inflation and alienate allies. Financial engineering could unsettle investors. A debt swap with NATO partners could undermine trust in the U.S. financial system. The Trump administration is making a high-stakes bet that the global financial order can be reshaped without collapsing it.

Whether the "Mar-a-Lago Accord" is an official strategy or an evolving economic shift, it is already influencing global markets. The coming months will reveal whether this approach stabilizes the U.S. economy or triggers even greater uncertainty.

The Trump administration, particularly Scott Bessent has made it clear repeatedly that the bond yields (10Y) must come down.

So far they have come down but not for the reason Scott Bessent had hoped for. Trump’s unresolved tariff policy has sparked fears of a recession and pushed investors out of stocks and into the safety of bonds. This however, has only added to the consensus among some in the market that this administration is going to bring down yields one way or another.

With that being said, yields rising again is not completely out of the question such as higher inflation or any set backs in reducing spending will cause see the yields fight to appreciate again.

Scott Bessent expressed confidence that the budget cuts will be significant enough to fuel “a natural lowering of interest rates” that helps revitalise the private sector. In addition to spending cuts, lower taxes and policies aimed at reducing energy prices are intended to boost economic output while tamping down inflation.

Scott Bessent has backed a review of the Fed’s supplementary leverage ratio (SLR) which would boost demand for government bonds thus pushing the yields lower.

Scott Bessent has not only delivered verbal intervention, but also delivered concrete actions so far, which have supported bond yields to move lower keeping the bond vigilantes at bay. For anyone unfamiliar with the term, bond vigilantes are investors who sell off government bonds in response to fiscal policies they see as irresponsible, driving up yields and borrowing costs for the government. Essentially, they act as a check on excessive government spending or inflationary policies by punishing countries with higher interest rates.

It seems to me that whether there is a recession incoming or a revitalisation of the US economy as a result of Trump’s policies success, the bond yields are most likely coming down either way.The Trump administration has repeatedly made it clear that it wants to see bond yields come down. This has already happened, but not for the reasons they had hoped. Trump’s unresolved tariff policy has caused concern about a potential recession, leading investors to move out of stocks and into the safety of bonds. This has only strengthened the belief that the administration will find a way to lower yields.

However, yields could still rise again due to factors such as higher inflation or setbacks in reducing spending. Scott Bessent has expressed confidence that budget cuts will be enough to naturally lower interest rates and revitalize the private sector. In addition to spending cuts, lower taxes and policies aimed at reducing energy prices are also intended to boost economic output and keep inflation low.

Bessent has also backed a review of the Fed’s supplementary leverage ratio, which would increase demand for government bonds and push yields lower. He has not only used verbal intervention, but has also taken concrete actions to support lower bond yields and keep bond vigilantes at bay. Bond vigilantes are investors who sell government bonds in response to fiscal policies they see as irresponsible, driving up yields and borrowing costs for the government. They act as a check on excessive government spending or inflationary policies by punishing countries with higher interest rates.

Whether there is a recession or a revitalization of the US economy as a result of Trump’s policies, it seems likely that bond yields will come down either way.

The Trump administration's policy of devaluing the U.S. dollar has been effective so far, but its decline—much like bond yields—has not been driven by optimism in the U.S. economy. Instead, growing concerns over a potential recession, unresolved tariff disputes, sluggish economic growth, and persistent inflation have made investors increasingly cautious about America’s economic outlook.

Adding to the dollar’s decline is the recent surge in the euro, fueled by Germany’s newly announced large-scale fiscal spending plan, which has attracted significant capital inflows into European markets.

Regardless of whether Trump's policies ultimately lead to an economic resurgence or a downturn, the U.S. dollar appears set for a decline—either due to policy-driven devaluation or broader market forces at play.

I expect it to reach 100.00 in Q2, driven by growing expectations of interest rate cuts. Trump has consistently called for a rate reduction, openly advocating for it, which has created a noticeable discord between his stance and Powell’s more cautious approach. This public tension between the administration and the Federal Reserve is adding to the sense of uncertainty surrounding the US economy, further heightening concerns and fueling market volatility. The lack of alignment on monetary policy is likely to amplify doubts, contributing to a more fragile economic outlook in the coming months.

Germany’s aggressive fiscal stimulus package, unveiled in early March, aims to revive its struggling manufacturing and defense sectors. This has triggered a sharp appreciation in the euro, alongside heightened economic growth expectations, as investors shift capital into European markets.

Meanwhile, ongoing uncertainty surrounding the U.S. dollar remains a key driver of a bullish EUR/USD outlook.

In the Eurozone, the primary source of uncertainty is political, not necessarily financial. Germany's stimulus plan required significant compromises to move forward, while in France, Marine Le Pen’s recent conviction for embezzling $4.2 million in EU funds adds another layer of instability.

Despite these political headwinds, the euro's strength is underpinned by increased growth expectations from fiscal stimulus and overall positive market sentiment. Combined with anticipated U.S. dollar weakness, this sets the stage for continued EUR/USD appreciation in Q2, with 1.10 already reached and 1.12 to 1.15 within sight.

Despite the fragile state of the British economy, the pound has strengthened significantly alongside the euro. This appreciation has been driven by the Bank of England’s (BOE) relatively high interest rates and the weakening U.S. dollar, which continues to struggle amid uncertainty over the U.S. economy.

As long as the U.S. remains committed to devaluing the dollar, the British pound is likely to keep rising, even in the face of economic weakness and potential BOE rate cuts. Key upside targets include 1.30, 1.34, and 1.38.

Meanwhile, despite the interest rate differential between the pound and the euro, the euro has gained momentum, pushing EUR/GBP higher—primarily due to Germany’s fiscal stimulus package. Given these factors, my outlook on EUR/GBP remains neutral.

However, this could shift depending on key developments. If Germany faces setbacks in implementing its stimulus plan and market sentiment around the euro turns negative, I would turn bearish on EUR/GBP. Conversely, if the UK economy contracts sharply and the BOE accelerates rate cuts while the eurozone continues to grow, EUR/GBP would likely turn bullish. As it stands, there is no clear directional bias for EUR/GBP.

The recent yen rally has come under scrutiny, with growing speculation that the Bank of Japan (BOJ) has reached its peak interest rate and may soon pivot to cuts amid concerns over slowing economic growth, exacerbated by ongoing tariff uncertainties.

However, despite these concerns, the current risk-off sentiment fueled by trade uncertainty continues to position the yen as a safe-haven asset. Moreover, Japan remains in a growth cycle—albeit nearing its end—while many other major economies teeter on the brink of contraction, further enhancing the yen’s appeal.

Crucially, the BOJ remains committed to tightening monetary policy, as rising core inflation pressures the central bank to continue hiking rates, providing further support for the yen.

In my view, despite the potential economic headwinds from tariffs (which Japan is likely to navigate through cooperation with the U.S.), and the extreme net short commercial positioning, the yen is well-positioned to strengthen in the near term. The combination of a risk-off environment and persistent inflation, which is likely to prompt further BOJ rate hikes, makes a continued yen rally the more probable outcome.

The risk-off environment driven by tariff uncertainties and recession fears has significantly boosted gold, fueling its continued rally. Each new unresolved tariff conflict adds further momentum, reinforcing its appeal as a safe-haven asset.

As long as these economic uncertainties persist, gold is likely to remain strong, with investors seeking protection from market volatility by shifting capital away from the U.S. dollar. However, if market sentiment shifts to a risk-on environment, gold could face a sharp downturn as capital flows out of safe-haven assets and into riskier investments such as stocks and cryptocurrencies.

The Australian Dollar (AUD) and New Zealand Dollar (NZD) have both benefited from the weakening U.S. Dollar, but their outlook remains uncertain due to the global risk sentiment.

The AUD, heavily tied to global commodity demand, has seen support from rising iron ore and energy prices. However, concerns over slowing Chinese growth and potential trade disruptions due to tariffs pose downside risks. If China’s economy stabilizes and the appetite for risk improves, AUD/USD could continue its upward trajectory. Conversely, if trade tensions escalate or risk sentiment worsens, the AUD may face renewed selling pressure.

Similarly, the NZD has gained from USD weakness but remains vulnerable. The Reserve Bank of New Zealand (RBNZ) has signaled a cautious stance on rate cuts, supporting the Kiwi in the short term. However, if economic data weakens or risk-off sentiment intensifies, the NZD could struggle.

Overall, both currencies are positioned to strengthen if the risk-on environment returns, particularly if China stabilizes and commodities remain in demand. However, should global recession fears escalate and risk aversion persist, the AUD and NZD may come under pressure as investors flock to safer assets.

The question on many investors' minds today is whether we are experiencing a temporary market correction or the early stages of a major recession. Let's explore both possibilities — the optimistic and the pessimistic.

Below is a technical outlook for the US Stock market.

What we may be witnessing is simply a healthy market correction following a significant rally that began in 2023. Scott Bessent, a prominent market strategist, suggests that the Trump administration is focused on preventing a financial crisis that could arise from the high levels of government spending in recent years. He argues that pulling back from an overheated market rally is essential to avoid a situation similar to the 2008 financial crisis. Bessent remains optimistic, stating that Trump's pro-business policies will ultimately foster long-term market and economic growth. “I’m not worried about the markets. Over the long term, with good tax policy, deregulation, and energy security, the markets will thrive,” Bessent commented. However, he also acknowledges that "a recession is not out of the question," recognizing the inherent risks in the administration's strategy.

In this scenario, investors are simply taking profits and positioning themselves to re-enter the market at more favorable prices as the Trump administration works to lay the foundation for economic recovery. For this bullish scenario to unfold successfully, several key conditions need to be met:

To keep inflation in check and prevent economic contraction, the US needs to quickly resolve trade disputes and reach agreements with its trading partners, especially China. A deal with China would be a significant catalyst for market optimism and economic growth.

Trump’s administration needs to deliver on its promise to end the Russia-Ukraine war swiftly. A breakthrough in peace negotiations would not only provide relief but also boost market confidence. Additionally, securing a critical minerals deal with Ukraine would further support US economic interests and bring stability to the region.

The return of robust economic growth is critical. Positive economic indicators, such as rising GDP, low unemployment, and controlled inflation, would signal the success of the administration’s policies. While inflation might not return to the Fed’s 2% target, as long as it’s linked to higher growth, it can still be viewed positively. At present, the concern is more about sluggish growth than runaway inflation.

If the Trump administration can achieve these objectives, it would spark a wave of optimism among investors, leading to a surge of capital into US markets and potentially starting a new bull market era.

In this scenario, instead of witnessing a healthy market correction or a successful economic revival under the Trump administration, we face the onset of another major recession akin to the 2008 financial crisis. This collapse is triggered by failed tariff negotiations, unresolved geopolitical conflicts, and increasingly negative economic data, ultimately leading to a breakdown in the global financial system and possibly even the onset of another world war.

In this outlook, smart money capitalized on the euphoria surrounding Trump’s election victory, exiting their positions at the market peak, while retail investors, driven by the hype of the Trump win, entered at the top — ultimately setting the stage for a sharp downturn.

For this bearish scenario to unfold, the following factors would need to align:

Trump’s inability to convince trading partners to sign favorable deals would result in retaliatory tariffs, further escalating tensions. As tariffs increase, the global economy suffers, and US growth faces severe headwinds. In turn, US allies may start distancing themselves from the US, seeking closer ties with China, which could erode America’s global influence.

Efforts to bring an end to the Russia-Ukraine conflict collapse, with peace negotiations between the US and Russia stalling. This failure results in an escalation of the conflict, further destabilizing both global markets and geopolitical relations, adding to investor uncertainty.

Economic growth turns negative, signaling a recession, while inflation spirals out of control. Unemployment begins to rise significantly, and interest rates either surge rapidly or are cut aggressively — both scenarios lead to deeper economic turmoil. High interest rates choke off growth, while rapid rate cuts could cause runaway inflation, both contributing to further market instability.

If the Trump administration is unable to effectively wield US power to restructure the global trading system in favor of America, the repercussions could be severe. The longer Trump fails to implement and enforce his economic policies, the more investor confidence erodes, especially when coupled with worsening economic data. As the US fails to project its influence on the world stage, the consequences would be felt not just within the markets, but across the entire global financial system.

This scenario would result in devastating consequences for the US economy, with a plummeting stock market, a breakdown in global trade relationships, and the potential for heightened geopolitical tensions. The longer this process drags on, the worse the sentiment becomes, potentially leading to a full-blown global economic and geopolitical collapse.

The ambitions and objectives of the Trump administration are nothing short of monumental, with the potential for either an extraordinary bull market or a catastrophic crash — there’s no middle ground. It’s a high-risk, high-reward gamble, and the stakes couldn’t be higher. In such a high-pressure environment, staying on top of the constant flow of crucial data is essential. We find ourselves in a state of limbo, with no clear direction on where we’re headed. The only certainty right now is volatility, and with it, ample trading opportunities.

It’s vital to remain dynamic and objective, constantly adjusting to new information as it comes in. The key is to develop a playbook, but be ready to adapt it as the situation evolves. This could very well be the tipping point for a generational shift in global trade and financial systems. The question remains: Will Trump manage to navigate this intricate landscape and lead the US into a new golden age, or will his policies trigger the collapse of America and the global economy?