GM. This is Milk Road Macro, the newsletter that explains why a Trump post can tank your bags faster than you can say “systematic deleveraging”.
Here’s what we got for you today:
- ✍️ This is what happened on Friday and why systematic strategies are key
- 🎙️ The Milk Road Macro Show: Market Chaos Now, But a Massive Bullish Decade Ahead w/ Mary Ann Bartels
- 🍪 Investors rushed to protection after Friday’s wipeout
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THIS IS WHAT HAPPENED ON FRIDAY AND WHY SYSTEMATIC STRATEGIES ARE KEY
Was it a dream?
No - it happened.
The biggest down day for major US stock indices since April.
And complete devastation in the crypto market.
Many altcoins flash-crashed more than 50%.
The cause?
A couple of headlines from Donald Trump.
That’s apparently all it takes.
But if we look under the surface - there’s another reason why risk asset markets were particularly vulnerable to a sudden shock.
And this is due to the current dynamics in the world of institutional systematic strategies.
So, what happened on Friday?
And why are systematic strategies important?
Let’s take a look…
So, what happened on Friday?
The news flow actually began earlier in the week.
China announced it would require export licenses for anything that consists of even 0.1% of Chinese rare earth minerals.
Rare earths (which China has a stranglehold in the refining of) are extremely important for many key industries like defence and semi-conductors.
This move would mean that China could, in theory, restrict defence and semi-conductor trade for the entire world, as it essentially controls the rare earth market.
While China intended to use this as leverage, I do not think it intended to hold the entire global economy hostage - and that is how the action was taken by Trump and others.
There was actually little noticeable market reaction to this first China headline.
But then, in the middle of the trading day on Friday, President Donald Trump released a long statement on Truth Social attacking “hostile” China over the rare earth controls.
He also wrote that there was “no reason” to meet Chinese President Xi Jinping for scheduled trade talks in a few weeks.
This sent risk asset markets tumbling and volatility surging throughout the trading day on Friday.
Then, we got a second (worse) headline that occurred after US stock trading closed.
Trump threatened to place an additional 100% tariff on China.
With the stock market closed, this was when bitcoin and crypto were really hammered.
But then, just 30 minutes later, a walkback started to occur:
Trump: “Haven’t canceled meeting with Xi”
And this fueled a bounce in bitcoin/crypto on Friday evening.
The walkback really kicked into gear on Sunday, with Vice President JD Vance stating “Trump is willing to be a reasonable negotiator” and he hoped “Trump doesn’t need to use leverage on China”.
And finally, later on Sunday, Trump wrote on Truth Social:
“Don’t worry about China - all will be fine!”
My general view is that this is all just a negotiating process ahead of the upcoming meeting between Trump and Xi as both sides jostle for leverage.
After a few rounds of similar instances in the past few months - we know how these things tend to play out.
However, despite this, there are some immediate technical risks that mean risky asset markets are currently particularly vulnerable to sudden shocks…
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THIS IS WHAT HAPPENED ON FRIDAY AND WHY SYSTEMATIC STRATEGIES ARE KEY (P2)
Why are systematic strategies important?
Readers of the Milk Road Macro PRO report will know that I have been writing about the current risks with systematic strategies.
In the recent edition, I wrote:
“Systematic strategies are basically maxed out on equities - and will start to sell in the event of a correction (which will come eventually)... which could exacerbate a pullback and could make it quite vicious.”
This widespread deleveraging started to happen on Friday, and was looking ominous.
But on Monday, it seemed like it might have been largely averted, after the walkback of trade tensions over the weekend.
So, let's take a look at the anatomy of a sudden deleveraging and how the market "eats itself".
Between May and September, systematic strategies were a large driving force behind the equity rally.
So, what are systematic strategies?
They are quantitative funds that mechanically buy and sell stocks based on rules under certain conditions - with little human discretion - and they control huge amounts of capital.
Because of the strange nature of the market this year - historically huge volatility in April, followed by extremely low volatility - systematic strategies sold everything in April but have since been loading up on stocks for months.
Just a slow-motion “buy everything” spree.
This environment is all fun and games until these strategies suddenly switch to selling - which is what started to happen on Friday.
Systematic strategies recently reached hugely overweight positioning - the most overweight in years - which means they were hyper-sensitive to small changes in trend and volatility.
So when a meaningful drawdown starts to occur and volatility rises - like on Friday - it becomes a relentless and fast-motion "sell everything" fire sale, completely agnostic to price.
The chart below (from before Friday) shows predicted selling flows from just one systematic segment - vol control funds.
My estimate is that $100bn (at the very least) of sell triggers would have been flipped by the rapid change in trend and volatility on Friday, across the whole systematic world.
This is what contributes to creating massive “down only” red days like we saw on Friday:
And this risk-off scramble then reverberates around “riskier” risk assets like crypto.
In these situations, if the stock market continues dropping and volatility continues rising, it can drive a cascading and self-perpetuating cycle as the market "eats itself", with systematic selling triggering further systematic sell triggers.
A lot of the selling triggered on Friday would have been completed on Friday, but some will “bleed over” into this week.
While the Trump headlines were the spark - the actual fundamental market risk here was that systematic strategies were basically “full” and sensitive to small changes in trend and volatility.
On Friday, we got a taste of what happens when volatility spikes with systematic strategies full to the brim.
But, for now, a widespread deleveraging looks like it's been avoided.
However…
Re-escalation?
Unfortunately for bulls, it looks like China has started to re-escalate tension over the past 24 hours.
China’s Commerce Ministry criticized Washington for “threatening and imposing new restrictions” while seeking dialogue, urging the US to “correct its actions and show sincerity”.
It also sanctioned American entities of a South Korean shipping giant - placing limits on five US entities of Hanwha Ocean Co.
The dispute has consequences for the global economy, as vessels are involved in worldwide trade.
If this tit-for-tat negotiating process spirals, it could spell bad news for risk assets - given the current dynamics with systematic strategies.
Wrapping up
The US and China are wrestling for leverage ahead of a big meeting between Donald Trump and Xi Jinping in a few weeks.
This jostling means markets are caught in the crossfire - but remember, it’s likely that anything said in the coming weeks will simply be a negotiation tactic (this might be “famous last words” - but I still think it’s best to fade any escalation).
My view is that strangling the supply of rare earths hurts China too much, and additional large tariffs on China hurt the US too much.
However, there is still an ongoing risk with the US stock market.
Systematic strategies are ultra-long and very sensitive to shocks.
Without the US walkback over the weekend, this shock “vol event” could have led to cascading sell triggers and a very nasty market pullback.
But it looks like we’ve avoided that, for now at least.
While short term volatility has everyone on edge, we’re still betting on strength into year-end.
Yesterday, our PRO Team broke down the liquidation event and talked about $ETH’s strength.
They all agreed we can expect to see $ETH hit ATHs by December 31st.
In fact, we’re so sure about this that we’re willing to bet on it.
If $ETH doesn’t smash its all time high by that date, we’ll refund every person who upgrades to PRO All Access this week (oh and we’re knocking 20% off up front).
Upgrade at 20% off today and if we’re wrong, simply cancel your subscription and we’ll give you your money back.
That’s it for this edition - catch you for the next one.
THE MARKET MAYHEM ISN’T WHAT IT SEEMS 📉
In today’s episode, we sat down with Mary Ann Bartels to talk about why short-term volatility isn’t the full story, and why the next decade might be wildly bullish.
Here’s what you’ll hear:
- Why October’s pullback is normal—and even bullish
- Her bold call for S&P 500 at 10,000–13,000 by 2030
- Why she’s not buying the rate cut hype (yet)
- The mega-trends she’s watching: semis, crypto, and gold
It’s a banger of an episode, don’t miss it 👇
YouTube | Spotify | Apple Podcasts
BITE-SIZED COOKIES FOR THE ROAD 🍪
Argentine leader Javier Milei will meet US President Donald Trump today after the US provided a huge bail-out for the South American country. T he United States directly purchased Argentine pesos on Thursday and finalized a $20 billion currency swap line with Argentina’s central bank.
Following the largest crypto liquidation event in history on Friday, investors are aggressively positioning in trades that offer protection. Data shows heavy "put" buying from traders in bitcoin and ether, which suggested hedging against potential downside risks.
Silver touched an all-time high as a historic short squeeze pushed up the price of the metal. Concerns about a lack of liquidity have sparked a worldwide hunt for silver, with some traders booking cargo slots on transatlantic flights for silver bars.
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