Weekly Market Insights:
Trade Tensions, Bond Market Outlook, and Crypto Trends
Market Highlights
Equities wrapped up the holiday-shortened week on a positive note. Investor expectations for monetary easing in 2025 have dropped significantly, from 125 basis points in September to just 40 basis points recently. Key updates include evolving trade relations, European monetary policy, and economic pressures in China.
Global Trade and Economic Developments
#1. US-EU Trade Relations:
President Trump has called on the European Union to address its trade deficit with the US by increasing oil and gas purchases. Failure to comply could lead to higher tariffs on EU imports. Markets anticipate the EU will increase its US energy imports, partly driven by its intent to reduce reliance on Russian supplies.
#2. European Central Bank (ECB):
The ECB president highlighted progress in curbing inflation but expressed ongoing concerns about the services sector. Renewed US-EU trade tensions and their potential impact on growth and inflation have raised questions about the eurozone’s monetary policy direction.
#3. China’s Economic Slowdown:
Chinese manufacturing profits continue to decline, with recent PMI data showing limited effects from government stimulus measures. Deflationary pressures remain a significant challenge, impacting corporate earnings.
Key Highlights of the Week
The crypto and macroeconomic landscapes saw several significant developments this week, marking a fitting close to an eventful 2024. Key milestones included regulatory breakthroughs, institutional adoption, and notable market movements:
Donald Trump Appoints Bo Hines: Bo Hines has been named head of the Presidential Council of Advisers for Digital Assets, signaling a crypto-friendly direction for the new administration.
Ripple Launches $RLUSD Stablecoin: Ripple has officially debuted its fiat-backed stablecoin, $RLUSD, further advancing its position in the digital asset ecosystem.
Bitcoin ETFs Surpass Gold ETFs: Bitcoin Exchange-Traded Funds (ETFs) have surpassed Gold ETFs in assets under management (AUM), a historic shift after gold’s two-decade dominance.
Cango Inc’s Bitcoin Mining Pivot: The NYSE-listed Chinese auto trading platform has transformed into a major Bitcoin miner, matching the hashrate of leading US mining company MARA.
SEC Approves Spot ETFs: The SEC has approved the first combined spot Bitcoin and Ethereum ETFs, managed by Hashdex and Franklin Templeton, marking a significant regulatory milestone.
Binance.US to Resume USD Services: Binance.US plans to restore USD services in 2025, amid expectations of a more favorable regulatory environment.
Insights from Wall Street
#1. Equities:
Morgan Stanley:
US households now hold over 37% of their assets in equities, but stretched valuations and thin risk premiums suggest investors should rebalance portfolios for greater diversification.
HSBC:
US large-cap growth stocks, particularly in technology, continue to outperform, while value stocks and emerging market equities have lagged behind.
#2. Fixed Income:
Morgan Stanley:
The Fed raised its inflation forecast and neutral rate during its last meeting, reducing the likelihood of multiple rate cuts in 2025.
Goldman Sachs:
Short-term US bonds offer attractive opportunities following recent yield increases. However, European bonds appear less compelling, as their divergence with US bonds is largely priced in.
#3. Economy:
J.P. Morgan:
Despite stronger-than-expected economic growth in 2024 and record equity market highs, inflation progress has stalled, squeezing consumer purchasing power.
Goldman Sachs:
GDP growth remains robust, but labor market metrics, including unemployment-to-employment flows, have softened. A weak labor report could increase the likelihood of additional rate cuts in 2025.
Fixed Income Overview
2024 Recap:
Fixed-income markets delivered mixed returns, highlighting the importance of diversification. US investment-grade bonds underperformed as yield increases weighed on prices, while international bonds, emerging market debt, and US high-yield bonds delivered stronger results.
Outlook for 2025:
Monetary Policy:
The Fed is expected to slow the pace of rate cuts, targeting a fed funds rate range of 3.5%–4%.
Disinflation remains the key driver, with labor market normalization and pro-growth policies supporting economic expansion.
Bond Market Dynamics:
US Investment-Grade Bonds: Positioned for a comeback as Fed rate cuts steepen the yield curve, boosting yields over cash.
Intermediate-Term Bonds: These offer value, balancing yield opportunities with lower risk compared to long-term bonds.
Credit Spreads: Tight spreads suggest limited room for narrowing further, though stable economic growth could prevent significant widening.
10-Year Treasury Yields: Expected to remain range-bound between 4%–4.5%, supported by Fed balance sheet strategies and resilient growth.
2024 in Retrospect: A Year of Milestones
This year cemented Bitcoin’s position as a global asset, embraced by corporations and sovereign entities as a hedge against fiat volatility. The year also witnessed groundbreaking regulatory and institutional advancements:
#1. Institutional Adoption: Major asset managers launched Bitcoin spot ETFs, widening access for retail and institutional investors globally.
#2. Emerging Markets Drive Growth: Adoption in South America, Africa, and Southeast Asia surged, fueled by economic freedom and access to stablecoins as payment mechanisms.
#3. Crypto-Friendly Policies: Donald Trump’s presidency has reinvigorated optimism with policies supporting energy, banking, and Bitcoin sectors.
The resilience of Bitcoin and other crypto assets in an evolving macroeconomic environment underscores the maturation of the digital asset space. As we move into 2025, expect further growth and innovation.
Market Analysis
Bitcoin (BTC/USD):
Bitcoin set a new all-time high of $108,268 this week before retracing to $92,175 following the Federal Reserve’s decision to cut interest rates by 25 basis points. Federal Reserve Chair Jerome Powell’s cautious remarks on Bitcoin’s regulatory risks added to the market's volatility. Despite this pullback, Bitcoin remains well-supported by positive macroeconomic trends, including Trump’s crypto-friendly policies and a strong US economy.
Key Levels:
Support: $92,000
Resistance: $108,364 (All-Time High)
Ethereum (ETH/BTC):
ETH/BTC has seen downward momentum in the wake of FOMC-induced risk aversion. While Ethereum faces near-term headwinds, the SEC’s approval of a spot ETF combining Bitcoin and Ethereum could catalyze renewed interest.
Gold vs. Bitcoin:
Gold continues to trade in a defined range, with macroeconomic factors such as interest rates expected to drive its performance in 2025. A compelling relative value trade is long Bitcoin and short gold, given Bitcoin’s increasing market cap relative to gold.
Dollar Index (DXY):
The DXY remains strong, reflecting US economic resilience and expectations of sustained growth and inflation in 2025. A strong dollar could continue influencing crypto and traditional asset markets.
Spot Market Trends
Altcoins were hit hard by post-FOMC risk aversion, contributing to a sharp drop in the total crypto market cap from $3.73 trillion to $3.05 trillion. Despite this, many traders took advantage of the dip to accumulate assets like BTC, ETH, and SOL, alongside smaller altcoins such as SEI, GRT, and AERO.
Derivatives Insights
Implied Volatility Opportunities:
The sharp decline in Ethereum's price has elevated implied volatility for the January 31st expiry, presenting opportunities for traders. Yield Entry Notes and Yield Exit Notes are well-positioned to capitalize on price dips or recoveries. Selling straddles is another strategy for those expecting ETH to remain range-bound.
What to Watch Next Week
RBA Meeting Minutes (Tuesday): Insights into Australia’s monetary policy outlook could influence AUD, equities, and risk sentiment.
US Consumer Confidence (Tuesday): A key indicator of economic optimism and spending patterns, impacting US equities and the USD.
US New Home Sales (Wednesday): This data will shed light on housing market trends and broader economic health.
US Initial Jobless Claims (Friday): Labor market data will guide expectations for future Federal Reserve policy moves.
As 2024 concludes, market participants face a dynamic landscape shaped by global trade tensions, evolving monetary policy, and mixed economic signals. Whether in equities, bonds, or crypto, diversification and careful allocation remain crucial as we head into 2025.