2024 is nearing its end, and the last few trading days of this year are more important than expected. Although the Bank of England and the Bank of Japan held rates steady as the market expected and leaned towards a dovish stance, the Federal Reserve's 'hawkish rate cut' and technical adjustments to the overnight reverse repo rate caught the market by surprise, indicating that liquidity conditions will tighten by the end of the year.
Regarding interest rates, although Powell announced a 25 basis point rate cut as expected, his statement carried a clear hawkish stance, particularly mentioning the 'magnitude and timing' of future rate cuts, reminiscent of the wording used during the pause in rate cuts in 2006-07. Federal Reserve Chair Hammack also expressed opposition to the rate cut and hopes to keep rates unchanged, while the economic projections summary (SEP) dot plot also showed a hawkish stance, with only 5 members believing that there would be more than 3 rate cuts in 2025. The median of the dot plot expects only 2 rate cuts in 2025, while long-term interest rate expectations have also risen to 3.0% in light of the still-strong economic conditions.
More importantly, the core PCE inflation median for 2025 has risen to 2.5% (+0.3%), with the 'inflation risk distribution' rising to 15 (only 3 in September), highlighting the stickiness of inflation over the past quarter. Additionally, during the Q&A session of this year's final FOMC meeting, Powell explicitly stated that he is 'very optimistic' about the economic situation and believes that the Federal Reserve has now entered a new phase that should 'act cautiously' after cutting rates by 100 basis points, indeed indicating a strong hawkish tone.
In terms of fiscal policy, Trump's campaign proposals are expected to increase the U.S. deficit by $7.7 trillion over the next 10 years (with CRFB estimating a range of $1.7 to $15.5 trillion), which would push the U.S. debt-to-GDP ratio to around 145% by 2035. The extent of ultimate inflationary pressures will depend on how many initiatives he can implement during his second term, while Trump's recent dramatic shift in attitude towards the TikTok ban may indicate that the actual implementation strength of his policies may not be as large as expected.
Regarding government spending, the current debt ceiling pause will expire on January 1, prompting Secretary Yellen to take a series of 'extraordinary measures' to create more borrowing space. According to Wall Street estimates, the Treasury should have enough emergency funds available until August, so the debate over the debt ceiling may not become a news focus until after spring at the earliest.
A series of hawkish messages brought significant negative effects on risk, with the SPX index dropping 200 points. The U.S. Treasury yield curve showed a bear steepening trend, with the 10-year yield breaking through the downward channel and heading towards the year's high, rising 15 basis points in just the past week.
The SPX index experienced a minor crash after the FOMC meeting, with the volatility index (VIX) significantly soaring. Before the sell-off occurred, there was a substantial overbuying of call options in index options, and the range of leading stocks in the market narrowed to levels exceeding those in July, both of which may have played a significant role in the rise of the VIX. In extreme oversold conditions, the stock market quickly rebounded to nearly 6000 points over the past few days, but whether the market has escaped danger remains to be seen.
The so-called 'Christmas rally' may have some indicators, revealing how risk markets wrap up and welcome the new year. Past data shows that negative performance in the last week often accompanies sell-offs in the following January. Will the year-end rally come again? We will know the answer in a few days...
In the cryptocurrency space, 2024 will undoubtedly go down in history, with the market capitalization of cryptocurrencies rising over 90% this year, from $1.65 trillion to $3.2 trillion. Incredible as it may seem, cryptocurrencies are the only asset class in 2024 to surpass U.S. stocks based on market capitalization growth, thanks to the approval of spot ETFs in January and the regulatory optimism following Trump's election.
The rise in cryptocurrency this year was initially driven by BTC, with its dominance rising from a low of 40% to over 60%. Overall, this year’s market activity consists of three important phases: In the first quarter, the approval of spot ETFs drove significant gains; in the second and third quarters, market activity was muted and lacked sustained momentum, leading to sideways price action; finally, Trump's re-election made altcoins regain their market dominance, driving recent gains, with XRP and Dogecoin seeing annual increases of over 200%, while other major altcoins rose around 150%, making ETH's 40% increase this year look modest.
The influence of the mainstream market on cryptocurrencies is most evident in the high correlation between BTC and the SPX index. By the end of 2024, the SPX index will still be the asset class with the highest correlation to BTC. Moreover, Citigroup's research shows that ETF inflows can explain nearly half of BTC's weekly return volatility, and this trend is likely to continue into the new year.
Additionally, using stablecoin market capitalization as an indicator, mainstream funds have massively re-entered the cryptocurrency market since Trump's election, with the current stablecoin market capitalization nearing $190 billion, far surpassing the peak during the FTX period in 2022. Meanwhile, discussions among governments regarding BTC reserves are also becoming increasingly popular, with unverified media reports indicating that Hong Kong legislators recently proposed that the government should consider including BTC in its foreign exchange reserve portfolio.
Another sign that BTC is gradually becoming a mainstream asset class is the continuous decline in actual volatility, which will ultimately provide more diversification benefits and excess returns for traditional 60/40 portfolios. As asset classes mature, volatility should continue to decline, with the development path of cryptocurrencies not differing from other asset classes.
Finally, concluding with an unresolved BTC and M2 chart. As global liquidity continues to decline, should we remain cautious about BTC's rise? Will the continued inflow of new TradFi funds and the U.S.'s cryptocurrency-friendly regulations lead to a breakthrough change in this correlation? Or will macro factors prevail, allowing skeptics to prove that BTC is merely a part of liquidity performance?
Thank you all for accompanying us through the wonderful year of 2024, and we look forward to sharing more insights on cryptocurrencies and the macro market with you in the new year! Happy holidays!
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