Digital Asset Market: The crypto markets saw a steep decline led by bitcoin, which fell over 4%, along with major altcoins, including Ethereum and Solana, dropping 6%-9%. The cause behind this decline was the release of stronger-than-expected U.S. economic data, including higher job openings and a rise in the ISM Services PMI. These positive indicators led investors to reassess their expectations for further rate cuts from the Federal Reserve, with markets now pricing only one reduction for the entire year. This resulted in a rise in U.S. bond yields, which also caused a sell-off in U.S. stocks, further contributing to the decline in crypto prices. The swift price dip also saw nearly $300 million in long positions liquidated in the market's derivatives. Overall, the strong economic data has caused investors to scale back their expectations for rate cuts, with the odds of any easing moves in the near future dropping significantly.
Macro Economics: Eurozone inflation in December rose to 2.4%, which aligned with expectations and marked the third consecutive monthly increase. Core and services inflation remained steady at 2.7% and 4%, respectively. The Euro held its gains against the US dollar following the release of the data. Economists believe that the European Central Bank will continue to cut interest rates gradually in the coming months despite the rise in inflation, as wage growth is slowing and the economic outlook remains weak. Political instability, manufacturing weakness, and potential trade tensions under the new US administration have also added uncertainty to the euro zone's financial outlook for 2025.
President-elect Donald Trump is considering a new tariff approach that would still apply to all nations but narrow the focus to a select set of goods and services. The proposed plan is not as sweeping as his earlier ideas but would still significantly impact global trade. The new approach would not be as powerful as his original proposals but would still cause significant changes to international commerce. Concerns about the potential impact of 10% or 20% universal tariffs on inflation have been raised. Early discussions suggest that the sectors most likely to be affected by the plan include industrial metals, medical supplies, and energy. With the U.S. currently running a $74 billion monthly trade deficit, the decision on tariffs could have far-reaching consequences.
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Equities: The stock market is trading lower on Tuesday, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all declining. This was driven by concerns about potential rate hikes after the release of economic data showing faster-than-expected growth in the services sector and a spike in Treasury yields. Mid-cap stocks outperformed being focused away from large caps. Nvidia and Tesla were among the companies that saw their stocks dip, while large tech stocks also saw declines. The previous day, the market had seen gains, boosted by semiconductor companies and a report about Trump's tariff plan, which later turned out to be false.
The latest Bureau of Labor Statistics data showed that job openings increased in November, surpassing economists' expectations. However, signs of a cooling labor market emerged as fewer workers left their jobs and hiring continued to slow. The Job Openings and Labor Turnover Survey (JOLTS) reported 8.1 million open jobs in November, the highest since May 2023. The hiring rate fell to 3.3%, and the quits rate decreased to 1.9%, indicating cautious approaches from employers and less confidence among workers. Fed Chair Jerome Powell described the labor market as "looser than pre-pandemic" but noted a gradual and orderly cooling process. While the labor market is decelerating, it has not seen a sharp decline, and the Fed remains committed to a gradual approach to interest rate cuts. The December jobs report, to be released on Friday, is expected to show a smaller increase in jobs and a steady unemployment rate. Overall, the labor market shows signs of slowing down but not a significant collapse. Hence, the assumption is that the Feds will cut rates more cautiously and focus on fighting inflation instead.
The Fed and US Treasury: The US services sector grew in December, with the nonmanufacturing purchasing managers index (PMI) increasing to 54.1 from 52.1 in November. This was higher than the forecasted increase of 53.3. However, concerns over inflation remain, as the prices paid for inputs in the services sector reached a near two-year high. This is consistent with the Federal Reserve's projection for fewer interest rate cuts this year. Demand for services also increased, with the new orders measure rising to 54.2. The Fed has lowered its benchmark interest rate three times in the past year but is now expected to add only two rate cuts in 2025 due to the economy's resilience. The employment rate in the services sector changed little at 51.4, but this has not been a good predictor of overall employment growth.
Geopolitical: An elite Ukrainian brigade trained by France has been plagued by desertions and organizational chaos, with many members going AWOL during training and before seeing battle against Russia. The brigade was supposed to have about 5,800 troops, but only about 2,000 had gone through the French training program, with many still missing. Ukrainian officials admit to the problem, citing fear and lack of combat experience as causes. The front lines report a steady Russian advance, taking advantage of their manpower advantage.
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Cryptocurrencies declined across the board today following robust U.S. economic data and reduced expectations of rate cuts. The inverse relationship between cryptos and rate cuts, as well as inflation, highlights their growing recognition as a legitimate asset class. This trend underscores Bitcoin and other major cryptocurrencies gaining credibility among investors. However, the long-term trajectory of cryptocurrencies will hinge on major regulatory and political developments, particularly the anticipated integration of Bitcoin into U.S. Treasury operations. Such a move could trigger a ripple effect, encouraging global central banks to follow suit.
Fresh economic data has reinforced expectations that a January rate cut is off the table, with projections now pointing to no more than two cuts by the end of summer—if any at all. The evolving landscape has investors closely watching policy decisions from the incoming Trump administration, especially regarding tariffs. Recent indications suggest a shift toward a more targeted approach on an industry or product basis, coupled with broader strategies across regions and countries. This recalibration offers a glimmer of optimism for global trade relations, particularly for China.
Stock markets remain on edge, with investors searching for clear direction. Despite lingering uncertainty, the VIX, a key measure of market volatility, stands at a surprisingly low 17.0. This calm may prove short-lived as geopolitical and economic factors unfold, with potential volatility spikes anticipated in the months ahead. As markets await clarity on fiscal and trade policies, the current environment reflects a precarious balance between optimism and caution.
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