In the final hours of the week, cryptocurrencies faced significant declines. Powell’s remarks turned everything upside down. While hopes for the U.S. economy relied on a steady continuation of interest rate cuts, such a scenario for 2025 now seems unlikely.
Panic Selling in the U.S.
The Kobeissi Letter published a comprehensive assessment of the current situation, revealing critical details. U.S. stock markets experienced an outflow of $50.2 billion in the past week, marking the largest outflow since September 2009. Throughout this period, major events unfolded, and last week proved to be the worst.
Large-cap funds saw an outflow of $20.9 billion, coinciding with the end of a six-week inflow period, leading to a dramatic drop in cryptocurrencies. The volatility index experienced a larger spike than in February 2007 and 2020, with VIX rising by 74% on December 18, marking the second largest jump in history. What lies at the heart of this panic?
Cryptocurrencies Set to Rise
We observe a balance returning to panic selling, with signs of a potential reversal. November’s PCE data fell short of expectations, prompting demand from lower price levels. Had the PCE data been released before the meeting, Powell might not have presented such a grim outlook for the coming year.
We had already discussed the potential pause in interest rate cuts due to rising inflation. Markets might overlook this and could also miss the signs of a turnaround. This suggests we are in a scenario where a few savvy investors could profit from the situation.
On Friday, as $66 trillion worth of options expired, new purchases predominated, indicating that many professional investors expect further rises. If the Fed sees signs of recession risk, the situation in 2025 could differ significantly from Powell’s current portrayal. Should Powell receive discouraging data about economic stagnation before the upcoming interest rate decision in 38 days, a reversal from recent declines could occur, allowing markets to recover rapidly.
