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Year-End Week Set for a Bull-Run in Markets

Financial assets continued to rise last week, with bonds and equities both seeing gains as data readouts strengthened Wall Street's belief that rate cuts will come early and deep in the upcoming year.

December 25, 2023

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ETF Gamble Brings Bitcoin's 160% Recovery

The feeling of gloom that engulfed cryptocurrency markets at the end of 2022 after a $1.5 trillion wipeout has turned into avarice.

This year, Bitcoin made a huge comeback, rising more than 160% and adding $530 billion to its market valuation.

Many smaller tokens followed, from meme-coins with dog and frog themes to Solana, backed by Sam Bankman Fried, taking off as investors once again began to embrace risk.

An investor would currently have more than $800,000 in gains if they had invested $100,000 in Solana at the beginning of 2023.

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Much of the boom is based on the hope that US authorities would soon approve the first exchange-traded fund that makes direct Bitcoin investments. By January 10th, investors will know if that wager - which cryptocurrency bulls view as a near-certain winner—pays off.

Clearly, we are now approaching a critical turning point in the Bitcoin ETF decision countdown.

Many critics of digital asset exchanges claim cryptocurrencies are essentially worthless and serve as a shelter for illicit activity.

The biggest exchange, Binance, agreed to pay a $4.3 billion punishment in November for several infractions, and its CEO, Changpeng Zhao, was compelled to resign.

For his fraudulent activities at FTX, Bankman-Fried was sentenced to prison, and liquidity is still reeling from the fall of his massive enterprise.

Still, this year's bitcoin surge outpaced that of equities and gold. The halving, or halvening, is a quadrennial occurrence that supporters predict will stop supply growth in 2024 and support the token and possible ETF demand.

The leading cryptocurrency is still selling well below its peak of around $69,000 in November 2021.

As cryptocurrency markets rebounded, the leading US exchange Coinbase Global, software business turned Bitcoin investor MicroStrategy, and bitcoin miners Marathon Digital Holdings and Riot Platforms also saw increases.

The Securities and Exchange Commission (SEC) sued Coinbase for allegedly operating an unlicensed platform, an allegation the business denies, but Coinbase's over 400% gain withstood the legal action.

In 2023, there was a spike in interest in Bitcoin derivatives. According to CCData, the open interest in bitcoin options on Deribit, the biggest cryptocurrency options exchange, surpassed $16 billion for the first time in December.

The open interest in Bitcoin futures at CME Group also reached historic highs; the two companies are competing to be the leading markets for these securities.

The collapse of the TerraUSD stablecoin project in 2022, which cost over $40 billion, left the decentralised financial industry with no healing.

One exception is liquid staking, where DefiLlama data indicates that this year's total value of locked assets reached a new high.

Access to the incentives obtained when tokens are committed to support the operation of blockchains is made easier by liquid staking protocols.

Following the April Shanghai upgrade to the Ethereum network, staking gained traction.

According to data from Nansen, weekly trade volumes for nonfungible tokens, or digital collectables, have increased from October lows of less than $50 million to about $180 million this month.

However, they represent a small portion of the $1.8 billion high observed in 2022, indicating that the cryptocurrency market still has a long way to go before it can rekindle the degree of enthusiasm it garnered during the pandemic when the globe was flooded with stimulus.

This year has seen significant changes in the market share of cryptocurrency exchanges.

Although Binance is still the biggest platform, Kaiko claims that its percentage of spot trade decreased from over 65% in the beginning of 2023 to about 44% by mid-December.

Much of Binance's lost business was absorbed by Asian-focused platforms such as Upbit, Bybit, and OKX.

Stocks Extend Bull Run on Rate Cut Bets

During a turbulent, low-volume session before Christmas break, the S&P 500 recorded its longest winning run in almost five years.

This was due to indications that pricing pressures in the US were abating.

The Nasdaq 100 and an international stock market index had long runs; the tech-heavy Nasdaq's run was the longest since July 2021. The US bond market saw advances for the fourth week, a record since March.

Friday saw a meagre 0.2% increase in the S&P 500 as stock indices were affected by a decline in Apple's shares.

The massive iPhone manufacturer's market worth has increased by almost $1 trillion this year.

Another negative was Nike, which fell 12% on Friday after the sportswear manufacturer announced a strategy to reduce costs and a worse sales forecast.

The Nasdaq had a 0.1% increase after reaching all-time highs earlier in the week.

On Wednesday, events took a sharp turn when a late-afternoon slump was attributed to so-called zero-day, or ODTE, options.

As the session began the "Santa Claus rally," a seasonal tendency when stocks tend to soar into the first few days of the new year, some on Wall Street predict greater market gains.

The S&P 500 will only see minor declines, with the index continuing to rise beyond its highs from early December. With such progress, the gauge would return to being within reach of its all-time high.

Investing just in dividends, handpicking industries, or hunkering in cutting-edge options techniques have yet to perform as well this year as just holding the S&P 500.

Investors are learning to keep things simple as 2023 comes to an end.

They have been flooding plain-vanilla stock funds with cash amid a 4% rise this month, accelerating the index's 2023 advance to 24%.

It's evidence of what has consistently worked: purchasing and holding the benchmark gauge, which is getting close to all-time highs.

Many ostensibly protective actions that were really market timing in disguise have been left behind as 2023 has progressed.

Friday's report, which showed that the Federal Reserve's favoured underlying inflation indicator barely increased in November, initially helped stocks.

Even if some Fed members resisted this week, it helped solidify investor expectations for earlier and more significant interest rate decreases early in the upcoming year.

The interest rate cuts by more than 150 basis points in 2024, double the Fed's prediction and is what swaps traders are banking on.

Global bonds are poised for yet another victory. Treasury bonds had mixed trade on Friday, with the US 10-year bond's yield around 3.9%.

Dollar Short Bets Jump on Fed's Pivot

An increasing number of people are placing bets against the dollar after the Federal Reserve shocked markets by announcing the end of its monetary tightening programme.

The greenback remained stable despite a weeklong decline that saw the dollar hover near five-month lows versus its Group-of-10 competitors.

Following that conference, the Fed announced revised economic predictions that indicated more monetary easing would likely occur in the upcoming year, precipitating a sharp decline in the currency's value.

This put the Dollar Spot Index on course for its worst yearly performance since 2020, plunging to its lowest level since July and down more than 2% year to date.

The dollar value of such bets has decreased to $5.5 billion, somewhat less than last week, although there are now more contracts betting on dollar decline.

The Fed's preferred measure of underlying inflation revealed weak price growth on Friday, which confirmed the central bank's shift towards interest rate decreases next year and further depreciated the dollar.

Separately, according to a Commodity Futures Trading Commission report, traders are increasing their pessimistic bets on the Canadian dollar, pushing net short holdings to the highest level in over five years.

According to the latest data, leveraged funds increased their bet against the loonie to 51,971 contracts in the week ending December 19, the biggest since January 2019.

The previous week's wager was 37,707 contracts.

This quarter, the loonie has underperformed its counterparts in the Group of 10.

The third quarter saw an unanticipated contraction in the Canadian economy, and a second consecutive quarter of decreases is all but certain.

However, Governor Tiff Macklem of the Bank of Canada has stated that before considering lowering interest rates, officials must first see signs of easing inflation.

Bullish Oil Bets Rise for First Time Since September

For the first time in over three months, hedge funds have become more optimistic about oil as prices rise due to increased conflict threats to global energy exports.

Last week, money managers took the biggest bearish position ever in the West Texas Intermediate benchmark; nonetheless, they increased their net long holdings to 109,723 lots, according to ICE Futures and the Commodity Futures Trading Commission data.

The decrease of 32,678 lots in short positions was the main factor for the increase in net longs, the first since late September.

The optimistic move coincided with oil posting its biggest weekly rise in months, driven by strikes by Houthi militants in the Red Sea that may cause months-long interruptions.

The US is forecast to produce record amounts of petroleum next year, but demand growth is predicted to slow. As a result, the longer-term prognosis for crude remains uncertain.


THE WEEK AHEAD

Most global markets closed on Monday for the Christmas holiday.

According to the Commerce Department data last week, prices in the United States decreased in November for the first time in over three and a half years, bringing the annual growth in inflation even closer to 3%.

That data was the last major release this year, and many investors worldwide are expected to be away between Monday's Christmas Day holiday and New Year's Day.

All eyes now are on more cues for rate cuts next year.

The Red Sea snarl will focus on understanding the impact of shipping re-routes and costs on global supply chains and if that stokes inflation to rear its ugly head.


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