Bitcoin Sees $43K and Ethereum ETF Buzz: How Anticipated Fed Rate Cuts are Driving Markets

1. Digital Asset Market: The SEC has pushed back its decision on BlackRock's spot Ethereum ETF until March, citing the need for more time to review. The agency has also invited public comments on Grayscale's Ether ETF proposal, pushing the decision back an additional 35 days. There are several other applicants for an Ether ETF, and experts speculate that the maximum allowable 240 days could be taken before a decision is made. Standard Chartered Bank predicts that if the ETF is approved, Ether's price could rise by 70% and reach $4,000 by May. The SEC is expected to follow a similar pattern as with Bitcoin ETFs and delay decisions until closer to the final deadlines in May.

2. Macro Economics: The International Monetary Fund has increased its predictions for global economic growth, citing faster-than-expected easing of inflation in the US and China. The IMF sees a "soft landing" on the horizon, but overall growth and trade still fall below the historical average.  The Conference Board's consumer confidence index rose to its highest level in two years in January, with Americans feeling positive about inflation and interest rates due to a strong labor market. The present situation index, which measures current business and labor market conditions, saw a significant increase, while the expectations index, which measures short-term outlook, also rose slightly. Inflation expectations have fallen to a three-year low, and concerns of a recession have decreased. This positive sentiment is in line with the Federal Reserve's decision to hold interest rates steady at their latest meeting. However, some reports, like Legal Shield's consumer stress legal index, suggest that Americans are still very concerned about their finances, potentially fueled by an increase in credit card spending. The upcoming ADP and Labor Department jobs reports are expected to show a modest slowdown in job growth in January. 

3. Equities: The US economy is demonstrating strength and resilience, with record-breaking stock market performance and a moderation of inflation. This has led to a more positive outlook among investors and economists, despite concerns about wage growth, household debt, and the upcoming election. The recent shift by the Federal Reserve towards potential rate cuts can be attributed to the sudden decline in inflation, which may be necessary to prevent any potential risks to the current state of the economy. According to Citadel CEO Ken Griffin, there are indications of a potential soft landing this year due to favorable data on labor market, GDP growth, and inflation. Griffin predicts that inflation may even decrease to the low 2% range by the end of 2024, and the Fed could begin cutting rates as early as the summer. This reflects a significant shift in perception, as the overall economy is believed to be in a strong state, contrary to previous beliefs.

4. The Fed and US Treasury: The Federal Reserve is expected to keep interest rates unchanged at its first meeting of 2024, but the market is anticipating multiple rate cuts later in the year. This is despite the economy experiencing strong growth, with GDP up 3.1% in 2023 and consumer spending exceeding expectations. The unemployment rate is also at a historically low level. The question remains why the Fed would lower rates when the economy is doing well.

5. Geopolitical: The Biden administration's decision to delay the approval of new LNG terminals in the US is seen as a win for environmental groups, but detrimental to Western interests. It benefits Russia and Iran, while punishing Texas. US LNG exports have already helped wean Europe off Russian energy and reduce global gas prices. If new projects are blocked, Europe will have to rely on imports from less friendly countries. The move is criticized as playing politics with global energy security. It also goes against the US promise to support allies. The decision is believed to be a retaliation against Texas for opposing the administration's border policies.

View from our desk

The cryptocurrency market is experiencing a shift in dynamics, with Bitcoin (BTC) currently valued at around $43,000. Recent trends have shown aggressive buying in the $39,000 to $40,000 range, indicating a strong market position for Bitcoin, especially considering its limited supply and the upcoming halving event. Furthermore, the focus is gradually shifting towards the anticipated approval of an Ethereum ETF, expected around May. This transition is fostering a positive outlook for major cryptocurrencies in the weeks ahead.

In the broader economic landscape, a consensus among economists suggests a successful soft landing for the economy, as evidenced by the stock market's new highs. However, the need for Federal Reserve rate cuts in this context raises questions, especially in an election year with the necessity of rolling over Treasuries. It appears that these anticipated cuts are part of a larger strategy, potentially linked to a new policy proposed by federal regulators. This policy would require U.S. banks to use the Federal Reserve's discount window as a preparatory measure for future banking crises.

The timing and rationale behind these measures can be partly attributed to concerns surrounding commercial real estate debt. The banks have yet to fully mark-to-market their loans and investments in this sector, a step that is inevitable. The implementation of Fed rate cuts seems to be a strategic move to alleviate potential financial strain on banks as they navigate through this adjustment. This underscores the interconnectedness of different financial sectors and the role of monetary policy in stabilizing these connections.

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