Financial Market Analysis: Liquidity Squeeze, Rate Uncertainty & Crypto Outlook

Financial Market Analysis: Liquidity Squeeze, Rate Uncertainty & Crypto Outlook

This week, heightened short-term liquidity tensions in the US and growing uncertainty surrounding a potential December rate cut emerged as key trading themes in global financial markets. Despite the government reopening, the nearly trillion-dollar build-up in the US Treasury General Account (TGA) due to the government shutdown hasn't fully unwound, continuing to pressure short-term liquidity.

Furthermore, the lack of economic and jobs data resulting from the shutdown complicated the Federal Reserve's task of making informed decisions at the December FOMC meeting. Over the past three weeks, Fed officials have adopted a hawkish stance, consistently undermining market confidence and ultimately leading to a three-week losing streak for US equities.

On Friday, New York Federal Reserve President John Williams surprised the market with dovish comments, triggering a significant rebound in rate cut expectations. However, a December rate cut remains uncertain, and the likelihood of a rate cut next January is even more difficult to predict. This uncertainty has led to a sharp decline in risk assets, with a crash occurring in AI giant stocks and cryptocurrency markets.

The Nasdaq registered a near 10% decline in November, raising concerns about a potential breach of the 120-day moving average. Bitcoin (BTC) experienced a significant drop of over 35% from its recent highs. The impact of liquidity pressures and uncertainty on financial markets has been unexpectedly substantial.

Compared to US equities, Bitcoin and cryptocurrency markets face a greater degree of uncertainty. In addition to the pressure stemming from the liquidity squeeze, the traditional 4-year market cycle in the crypto space, characterized by bull and bear market shifts, has significantly exacerbated selling pressures. As a result, the decline in crypto markets exceeded three times the drop in the Nasdaq, compared to a historical average correlation of two times.

The liquidity pressures and rate uncertainty are expected to gradually ease in the coming weeks. However, whether the market cycle in the crypto space will undergo a fundamental change, and whether the market will transition into a bear trend or recover after the sharp correction to follow the potential bull market in US equities, will require more time to determine.

Policy, Macrofinance, and Economic Data

Since Federal Reserve Chairman Jerome Powell stated on October 29th that a December rate cut was not a foregone conclusion (despite FedWatch probabilities exceeding 90% at the time), the majority of FOMC members and governors have consistently issued hawkish statements in their various public addresses throughout November. They emphasized that the job market is merely cooling, while persistent inflation remains a greater concern.

This consistently reinforced hawkish rhetoric over the past three weeks has driven down rate cut probabilities from over 90% to below 40%. Coupled with short-term liquidity squeezes resulting from the US government shutdown, this has triggered a three-week losing streak for US equities. The Nasdaq 100 futures contract neared a 10% decline, reaching the 120-day moving average.

Despite Nvidia's remarkably strong performance, the earnings report failed to boost market confidence. On the day of the release, the stock initially rose by 4% before ultimately declining by 3%, with a volatility exceeding 7%. The Nvidia earnings report failed to dispel market concerns, and high-valuation AI stocks responded to liquidity pressures and uncertainty about a December rate cut with valuation haircuts.

Continued large outflows from Spot ETFs, perceived as high-risk alpha yields, have subjected Bitcoin to significant selling pressure, leading to waterfall declines to seek new price equilibrium.

The dovish comments from New York Federal Reserve President Williams on Friday are viewed as an attempt to "rescue" the stock market amidst a crisis. He emphasized that downside risks to employment goals are rising (the labor market continues to cool), while upside risks to price stability goals are diminishing (inflation is on a downward trajectory, albeit slowed by tariff disruptions). He suggested that there is room for further adjustments in the near future to bring policy closer to the neutral range.

Given his special status as one of the Fed's "troika", the market interpreted his statements as indicating that the Fed's internal risk assessment focus is shifting slightly from "fighting inflation" to "protecting employment." This assessment led to a dramatic reversal in December rate cut probabilities on FedWatch before the market opened on Friday, surging from below 40% to 70%. After several days of persistent declines, the three major indexes ultimately registered gains that day.

Caution remains necessary regarding this rapid adjustment in expectations. For Bitcoin's trajectory, it can be viewed at most as a temporary respite from the decline. Whether a rate cut is confirmed, and whether funds will return to high-risk assets after confirmation, remains to be seen by the market.

Cryptocurrency Market Analysis

Compared to the Nasdaq, Bitcoin, subjected to the dual pressures of macro liquidity and cyclical selling, has performed more severely. Following a significant decline of 5.25% last week, it experienced another substantial drop of 7.83% this week, consistently trading below the 5-day moving average. Trading volume nearly doubled compared to the previous week.

We have repeatedly emphasized in our daily Bitcoin analysis that cyclical selling represents the greatest pressure on Bitcoin's upside. Continued selling from long-term holders is weakening the market's ownership structure, making the market particularly vulnerable. This week, during the market decline, long-term holders increased their selling pressure, with sales exceeding 42,000 coins, while total sales from long-term and short-term holders exceeded 260,000 coins.

Bitcoin ETFs have contributed to at least two waves of funding momentum for this bull market. However, in the context of recent liquidity pressures and continued declines, this source of funding has transformed into a selling force, with outflows exceeding $1.171 billion over the entire week and significant declines for 4 consecutive weeks.

Another important source of buying power - DAT company, with Strategy buying $800 million of Bitcoin last week, and BMNR continuing to buy Ethereum (ETH) during the decline. However, in the face of relentless selling flows, their strength has been unable to slow down the decline. A shadowy group of whales emerged as the largest buyers this week, with their cluster of on-chain addresses registering net inflows for 7 consecutive days, reaching a volume of nearly 110,000 coins.

Technically, Bitcoin has completely lost momentum, remaining below the ascending channel and the 360-day moving average for two consecutive weeks. On the pessimistic side, we see that long-term and short-term holders are continuing to sell on a large scale. On the optimistic side, we see that whale groups and DAT company are still buying, leading to continued outflow of tokens from exchanges rather than accumulation.

Additionally, the most pessimistic time for macro liquidity may be over, as the Treasury General Account (TGA) has begun to decline slowly, and the Federal Reserve has begun to hint at a slight shift towards a December rate cut. We have not yet completed the final confirmation of the transition from bull market to bear market - that requires more time. The transformation of the shape of the new and old cycles is still uncertain - that requires more time.

In this difficult time, controlling positions, maintaining complete rationality in the face of price declines, and embracing a long-term view of industry development may be the best option.

Cycle Indicators

According to eMerge Engine, the EMC BTC Cycle Metrics indicator is at 0, indicating entry into a "downward period" (bear market).