One can’t help but feel that the market has hit the season finale for the year, with trading desks starting to thin out into the holiday season and cross-asset volatility starting to dwindle. With BoJ the only remaining ‘event risk’ for the year, soft US manufacturing data (Empire Fed -23.6 points to -14.5 in December) gave further credence to support the Fed pivot, with a growing sense of FOMO in which even the staunchest bears are starting to question whether this is just the start of the next asset reflation wave as the Fed throws caution to the wind against core inflation that is still well north of their long term target.

Total SPX options open interest hit a record high last week, eclipsing the pre-covid highs as traders piled into bullish expressions after the Fed’s dovish declarations. Furthermore, the Russell 2000 went from a 52-week low to a 52-week high in just over 1.5 months, an incredibly impulsive move that once again shows the pointlessness of old-fashioned labels such as ‘bull’ or ‘bear’ markets.

Looking back at history, the path leading to the first rate cut has generally been positive for equities, with the subsequent price following the rate cuts dependent on whether the economy is actually heading into a recession or not. The current cycle appears to be in the middle of the typical easing cycles, and the subsequent action will be dependent on whether the current slowdown in hard data manages to morph into a full blown recession.

In crypto, prices continued to flatline as we cautioned, with the ETF optimism likely fully priced in as per the rapidly compressing GBTC NAV discount. While the approval of the ETF is certainly a sentiment positive, one must caution that a significant portion of the initial flow might come from a swap out of GBTC and listed miners into the the ETFs, as investors trade out their imperfect Bitcoin proxies into the straight ETF product. Some of this will likely be off-set by the sharp drop in global bond yields as investors begin to pivot back to the “cash is trash” (or is it?), but that would put us once again at the mercy of what yields do as a secondary beta instrument.

Furthermore, sell-side analysts expect that much of the current move is driven off retail speculation over institutional re-engagement based on on-chain data, leading to possible ‘sell-the-news’ disappointment following the announcement. Given the somewhat overbought position in BTC, perhaps an ETH/BTC basis would make sense as an expression heading into the new year and the proto-danksharding upgrades? Only time will tell…

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