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Until the music stops
Aurelie Barthere
Key Takeaways
4 min read

Until the music stops: What comes after the bear market rally?

Crypto and risk assets are experiencing what is probably a powerful bear market rally. The drivers have been US and European inflation coming in below consensus for a few months, the macro spark of China reopening, and negative sentiment by investors reversing.

What now? Crypto and risk assets could ride the “feel good” wave a bit longer: our equity risk premium is back to the 75% percentile at 5.7% from close to 10% in October 2022, and our Smart Money stablecoin indicator, which crossed panic in May is only slowly normalizing (~25% as of January 22, 2023).

For a long-term investor who is looking to assess whether crypto and equity assets warrant a higher allocation, there is low conviction. A smooth desinflation is now priced in (Fed Fund rates expected to peak at 4.9% in June this year and drop to 2.8% at the end of Dec. 2024). The issue is that neither equity nor credit prices reflect the not-so-unlikely scenario of growth weakening sharply or of any accident in financial markets (watch for illiquid investment vehicles) spilling over to the macro. It is that optimistic pricing that makes us uncomfortable with calling for the beginning of the new crypto bull market.

Macro thread

The growth divergence between regions remains a relevant narrative for markets. In China, the bull market of local equities, copper and AUD/USD remains fundamentally supported by much better than expected activity data: in December, retail sales came in at -1.8% YoY vs -8.6% expected and -5.9% in November. At Davos, China's Vice-Premier Liu He confirmed that China was re-opening to the world: “Foreign investments are welcome in China, and the door to China will only open up further”.

In Japan, the BoJ was on hold, as we and the consensus expected.The Bank communicated that it would defend...