The year 2025 did not start well for financial markets. With a positive outlook for the first time in the post-Covid era, optimism was justifiably high. While only two weeks do not provide much information for the whole of 2025, they do show a relatively low level of confidence among market participants. The outlook for 2025 is based on improving market conditions in most areas. Reasonable inflation and still historically strong labour markets provide a solid foundation. The change of leadership in the US is also expected to improve the business environment. In addition to government support, central banks will cut interest rates, providing further support to businesses. Geopolitical tensions, which significantly increased volatility last year, are also expected to improve. It is important to note that these are only a few examples that point to a strong 2025.
This is a stark comparison to the outlooks of previous years. Since Covid-19, almost every year has seen outlooks with almost apocalyptic consequences, especially around potential recessions. Perhaps it is precisely this overall positive outlook that makes the negative news shine more brightly. In this sense, any disappointment could send markets tumbling. Part of the recent decline in markets was triggered by the Fed's latest rate cut, in which the Fed stated that they would cut rates less than initially expected. Another factor was higher than expected US inflation data. This led to a general sell-off in risky assets, such as cryptocurrencies and equities, as shown in Figure 1. The impact on the performance of Bitcoin and the S&P500 has so far been limited due to a slight correction in mid to late December.
US inflation has fallen significantly since 2023. At the end of 2023 and the beginning of 2024, US inflation hovered just above 3%, before falling to just below 3% for the remainder of 2024. In September 2024, inflation was on a promising trajectory before picking up in the remaining months. Under "normal" circumstances, inflation is expected to remain between 2% and 3% throughout 2025, with a tendency to fall to 2% by the end of the year. Although inflation has become a frequent topic of discussion, it is still important that it stays below 2% in order to stabilise the economy. Its importance has diminished, especially for the Federal Reserve, which has based most of its recent interest rate decisions on the US labour market. The Fed hiked rates aggressively in 2022 and 2023. Its rate rose to 5.25% - 5.5% by the end of 2023. Initially, markets expected rate cuts in early 2024 to gradually counteract the potential recession. The Fed did not cut rates until autumn 2024, citing the solid state of the economy due to a strong labour market. As soon as this market showed signs of weakness, the Fed began to cut rates aggressively, surprising market participants. However, in its latest cut to 4.25% - 4.5% in December 2024, Powell stated that the Fed would stop cutting aggressively in 2025. He outlined only two 25bp cuts in 2025, which would bring the federal funds rate to between 3.75% and 4% by the end of 2025. Prior to the meeting, expectations were for at least 1% cuts in 2025. Figure 1 shows these developments in more detail.
Cryptocurrencies keep dominating market news with staggering gains over the past weeks. Ever since Trump won the election in November 2024, cryptocurrencies kept soaring. Trump has been a strong supporter of cryptocurrencies during his race. Unsurprisingly, when he won, optimism about the asset class increased significantly. Enthusiasm increased due to the prospect of finally clear regulation around cryptocurrencies in the US. Under Trump’s administration, he wants to avoid that the US becomes irrelevant for such a promising industry, which is frequently compared to the early tech industry – of which the US is the major hub in the world through strong support during the development of the industry. Additionally, Trump suggested a large Bitcoin reserve, which naturally pushes the price of Bitcoin. He is also filling his departments with strong cryptocurrency advocates to place the US as market leader in the blockchain technology. One of his latest moves is replacing Gary Gensler with Paul Atkins as chair of the SEC. This will likely result in further institutional support, as the asset class matures and clearer regulations are in sight. Institutional adoption is already on the rise with Australia’s AMP adding Bitcoin to its portfolio. Similarly, Ray Dalio and BlackRock are also pushing for the asset class. The previously mentioned factors led Bitcoin to soar from around $60k-$70k prior to Trump’s election to above $100k within slightly more than one month. Inflows in Bitcoin ETFs in November and December also topped the inflows after the initial approval of the first Bitcoin ETFs in the US. As of the time of writing, Bitcoin is trading at $101k with a performance of 140% in 2024. Figure 1 also highlights the steep growth in the past month.
Cryptocurrencies have exploded in price since Trump's victory. Prior to the election day, Bitcoin hovered between $60k and $70k. Since then, Bitcoin has narrowly missed the $100k on its latest rally. Bitcoin reached a new record high of $99.6k and has since fallen back to $91k. At the time of writing, Bitcoin has risen 37% since Trump was elected for office. With these new highs, Bitcoin nearly reached a market capitalization of $2tn. Figure 1 shows the price and market capitalization of Bitcoin since 2020 and its recent surge. Optimism in the cryptocurrency space increased significantly when Trump was elected to office. He highlighted plans for a government reserve in Bitcoin, progress on cryptocurrency regulation and the replacement of Gary Gensler as chair of the SEC. Gensler has shown a strong tendency against cryptocurrencies and is likely replaced by a person significantly more positive on cryptocurrencies.
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