Crypto Markets Daily Dec 19 2024

The Fed’s 25bps rate came with an unsettling hawkish tone from Chair Powell, jolting markets and unveiling the prospect of fewer 2025 cuts. Traders re-evaluate their risk-on strategies as both equities and crypto see red.

Crypto

Derivatives

DeFi

Macro

Fed Cuts, Markets See Red

In a move that was almost entirely priced in by markets well ahead of time, the Federal Reserve delivered another quarter point rate cut that brought the target range for its federal funds rate down to 4.25-4.5%. However, it was the even more hawkish undertone than most expected, delivered in Powell’s presser and the SEP, which spooked markets. Both equities and crypto have been caught out as traders reconsider their positionings in risk-on assets.

While rates markets had been moving in the direction of a slower pace of rate cuts for some time, Powell’s hawkish tone was somewhat of a jolt to the system. The chart below shows the interest rate expectation for this time next year, Dec 2025, essentially encapsulating expectations for all the upcoming Fed meetings in 2025. With rates currently at 425-450 (Dec, 2024), the probability of a higher terminal interest rate for 2025 shot up as markets got the message and resolved the disconnect between the concerning inflation data and implied pace of cuts over the next 12 months. Any chance of more than 100bps over 2025 has essentially been priced out with the probability of no cuts over the year spiking up.

Figure 1. Interest rate expectation for Federal Reserve meeting on 10 Dec 2025, *Source: CME FedWatch*

It is this slower pace of adjustment that has impacted risk-on assets. The S&P 500 closed 2.95% lower yesterday, NDX nearly 4%, and the Dow Jones had its 10th straight losing day. Crypto-assets have fared even worse – BTC is down 5.3% from Tuesday’s ATH, ETH cratered from its $4k wall, and memecoins are amongst the worst performers. The post-election period of elation appears to be over, and crypto-asset spot prices are once again sensitive to macroeconomic drivers.

Figure 2. BTC and S&P 500 (SPX) spot price for last 24hours. *Source: Bloomberg, Block Scholes*

We had previously highlighted the apparent disconnect in macro data that the market appeared to discount several times, including here:

“The market's certainty of a December cut is at odds with some other data points – jobs added beating expectations at 227K, JOLTS earlier in the week indicating increased number of vacancies and a higher quits rate, and PCE at the end of November rising to 2.3% YoY”

And here:

“Markets still solidly expect the Fed to cut by 25bps next Wednesday, but yesterday’s mixed macro news has been slightly more difficult for markets to digest for expectations of the policy path beyond that final meeting of the year. This uneasiness has been reflected in crypto markets too.”

This disconnect was at the core of questions that Powell faced in his post-meeting press session – “why do officials think it’s appropriate to cut rates at all in 2025 if inflation is expected to remain firm throughout the year?”

FOMC members anticipate higher GDP in 2025 relative to their September projections, slightly lower unemployment and a 2.5% core PCE rate compared to 2.1% with the central tendency range more right-skewed. To reflect these higher inflation projections, members foresee only 2 rate cuts in 2025, against the 4 projected in September. The SEP report also showed 15 FOMC participants saw the risk to PCE inflation as now ‘weighted to the upside’ — to put that into perspective, only 3 saw upside risk in September with 16 seeing risks to inflation as ‘broadly balanced’; quite a remarkable sentiment shift and proof that the “jobs not done”.

Some of the caution around these cuts or lack thereof in 2025 had been priced in by crypto-asset derivatives markets in the week ahead of yesterday’s meeting – front-end implied volatility did not invert the term structure during Tuesday’s ATH run (chart below).

Figure 3. BTC at- the-money volatility for selected timestamps. *Source: Deribit, Block Scholes*

Equally, volatility smile skews remained subdued for longer tenors and turned bearish for shorter tenors indicating increased expectations of an immediate downturn (below in both BTC’s and ETH’s 25-delta call-put skews).

Figure 4. BTC skew for selected timestamps. *Source: Deribit, Block Scholes*

Figure 5. ETH skew for selected timestamps. *Source: Deribit, Block Scholes*

However, the move was short-lived. Short-tenor vol smiles for BTC and ETH alike have moved call-skewed in the early morning relief rally. We see that in the 27DEC24 smiles below for both assets: the implied vol of puts was lifted before and during the FOMC meet (grey coloured smiles), likely telegraphing market sentiment, before the correction in spot prices was delivered and demand has shifted now towards upside volatility (coloured yellow and purple smiles) once again.

Figure 6. BTC 1-week tenor volatility smiles for selected timestamps. *Source: Deribit, Block Scholes*

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Figure 6. ETH 1-week tenor volatility smiles for selected timestamps. *Source: Deribit, Block Scholes*

Across DeFi markets, the majority of coins show a similar picture, downturned reflecting the changing sentiment. A stand out coin standing a little stronger than the rest is ENA, Ethena’s native token. Up a modest 2% in an overall red crypto portfolio, ENA continues to revel in the increased publicity it’s received from its close association with World Liberty Financial, Trump-backed DeFi lending platform. It follows that WLF are considering the integration of SUSDe, Ethena’s staked stable coin, into their platform.

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