A fragile rebound

Wow, the month started very strongly, with Bank of Japan (BoJ) head Ueda hinting yesterday that the BoJ could deliver a rate hike next month — and boom, all hell broke loose. Japanese yields spiked to fresh multi-decade highs, pulling other sovereign yields up, while equities and Bitcoin tanked and gold and silver spiked. Reports suggest around $1bn of leveraged crypto positions were wiped out yesterday. It was bad. Really bad.

Today, the mood is much better after the 10-year JGB auction went well and saw strong demand — helping to stabilize Japanese JGBs and other sovereigns. The US 10-year steadies near the 4% mark, and the USDJPY is recovering yesterday’s heavy slump.

Even though the Nikkei remains under pressure, Bitcoin and tech-heavy pockets of Asian markets have rebounded. The Kospi is up 1.61% at the time of writing, while Bitcoin is up less than 1% — very small by its standards. The coin tested a key support level yesterday: the 38.2% Fibonacci retracement around $83K. If broken, it could push Bitcoin into a medium-term bearish consolidation zone.

What’s the downside? Mining costs are said to be around $70K, which could act as a floor as commodities don’t trade below their production costs. But Bitcoin is not a typical commodity. You don’t use it to build houses, cars or solar panels. That supply-only perspective ignores demand. If investors fear a decline, will demand remain strong? Bitcoin has limited real-world usage and mostly serves as a store of value.

The recent wipeout could deepen, leaving less money for traditional investments, while rising Japanese yields and the potential repatriation of billions of dollars back to Japan add further risks for risk assets.

Let’s see if Federal Reserve (Fed) doves return to charge. Yesterday’s US data highlighted economic weakness beyond AI hype: factory activity contracted for the ninth straight month, orders fell at the steepest pace in four months and employment shrank. Judging by the data and Fed funds futures, a rate cut next week seems highly likely; otherwise, the market reaction would be severe.

The hope is that the slowing US economy also slows spending and tames inflation. Black Friday sales hit a record, and Cyber Monday was robust, but part of that was due to inflation — Americans bought 1% fewer goods but paid 7% more, according to Salesforce. Tariffs will likely continue adding pressure. Companies have weathered costs by liquidating pre-tariff stockpiles, while others absorbed temporary hits. But ultimately, someone pays. If demand weakens, tariff-led price increases could be neutralized.

So it comes down to this: will tariff-driven price pressure, combined with a softening jobs market, eventually force consumers to pull back? And could any slowdown offset the inflationary impact of tariffs? US inflation cannot rise materially above 3% without affecting Fed cut expectations. We are in a delicate place for policy: a rate cut next week may not bring relief if inflation data doesn’t improve.

The US dollar remains under pressure, below the 200-DMA. Other traditional currencies, like the euro and sterling, look unattractive amid high debt, budget issues and weak growth. Gold, silver and copper have spiked as investors seek hard commodities — seemingly a safer store of value than Bitcoin — which also hedge against inflation, unlike Bitcoin, which has too short a track record.

Meanwhile, in technology, it’s business as usual. Nvidia announced yesterday a $2bn investment in Synopsys, which makes the software and building blocks used to design computer chips — and incidentally, is also a Nvidia client. OpenAI is investing in the startup vehicle Thrive Holdings. Time will tell whether these companies are building a genuine AI ecosystem or a house of cards. Nvidia rose 1.65% in an otherwise ugly session, suggesting investors can digest anything — wars, exploding debt, tariffs — and circular AI deals.