Intensified inflation and economic slowdown raise market concerns, approval of encryption ETF brings new opportunities

This month, inflation in the United States has intensified, but GDP has fallen short of expectations, raising concerns in the market about "stagflation" in the US economy. Amid these worries, combined with the impact of geopolitical conflicts, the capital markets have experienced a correction this month. The US and Japanese stock markets have seen significant pullbacks, while Europe has fared better, indicating that global investors are not overly concerned about so-called systemic risks in the global economy. Despite the fluctuations in the encryption market, a black swan event caused Bitcoin to fall below $60,000, but on April 29, the encryption market welcomed a historic moment: the approval of the cryptocurrency asset ETF in Hong Kong, indicating that incremental funds are still continuously entering, and the market outlook is positive.

At the beginning of the year, driven by the Federal Reserve's expectations of interest rate cuts and the continuous decline of the Consumer Price Index ( CPI ), the market ignored inflation concerns. However, inflation data has been continuously rising, and expectations for interest rate cuts have repeatedly declined. Currently, the market still maintains the expectation of no interest rate cuts in May, with only a very small number of people anticipating further rate hikes.

According to the current data, the United States seems to have entered a "stagflation" state—high inflation but low economic growth. The U.S. GDP growth in the first quarter was only 1.6% year-on-year, which is significantly below expectations; meanwhile, the core PCE price index in the first quarter grew by 3.7%, exceeding expectations, and this data has already excluded energy and food. In other words, even after removing the impact of the recent rise in international commodity prices, inflation in the United States remains very severe.

At the beginning of the year, the U.S. economy showed a "high growth, low inflation" situation, and the economic narrative of the "Goldilocks" became the mainstream narrative for global investors. In just a few months, the situation transformed from "all good" to a "stagflation crisis," with the focus for the U.S. going forward being how to handle the "inflation" issue. Currently, there is a very small portion of the market that has even begun to bet on continued interest rate hikes, but the likelihood of further hikes is low; it will merely delay the timing of rate cuts and reduce the frequency and basis points of cuts. The current inflation in the U.S. is influenced by multiple factors including upstream raw material prices, employment, and demand. As commodity prices trend towards rationality, the labor market rebalances, and the declining trend of used car prices continues, U.S. core inflation is expected to ease.

Currently, the economic situation in the United States is exactly what the Federal Reserve wants to see. There are many ways to unravel the "wage-inflation" spiral, and it is not necessary to choose to continue raising interest rates, which would have a significant impact on the economy. This month, the Japanese yen and the Japanese stock market experienced a sharp plunge. In this situation, international investors would sell the yen and buy back dollars, leading to suspicions of U.S. manipulation behind the scenes, which also greatly helps in tightening dollar liquidity.

Currently, Federal Reserve officials are generally dovish and have not released any clear signals for further interest rate hikes, which may indicate that the U.S. has certain policy tools to address the inflation issue. In short, at this stage, the U.S. economy is indeed facing the challenge of inflationary pressure, causing some concern in the market, but investors need not panic excessively about the inflation issue.

Additionally, there have been many geopolitical conflicts this month, which is also a factor leading to fluctuations in the capital markets. From the current perspective, both Iran and Israel are actually showing relative restraint, with no signs of further escalation of conflict. Moreover, in modern society, the likelihood of large-scale wars breaking out under the nuclear deterrence of major powers is extremely low; hence, the impact of geopolitical issues on financial markets is often sudden but temporary. Even in the case of a war between Russia and Ukraine and NATO, the Russian stock market has almost recovered all its losses since the war began. Therefore, the impact of war this month is merely a sudden variable.

After a continuous "mad bull" run in the US stock market for 5 months, a significant correction has finally occurred - the Nasdaq index fell to the 120-day moving average, and a certain tech giant experienced a drop of -10% on April 19.

The current trend of the US stock market reflects more of the changes in interest rate cut expectations, while geopolitical conflicts are a secondary reason. The valuation of technology stocks is directly related to liquidity, and a delay in interest rate cut expectations will directly compress the valuation space of technology stocks. A certain investment bank downgraded the ratings of six major US technology stocks from "overweight" to "neutral" this month, citing that the earnings momentum previously enjoyed by the sector is facing cooling, and the upward momentum is fading away. However, the investment bank's strategist also stated that this downgrade is an acknowledgment of "the difficulties these stocks face in comparison and the constraints of cyclical forces," rather than a prediction based on valuation expansion or skepticism about artificial intelligence.

The reasons given by the investment bank are actually quite reasonable, after all, under the influence of AI expectations, the valuations of the giants have already reflected future profit expectations in advance. If the giants experience another surge in the future, it can only be because the development of AI exceeds market expectations again.

In addition to the United States, the Japanese stock market also experienced a significant correction this month. The situation in Japan is primarily due to the recent wild depreciation of the yen, causing investors to sell Japanese assets. Furthermore, the strong correlation between the yen and the dollar, as well as the delayed expectations of interest rate cuts by the Federal Reserve, are also important reasons for the recent volatility of the yen.

The disappointing performance of the stock markets in the US and Japan has raised concerns among some that the inflation issue in the US could lead to a global financial crisis. It may still be too early to draw such conclusions, as the stock markets in other countries have not shown significant corrections: the French CAC40 and the German DAX have not experienced substantial pullbacks and remain strong; India's Bombay Sensex30 has also been fluctuating above 70,000 points. The recent pullback in the US stock market is likely just a market reaction to changes in expectations and unexpected black swan events, without any clear systemic risk.

This month, the encryption market performance has been unsatisfactory, with BTC prices dropping below $60,000 at their lowest and ETH prices falling below $2,800. Since mid-March when Bitcoin prices reached a new high, it has entered a correction period, which has lasted for a month and a half so far. During this time, black swan events such as geopolitical conflicts and U.S. economic data falling short of expectations have exacerbated the already lukewarm encryption market, and the pin bar movement in mid-April was triggered by the geopolitical conflict in the Middle East.

Currently, it seems that the encryption market has entered a state that is strongly correlated with the trends of traditional assets—over the past year, the price of Bitcoin has shown an astonishing correlation with the stock price of a certain tech giant. This strong correlation is quite intriguing, and there is no widely accepted explanation for it.

If Bitcoin is indeed recognized by the market consensus as "electronic gold", then theoretically its movement should be related to gold, and the trend corresponding to geopolitical conflicts should be a surge rather than a downward spike. From the price movement of gold, it can be seen that gold reached a historical high during the days of the conflict between Iran and Israel, fully demonstrating gold's safe-haven properties.

This situation may indicate one thing - the current trend of Bitcoin is indeed bound by the US ETF. Throughout April, the ETF has shown a trend of net outflows.

The trend of being tied to the assets of a single country is actually not particularly reasonable. The most notable decentralized attribute of Bitcoin has become a widely recognized value storage tool, with no one having the authority to issue or destroy Bitcoin. This attribute, which is different from fiat currency, has become a refreshing force in the era of credit money. However, currently, a single country's ETF has already acquired the pricing power of Bitcoin. Although it cannot create or destroy it, there is indeed a certain divergence from the decentralized attribute.

Fortunately, after the United States, Hong Kong officially approved 6 virtual asset spot ETFs on April 29, including 3 Bitcoin ETFs and 3 Ethereum ETFs. These ETF products differ in their fee structures, trading efficiencies, and issuance strategies, providing investors with diversified choices, and they are already ahead of the United States in this category, as the U.S. has not yet approved Ethereum spot ETFs. Institutions predict that as market interest in these innovative ETFs continues to grow, these six ETFs will bring an incremental $1 billion to the encryption market.

The latest news also indicates that Australia will launch a Bitcoin ETF by the end of this year.

This multi-point flowering style of ETF listing is somewhat similar to the early distribution of mining farms and mining machines around the world, which can fully maintain the decentralized attributes of Bitcoin in the secondary market—no single institution or country has the right to price Bitcoin alone.

Therefore, as more countries or regions' institutions list Bitcoin spot ETFs, the holdings of the whales will become increasingly dispersed. At that time, the pricing power of Bitcoin in the secondary market will also exhibit characteristics of decentralization, potentially returning to the intrinsic value of electronic gold.

In April, the hawkish statements from the Federal Reserve and geopolitical conflicts in the Middle East brought volatility to the capital markets, but the strategic stability among nuclear powers provided a certain level of assurance to the market. In terms of inflation suppression strategies, the Federal Reserve is actively addressing potential financial risks, and although the stock markets in the United States and Japan have seen a pullback, there are no widespread signs of a financial crisis in the global capital markets.

At this critical moment, financial innovation initiatives in the Asian market, especially in Hong Kong, are particularly important. The approval and upcoming listing of the Hong Kong Bitcoin ETF not only marks a significant step for the Asian financial market in the field of encryption but may also become a new ignition point for global capital markets. This development provides investors with new asset allocation options and may also drive the cryptocurrency market towards a more mature and regulated direction, heralding the birth of new investment opportunities and market trends, while promoting the "decentralization" of Bitcoin pricing power in the secondary market.