Easing of Market Volatility Hinges on Bitcoin, Big Tech CDS, and Dollar Trends [Click eJongmok]

Strong Nvidia Earnings Amid AI Bubble Concerns
JP Morgan: "Potential Credit Risk Stemming from Bitcoin"
Stabilization of Big Tech CDS Premiums Also in Focus
US FOMC Key Event... "Mild Dollar Weakness Expected"

Despite Nvidia's strong earnings, concerns about an artificial intelligence (AI) bubble persist, leading to a continued decline in the prices of major assets. Analysts suggest that in order to determine whether market volatility will subside, it is necessary to closely monitor Bitcoin prices, credit default swaps (CDS) for big tech companies, and the value of the US dollar.

On November 24, iM Securities anticipated that market volatility would somewhat ease from early to mid-December and provided this analysis.

JP Morgan's Warning... Potential Credit Risk Triggered by Bitcoin

First, they emphasized the importance of watching Bitcoin, which serves as a key price indicator for liquidity flows. Among risk assets, Bitcoin's price is the most sensitive to liquidity trends. In periods when liquidity contraction risks intensified, Bitcoin experienced sharp declines. This month, as liquidity risks emerged, Bitcoin's price plummeted by 22.2% as of the closing price on the 21st, marking the largest drop among major assets. While there have been months with even greater declines than November, in terms of market capitalization loss, this month is expected to see the largest decrease ever.

The decline in Bitcoin's market capitalization not only signals a contraction in liquidity but also puts pressure on technology stocks such as those listed on the Nasdaq. Since 2020, there has been a strong correlation between Bitcoin prices and the Nasdaq Index. This is due to the common denominator of liquidity, the entry of cryptocurrencies into the institutional sphere through Bitcoin exchange-traded funds (ETFs), and the direct impact of Bitcoin prices on the stock prices of cryptocurrency-related companies.

JP Morgan issued a serious warning regarding MicroStrategy, the largest corporate buyer of Bitcoin. If the Morgan Stanley Capital International (MSCI) index removes MicroStrategy from its index, approximately 2.8 billion dollars (about 4.12 trillion won) could flow out. If the company is subsequently excluded from other indices, an additional 8.8 billion dollars could be withdrawn, putting significant pressure on the company's valuation. This means that unexpected credit risks triggered by Bitcoin could arise. Already, MicroStrategy's stock price has dropped by about 37% this month as of the closing price on the 21st, and is down 69% from its annual peak.

Need to Confirm Declining Big Tech CDS Premiums

It is also important to confirm the downward stabilization of major big tech CDS premiums. This is because the short-term liquidity crunch, which iM Securities highlighted as a main cause of the simultaneous decline in major asset prices, has yet to be resolved. The rise in Oracle's CDS premium, which began with a surge in corporate bond issuance by big tech companies, is a representative example. Although the risk of increased debt for big tech firms due to bond issuance is considered low, it is sufficient to cause short-term instability in the funding market.

Park Sanghyun, a researcher at iM Securities, explained, "Given that the rise in major big tech CDS premiums is also influenced by the AI bubble debate, whether CDS premiums stabilize downward will serve as an important signal for assessing the easing of credit crunch and the AI bubble debate."

Focus on Dollar Trends..."Downward Stabilization Expected in December"

He also advised paying attention to the movement of the US dollar. Due to several factors-including a short-term funding market crunch, Japan's large-scale economic stimulus, and uncertainty surrounding the Federal Reserve's monetary policy in December-upward pressure on the dollar is increasing, negatively affecting global liquidity flows. Whether the dollar continues to strengthen or shifts to a weaker trend is expected to play a crucial role in short-term liquidity and asset price movements.

Researcher Park identified early next month as a critical short-term turning point not only for the stock market but also for the volatility of major asset prices. Above all, attention is focused on the interest rate decision to be made at the Federal Open Market Committee (FOMC) meeting on December 9-10 (local time). Within the Federal Reserve, opinions are already polarized between hawkish and dovish stances, adding to the uncertainty.

Nevertheless, iM Securities is forecasting a rate cut next month. This is because Federal Reserve Chair Jerome Powell lacks sufficient justification or data to maintain the current rate. In addition to the December rate decision, whether the Fed implements a balance sheet expansion policy centered on short-term Treasury markets could also significantly impact market liquidity and Treasury yields.

They also projected that the dollar would show a slight weakening rather than further strengthening through the end of the year. This is due to expectations that the appointment of the next Fed chair next month and the yen weakness triggered by Japanese Prime Minister Sanae Takaichi will also subside.

Researcher Park stated, "Although the Takaichi cabinet delivered a larger-than-expected shock, causing the yen to weaken further, it will be difficult for Japan to expand fiscal spending further given the rapid rise in domestic government bond yields, so the yen's weakness may subside. Ultimately, if the dollar records mild weakness rather than further strengthening through the end of the year, risk appetite for assets will be reinforced again, and market volatility will also subside."