The ECB’s recent focus on liquidity marks a change in tone, following in the Fed’s footsteps, which began addressing liquidity issues in the spring. We now have a somewhat formal reaction function to track. The market is beginning to anticipate that liquidity trends will shift heading into 2025, creating an incredibly bullish setup. The tightness in EUR funding markets is starting to draw the attention of leveraged funds.

The ECB is aware of these developments but still considers reserves “ample,” citing three factors: (1) an abundance of collateral has stabilized repo markets, (2) there has been an increase in market-based funding and cross-border distribution of the remaining euros, and (3) the low sensitivity of ESTR rates to banks’ excess liquidity.

Schnabel gave a speech on the topic recently, and it doesn’t sound like the ECB is ready to reconsider its quantitative tightening efforts just yet. We’ll probably need to see more strain in the markets before they change course, but the outcome space is getting incredibly skewed on liquidity (more upside than downside), which is what high beta assets respond to.

Moving over to the Trump trade. As we get more and more information on Trump’s appointees and policy stands let’s look at some. Crude is getting hit right, left and center these past days. Outlook still remains weak with global supply expected to outpace demand next year and now the USD is also starting to weigh down on crude where the beta has flipped. Could be more fuel for the long bonds story where the divergence between 10y and crude is still large compared to the last few years. Furthermore, Trump’s trade tariffs and deficit story may also have been baked too much into the long end. His 60-100% China tariffs seems more like a bargaining chip and do we really believe that Elon will allow that to happen? Seems unlikely. Meanwhile, the onslaught in Hang Seng is noteworthy this morning and we have now decisively broken lower after a bit of choppy range trading for a while, amidst playing briefing bingo with the authorities.

The debt swap solution is not convincing anyone of a brighter future in profit terms for Chinese companies and we continue to see lower and lower price pressures in our Chinese nowcasts hinting that Chinese companies swallow the pain via margins.

In short: Stay long the US over China and Germany, and remain long in Trump trades in risk assets. And, oh boy, this could go through the roof if bond yields settle a bit lower by year-end.

Chart 1.a: USD weighing down in crude oil prices

Chart 1.b: Will the divergence continue?

Trump Trade unfolding – Bitcoin on it´s path to $100,000?

Bitcoin hit a historic high this morning, surging past the $90,000 mark as the market heats up under what’s being dubbed the “Trump Trade.” With a lighter regulatory hand and a more crypto-friendly outlook in play, risk-on assets are on fire, and Bitcoin is right at the center. But is it just Trump hype, or is there more to this crypto charge?

 If we step back and look at the bigger picture, Bitcoin’s notorious cycle is hard to ignore. Typically, we see three years of explosive growth followed by a year of cooldown. And by the looks of it, we’re deep in the upswing, with signs pointing to at least another year of momentum. Google searches for Bitcoin are climbing, yet we’re still not at the fever pitch of past bull runs. Translation? The road to $100,000 and above could be wide open. 

Chart 2.a: Bitcoin interest still ways to go – The hype hasn’t even started yet

Bitcoin’s recent surge past $90,000 is not solely a product of favorable regulatory shifts but also reflects deeper economic currents. A significant long-term driver is liquidity expansion, historically averaging around 8% annually. This growth often serves to counteract demographic challenges, such as an aging population, by increasing the money supply to manage rising debt levels.

Looking ahead, if immigration slows due to the new government, this will intensify demographic challenges. In response, central banks might inject additional liquidity to sustain economic stability, which could further drive up the prices of risk assets like Bitcoin. Therefore, understanding the interplay between liquidity, demographics, and immigration is crucial for anticipating Bitcoin’s trajectory in the evolving economic environment.

Chart 2.b: Long-term drivers of liquidity 

The question emerges: why are we seeing the Bitcoin cycle over and over again and in which phase are we right now? Because liquidity is used to manage the debt, the main rollover years tend to be the best for liquidity as new debt needs to be issued to pay down old debt. This cycle corresponds with the Presidential election cycle and the Bitcoin Halving cycle. We are coming out of a period of stagnation for around 8 months, which is quite typical prior to a massive break out, followed by a tremendous bull year. 

Right now, it’s not just Bitcoin surging – the entire Trump Trade is still blazing forward with serious momentum. Hang on and ride this train as long as it’s running.

Chart 2.c: Trump market neutral basket roaring post election

Later today, we’ll receive the NFIB data from the US. With the newly appointed border czar, Tom Homan, preparing to start his work over the next 2-3 months, it will be very interesting to assess companies’ hiring expectations, especially among small and medium-sized businesses that rely on immigrant labor. Similar to Trump’s tough rhetoric on China, the immigration issue could also become a market theme that investors view with caution. If mass deportations lead to increased wage pressures in the US, don’t expect Trump to push it too far. Inflation played a role in costing Biden and the Democrats the presidency; Trump will likely try to avoid making the same mistake.

Chart 3.a: Hiring expectation form NFIB