If we take cryptocurrencies as a barometer of investor sentiment, December began with a sharp blow to risk appetite: Bitcoin price fell back below $90,000. As for what triggered this sudden wave of pessimism, it wasn’t that the odds of a rate cut suddenly changed course again. According to crypto analysts, the decline stemmed more from sector-specific concerns, including:

• S&P downgrading USDT’s stability rating to its lowest level over fears that a drop in BTC prices could leave the stablecoin insufficiently backed.
• Comments from MicroStrategy’s CEO, who said the company might sell some of its bitcoin holdings if its valuation fell below the value of its BTC reserves.

That said, while the negative headlines may have played a role, the market actually started falling well after these news items came out. This suggests that the decline may have been driven more by technical factors.

Does this mean the pessimism shouldn’t spread to U.S. stocks?

S&P 500 and Nasdaq futures have already opened the week in the red. However, for a more widespread decline in US stocks to occur, clear triggers would be needed. Assuming that the ADP private sector employment report for November, initial jobless claims, and September PCE data do not disappoint this week, and that the Fed cuts rates on December 10, other risks could weigh on confidence.

One of these is the potential bursting of the AI bubble. 

Beyond Michael Burry’s allegations of accounting fraud by large technology companies, The Economist notes that while companies plan to invest around $5 trillion in AI, actual adoption is only between 10% and 12%, raising questions about whether these investments can yield a return. To reach the break-even point, annual revenue generated by AI would have to increase from the current $50 billion to around $650 billion.

Another risk is a repeat of the yen carry trade crisis. If yen loans become expensive, a large number of leveraged positions will begin to falter. When those trades cease to be profitable, there will be massive liquidations and margin calls.

Jerome Powell, who is scheduled to speak today, could offer a potential lifeline. Today also marks the official end of the Federal Reserve’s quantitative tightening program. If the central bank signals a shift toward a new round of quantitative easing, that could provide some support for risk assets.

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