Wall Street giant Citi (C) said the slow start to the traditional Santa Claus rally cannot yet derail the year-end stock rally, but points to bitcoin’s recovery. fall as a warning sign.
Bitcoin’s trading behavior has historically mirrored the fortunes of the Nasdaq 100: When the cryptocurrency rises above its 55-day moving average, Nasdaq returns noticeably improve, analysts led by Dirk Willer wrote in Thursday’s report.
Now that Bitcoin is below that threshold, analysts said the stock market’s risk-adjusted returns have weakened.
Analysts at the bank attributed the cryptocurrency’s recent weakness largely to tightening liquidity conditions. The US Treasury’s rebuilding of its cash balance, combined with the decline in bank reserves, roughly $500 billion since mid-July, has depleted liquidity and put pressure on risk assets.
Analysts noted that while stocks had been resilient thanks to the rise of artificial intelligence (AI), bitcoin tends to react faster to changes in liquidity. The good news, according to the report, is that Treasury balances are now near levels where rebuilding has typically stopped, suggesting that liquidity could soon improve and revive both bitcoin and stocks.
Still, Citi sees new concerns emerging around AI trading. Investors are wondering whether massive spending on AI will produce sufficient returns, even as companies face rising hardware costs and supply constraints reminiscent of the late 1990s.
Hyperscalers like Meta (META) and Alphabet (GOOGL) are also tapping debt markets to finance data center construction, issuing tens of billions of dollars in new bonds. The bank noted that this shift toward credit financing echoes the dot-com era, although balance sheets remain much stronger today.
The report concluded that debt issuance reflects opportunity rather than stress, but warned that the shift from cash to credit is rarely positive for bondholders.
Read more: Citi Says Crypto Weakness Is Due to Slowing ETF Flows and Fading Risk Appetite
