What happened last week?

US

• Inflation in the US bummed everyone out by rising more than expected in December.
• Spot bitcoin ETFs began trading a day after getting the go-ahead from US regulators.

Europe

• Unemployment in the eurozone unexpectedly dropped, returning to its record low.
• Economic confidence in the bloc improved for a third consecutive month.

Asia

• Chinese shares began to look extremely cheap compared to bonds.
• Japan’s stock market kept on with its strong advance, hitting a fresh 34-year high.

What does all this mean?

The US’s hotter-than-expected inflation was unwelcome news for investors, deflating their hopes that the central bank might begin to cut interest rates as early as March. Consumer prices rose by 3.4% in December from a year ago – a clear acceleration from November’s 3.1% pace, as Americans paid more for housing and driving. Core inflation – the measure that strips out volatile food and energy items to give a better sense of underlying price pressures – eased slightly, to 3.9% in December from 4% the month before, but that was still sweatier than the 3.8% economists were hoping for.

Cryptocurrency fans celebrated some long-awaited news on Wednesday: US regulators approved the first ETFs that invest directly in bitcoin. The funds, which firms like BlackRock, Fidelity, Invesco, Grayscale, and WisdomTree have been trying to get authorized for years, allow investors to add bitcoin to their portfolios by simply buying shares, as they would a stock. Crypto traders have been betting that this new way to invest in bitcoin – without the hassle of storing the asset in a digital wallet – will draw new retail and institutional investors to the coin, boosting its value. The new funds debuted Thursday, with $4.6 billion of the new ETFs changing hands on day one.

The eurozone economy might’ve stumbled into a recession in the second half of last year, but its job market appears to be walking a different path altogether. The unemployment rate in the bloc dropped back to its record low of 6.4% in November. And this disconnect just underscores the reason why the European Central Bank isn’t talking about cutting interest rates anytime soon. See, despite the mild economic downturn Europe is facing, employers are having a hard time hiring, and that’s forcing them to offer higher wages – which could potentially send inflation back up again.

That strapping job market, meanwhile, might explain why economic confidence in the eurozone keeps getting better. The sentiment indicator – an aggregate measure of business and consumer confidence published by the European Commission – rose to 96.4 last month, hitting its highest level since May and surpassing the forecasts of all economists. The jump was driven by increases across all sub-indicators (industry, services, and consumer). And that’s encouraging, even if the reading is still below its long-term average of 100.

The “Fed model” – a tool that compares stock market earnings yields with long-term government bond yields – is flashing green for Chinese stocks. Right now, the earnings yield of the CSI 300 index is 5.7 percentage points higher than the yield on 10-year Chinese government bonds, a gap that’s wider than it’s been in two decades. The model has historically been a reliable predictor of future returns: in the past 20 years, whenever the stock-bond yield gap has exceeded 5.5 percentage points, stocks have risen in the following 12 months, with an average return of 57%.

The Nikkei 225 index rose 6.6% last week to hit a level not seen since February 1990 – Japan’s bubble economy era. Investor optimism about Japanese shares is strong, after the index gained 28% in 2023 to mark its best run in a decade. That surge was driven by solid company earnings, corporate governance reforms championed by the Tokyo Stock Exchange, the resurgence of some long-awaited inflation in Japan, and an extended period of weakness in the yen, which helped boost exporters’ earnings.

This week’s focus: bitcoin ETFs

With all the excitement over the newly approved bitcoin funds, you might be wondering what the difference is between these and the ones that have been around since 2021. On paper, they seem awfully similar. But here’s the key difference: those older ETFs invest in bitcoin futures, rather than in the coin directly. By purchasing those funds, you’re essentially betting on the price of bitcoin futures – i.e. contracts that let investors buy or sell the crypto for a set price at a later date. Bitcoin futures track the price of bitcoin closely, but they don’t do so perfectly.

And there’s a bigger hiccup too: because futures contracts have expiration dates, the ETF manager has to constantly reinvest in newer contracts, which are typically more expensive than the spot price of bitcoin. All that rolling over adds up over time, detracting from the fund’s performance. One of the biggest futures funds (the ProShares Bitcoin Strategy ETF), for example, has underperformed the spot price of bitcoin by more than 25% over the past year.

The new ETFs – approved last week by US regulators – do things differently. They invest directly in bitcoin, so they’re less costly by design. What’s more, a price war has already broken out among the new ETF providers: BlackRock, Fidelity, and others recently slashed their fees to less than 0.5%. Several announced they’d waive charges entirely in the early months of trading. And that’s all making it easier and cheaper than ever to invest in bitcoin. But whether that leads to the honking price gains that crypto buffs are hoping for remains to be seen.

The week ahead

• Monday: Eurozone industrial production (November) and trade balance (November). US stock and bond markets are closed for Martin Luther King Day.
• Tuesday: UK job market report (December). Earnings: Goldman Sachs, Morgan Stanley.
• Wednesday: China economic growth (Q4), UK inflation (December), China industrial output and retail sales (December), US retail sales (December).
• Thursday: Minutes of the ECB’s latest meeting, US housing starts (December). Earnings: TSMC.
• Friday: Japan inflation (December), UK retail sales (December), US consumer sentiment (January), US existing home sales (December). Earnings: Schlumberger.