- The crisis in the Middle East is continuing as Houthi attacks on ships intensify.
- This has led to a risk-off sentiment in the financial market lately.
- Inflation is also rising, which could hit cryptocurrency prices.
Cryptocurrency prices and stocks were on edge this week as investors reacted to the ongoing geopolitical issues. The Dow Jones, Nasdaq 100, and S&P 500 indices plunged by more than 0.80% on Tuesday while Bitcoin, Stellar Lumens (XLM), and Celestia (TIA) remained in a tight range. This article will explain how this crisis will affect these assets.
Risk-off sentiment
The Middle East has been having a few challenges in the past few weeks as Houthis have intensified their attacks on ships. On Monday, they attacked an American merchant ship followed by a Greek one on Tuesday.
In the aftermath, the US and the UK have continued to attack targets in Yemen. At the same time, Iran took responsibility for hits near a US base in Iraq. The impact of all this is that the crisis will likely continue escalating in the coming months.
This, in turn, will lead to a situation known as a risk-off sentiment, where investors move to safe assets for protection. This has already started happening as the US dollar index (DXY) has surged to over $103.30. Other safe assets like gold, Swiss franc, and short-term government bonds have started rising. The Bitcoin fear and greed index has retreated in the past few days.
In most cases, cryptocurrencies and stocks tend to underperform when traders embrace a risk-off sentiment. For example, most of them dropped sharply in 2022 after Russia invaded Ukraine. They also pulled back in 2019 as Donald Trump introduced a trade war with China.
Inflation and the Fed
The other important implication is that this crisis will spark inflation in the coming weeks. There are signs that this is already happening. For one, energy prices have remained at an elevated level, with Brent and the West Texas Intermediate (WTI) remaining above $70 in the past few days.
These prices will likely remain high after Shell and other shipping companies said that they will avoid the Red Sea route for a while. Also, the most recent data shows that the World Container Index (WCI) has jumped from $1,300 in December to over $3,000.
The impact of all this is that it could push inflation to an elevated level for longer. Data published last week showed that the US inflation rose from 3.2% in November to 3.4% in December. Core inflation pulled back to 3.8%.
Most of this inflation was driven by the housing sector. Now, the crisis in the Middle East will lead to higher inflation in the energy and other sectors.
As a result, the Federal Reserve and other central banks will likely maintain a hawkish tone in the coming months. Some analysts believe that the Fed could even hike rates in January or March, which explains why bond yields have risen.
Cryptocurrencies like Bitcoin, Celestia (TIA), and Stellar Lumens (XLM) tend to underperform when the Fed is hawkish. Besides, the chances of a rate cut as soon as in March was one of the reasons why these coins rallied recently.
Therefore, coupled with the poor reception of Bitcoin ETFs, there is a likelihood that these coins will underperform the market in the coming weeks.
