Summary

• Global markets were relatively optimistic until Thursday, when geopolitical instabilities abruptly reversed the earlier gains. However, historical experience shows that the market typically recovers quickly within a few weeks.

• In crypto, Ethereum stands out with a continuous streak of spot ETP inflows since May 16, critically catalyzed by an SEC clarification that specific staking does not constitute securities, paving the way for institutions to access native yield via ETFs.

• A fierce short squeeze is driving the U.S. stock market, with data showing hedge fund net exposure near a five-year low, fueling a capital rotation from large-cap tech into higher-risk, heavily shorted assets.

Market Overview

Initial market shocks triggered by verbal sparring between Donald Trump and Elon Musk led to broad-based sell-offs across equities and crypto. However, improved relations between the two, progress on US-China trade, and solid economic data helped fuel a strong rebound in risk assets — until Thursday’s renewed geopolitical headlines reversed much of those gains.

Figure 1: Weekly and YTD Performance – Crypto and Global Market Assets

1. Digital Assets

Over the past week, the crypto market initially rebounded strongly following the thawing of relations between Trump and Musk, as well as progress in U.S.-China trade negotiations. Bitcoin rose from a low of US$101K to a range high of US$110K, while Ethereum rebounded from a low of US$2,382 to a high of US$2,879. However, the overall market subsequently plunged sharply due to rising geopolitical instabilities in the Middle East.

Figure 2: YTD Indexed Performance – Major Digital Assets

Markets Rattle as Geopolitical Risk Rises in the Middle East

Markets remained fragile this week amid rising geopolitical instability in the Middle East, which escalated further after the U.S. market closed on Thursday. Reports of cross-border military activity and regional strikes triggered a sharp risk-off reaction across asset classes. S&P futures dropped, crypto sold off, bond yields declined, and oil and gold prices surged on safe-haven flows.

J.P. Morgan noted that any disruption to key supply routes — such as the Strait of Hormuz — could send oil prices sharply higher, potentially reaching US$120–US$130 per barrel in extreme scenarios. The geopolitical developments quickly overtook softer U.S. inflation data as the dominant market driver.

Although the initial reaction of the crypto market this time was a decline, historical responses have been mixed. For example, in January 2020, when tensions between the US and Iran escalated, crypto was not negatively impacted — in fact, it rose in the short term. Conversely, during the early stages of the Russia-Ukraine conflict in February 2022, crypto did experience a decline. However, the market recovered within a few weeks, and neither episode led to a prolonged downturn. As with past geopolitical events, market impact may depend on the duration and perceived severity of the situation.

Figure 3: Historically, geopolitical instabilities have caused only short-lived effects on the crypto market

Crypto reflects market sentiment with emphasis on ETH and Defi

Speculative enthusiasm in the stock market is resonating with the crypto market too, evidenced by a significant increase in Ethereum’s market dominance hitting close to 10%. This surge aligns with a broader pro-crypto regulatory shift, where SEC Chairman Paul Atkins signaled a more accommodative stance on Decentralized Finance (DeFi), and his promise of clearer regulatory guidance in this area. This could act as a catalyst for the DeFi sector to outperform other categories, while bolstering Ethereum as the largest DeFi ecosystem infrastructure — potentially even fueling the possibility of an "altcoin season".

Figure 4: Growth in ETH dominance is outpacing BTC dominance

A significant observation in asset flows is the unprecedented US$7 trillion sitting in money market funds. As the Federal Reserve approaches a threshold for interest rate cuts, a substantial portion of this capital is anticipated to shift toward higher-yielding assets. Notably, the latest data available for this year, ending in April, shows that MMFs experienced their first outflows in over a year — signaling that investors are beginning to reallocate capital toward alternative investment opportunities. This trend, coupled with ongoing regulatory efforts in both Europe and the United States to establish clearer frameworks for digital assets, underpins a sustained baseline of market optimism going forward.

Figure 5: U.S. Money Market Funds Reach Record High of US$7T

The Unfolding Opportunity in Ethereum (ETH)

Market sentiment is turning decisively bullish on Ethereum. This week, ETH's price broke through $2,800 to a 15-week high, supported by powerful underlying fund flows and a game-changing regulatory clarification. Aside from ETH now having its own version of 'Micro Strategy,' as discussed in prior weekly commentaries, three key drivers are behind this price action.

First, since May 16, Ethereum spot ETPs have not experienced a single day of net outflows. This sustained period of inflows is a first for ETH and is a streak longer than any seen in the history of Bitcoin spot ETPs. 

Figure 6: Ethereum Spot ETP Sees Record-Breaking Run of Consecutive Net Inflows

Secondly, relative to its market capitalization, Ethereum's ETP assets under management (AUM) are only half the size of Bitcoin's (3.2% Vs 6.2%). To reach a comparable 6% AUM-to-market-cap ratio, we estimate ETH would need to attract at least US$9 billion in net new inflows. 

Lastly, the most critical catalyst is the SEC's recent clarification that certain types of staking do not constitute a security. This directly addresses a major obstacle for institutional investors.

To understand its importance, consider the paradox of Gold ETFs. Despite a significant rise in gold prices over the past two years, North American Gold ETFs only saw a surge of inflows in April this year. The core reason for this lag is that gold generates no yield or cash flow, making institutional investors hesitant to hold it, unless there is higher policy and economic uncertainty.

Figure 7: Net Inflows of BTC Spot ETF and Gold Physical ETF

The SEC's guidance on staking solves this exact problem for Ethereum. It enables ETH ETFs to offer native yield, making them fundamentally more attractive to institutional capital than non-yielding assets like gold. This combination of strong fund flows and a clear path to institutional adoption positions Ethereum and its DeFi ecosystem as a compelling market opportunity today.

2. Global Markets

Capital markets were relatively optimistic before the Middle East conflict. A prevailing theory in global investors is that: "Trump always blinks." The market has increasingly priced in the pattern that President Trump cannot long tolerate the economic and market pressure resulting from his own policies, such as tariffs, and will eventually concede. This theory explains why markets now tend to recover swiftly following "Trump corrections," often creating buying opportunities for investors. From this perspective, the market has become adept at deciphering Trump's behavior, thereby reducing future uncertainty.

The current stock market is experiencing a fierce short squeeze, where heavily shorted stocks are experiencing massive gains and inflicting significant pain on short sellers. According to Goldman Sachs, the net exposure of U.S. fundamental long/short hedge funds is at historical lows, sitting in the 28th percentile over one year and the 23rd percentile over five years. This indicates that many funds have not only missed the recent rally but may have also incurred substantial losses on their short positions.

This dynamic is fueling a rotation in market leadership. Last week saw the highest single-week notional buying of technology stocks in over a decade. Meanwhile, since the beginning of June, a clear shift has occurred: a basket of large-cap tech stocks has consistently underperformed a portfolio of unprofitable tech companies, marking its worst performance in over three months. This suggests that capital is rotating from established "core assets" into higher-risk, deeply undervalued, or heavily shorted names as funds scramble to recoup losses or embrace rising speculative sentiment.

Figure 8: Multi-Asset Performance – Equities, FX, Commodities, Bonds, Volatility

• Equities: 

Both the S&P 500 and NYFANG Index ended the week with a slight gain of 1% and 1.14% respectively.

• FX: 

The DXY fell 0.50% alongside USD/JPY falling 0.11%, in anticipation of the BoJ hiking the benchmark interest rates. 

• Commodities: 

Gold spiked 2.13% and WTI crude ended the week up 18.65%, due to geopolitical instabilities in the Middle East. 

• Bonds: 

The U.S. 10Y Treasury yield fell back to 4.34% after a brief climb to 4.5% at the start of the month. This week, a US$22 billion 30-year U.S. Treasury auction saw strong demand, providing support to the bond market. Combined with continued softening inflation data and concerns over the Middle East conflict, U.S. Treasuries have once again reclaimed their position as a safe-haven asset.

3. Intermarket View

Bitcoin’s correlation with equities continues to hold, with the 2-month BTC–S&P 500 correlation falling to 0.33 from the prior week. Its correlation with gold also turned negative at -0.14, compared to being positive last week. 

Figure 9: BTC 2M Correlation Matrix (vs ETH, S&P 500, Gold, DXY, US 10Y)

Macro Outlook: CPI Data Cools, Easing Inflationary Pressures

The May CPI data came in below expectations across the board, with core CPI rising just 0.13% month-over-month. The slowdown was driven by weakness in used cars, new cars, shelter, and travel services. The report bolstered expectations for a Fed rate cut, causing bond yields to fall and crypto prices to rise right after data was released. President Trump commented that the Fed should cut rates by 1%. However, it is noteworthy that overall bond yields remain elevated, which could still pose a latent headwind for crypto markets.

Figure 10: Expected 25bps rate cuts for end-2025 increased from 1.5 to 2 over the past few days

Fed Chair Powell continues the central bank’s cautious stance on policy adjustments. The Federal Reserve is likely to keep interest rates unchanged, emphasizing the need for more comprehensive data before making policy adjustments, citing inflation concerns and the uncertain impact of the recent tariffs despite the US-China trade deal seeing some progress and CPI temporarily cooling.

The Week Ahead

In the coming week, the progress of geopolitical conflicts is likely to be the primary focus of market attention. In addition, the Bank of Japan’s interest rate decision may impact global trade and investment flows. Upcoming U.S. retail sales data will provide deeper insights into the current state of the American economy and whether the Federal Reserve might consider further rate cuts to stimulate growth. Later next week, the Fed will announce its June interest rate decision. While the market expects no change this time, the updated Summary of Economic Projections (SEP) will offer important clues about future policy paths.

Meanwhile, in crypto, the U.S. Senate is scheduled to give its final vote on the GENIUS Act on June 17. The bill, if passed by the Senate, will move on to the House of Representatives for further voting. Other upcoming events such as the Nordic Blockchain Conference and BTC Prague may also reveal major developments as the industry seemingly waits for the next big narrative to take hold.

Figure 11: Key Macro and Crypto Events for the Week of June 13–June 19, 2025