Deutsche Bank says the bitcoin rally still has legs. Here's why.

By Barbara Kollmeyer

Critical information for the U.S. trading day

After a record run and subsequent selloff, bitcoin still sits on a five-day near 7% gain, versus a 0.3% rise for the S&P 500. That brings us to a two-part call of the day, the first from Deutsche Bank strategists who say get ready for more bitcoin gains this year.

Strategists Marion Laboure and Cassidy Ainsworth-Grace say continued inflows to bitcoin exchange-traded funds, the looming halving, more regulation and a strong U.S. economic performance are all backstops for crypto gains.

On that last point, the pair said that "smoother skies ahead" on the economy will yield to more accommodative central banks - i.e. a Fed cut in June - boosting risk appetite and market liquidity.

"More investors will likely seek out higher-yielding alternative assets as treasury returns decline. This flow of capital into nontraditional investment classes like cryptocurrencies could further support an ongoing rally in digital currency prices," they said in a Thursday note.

Here's their chart showing how Fed rate cuts in 2020 supported a crypto rally:

Onto the second part of our call, where JPMorgan's top strategist also looks at bitcoin's gains and weighs in its recent surge could be a sign of "froth in markets."

Marko Kolanovic, chief market strategist, first wrote the note on March 4, when the crypto was trading around $63,000, a day ahead of a fresh record. He said more signs of "froth," can be seen in "speculative tech ETFs," many of which appear to have bottomed and are staging a comeback after losing 2/3 of their value.

"The takeaway from these indicators is that there appears to be room for them to go further before we reach recent extremes of speculative excess, but thinking about how rising asset prices fits into the broader picture of central banks looking to cut rates, the effect is likely to make them even more wary given strong growth and inflation," said Kolanovic.

So while Deutsche Bank is looking for a bump from bitcoin by central bank easing, JPMorgan says a bitcoin rally will scare off the Fed and others.

"The worry is that premature rate cutting could feed into inflating asset prices further or cause another leg up in inflation, but if the disinflation is still immaculate, 'what's the rush?', paraphrasing Fed governor Waller," Kolanovic added.

Not surprisingly, the often bearish strategist worries stocks are priced for perfection and overbought - "the current environment leaves us vulnerable to an accident." He reminds clients that earnings growth for the "Magnificent Seven" soared 56% last year, while the rest of the S&P 500 SPX shrunk 2%.

"So currently, we have the uncomfortable choice of buying something already expensive albeit with good earnings growth, or something cheap, perhaps justifiably so with negative earnings growth," said Kolanovic.

Kolanovic was wrongly bearish on stocks in 2023, sticking to his 4,200 forecast for the S&P 500 into 2024. Deutsche Bank is more optimistic with a 5,100 target this year and was closer to the 2023 turnout with a 4,500 prediction, compared with the 4,770 finish.

Read: Stock-market bubble? One key ingredient is still missing.

The chart

Ahead of President President Biden's State of the Union address on Thursday, WisdomTree has looked at equity gains throughout a presidency - with the best year being the third. In the final year, they find a weak first trimester, with the second and third quarters strongest - gains of 4% each - and the last is up just 2.6%.

Conclusion? "2024 is not a year to sit on the sidelines. The presidential cycle suggests positive equity performance could be expected in the last nine months of the year. Factors like high quality, high dividend, value stocks and small-caps could benefit in those periods," said Pierre Debru, WisdomTree's head of quantitative research & multi asset solutions.

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-Barbara Kollmeyer

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03-08-24 0309ET

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