Market update - January 23rd, 2026

From the Fed to Japan: liquidity risks resurface

Markets are currently grappling with a combination of monetary policy uncertainty, geopolitical stress, and shifting global liquidity dynamics. One of the more underappreciated sources of volatility has been growing uncertainty around the next Federal Reserve Chair. Kevin Hassett, who had been increasingly priced in by markets, now appears unlikely to take the role following comments suggesting President Trump prefers him to remain in the White House. Prediction markets have since pivoted toward Kevin Warsh, whose reputation as a traditional, inflation-focused central banker has weighed on risk sentiment.

This interpretation may be misplaced. Warsh’s orthodox approach, with an emphasis on institutional credibility and caution around rate cuts, would sit awkwardly with President Trump’s stated preference for meaningful monetary easing in 2026. In contrast, Rick Rieder has been emerging as a more plausible candidate. His market-oriented framework, advocacy for a lower neutral rate closer to 3%, and emphasis on easing financial conditions to support growth align more closely with both current macro conditions and political incentives. Markets may be underestimating the probability of a more explicitly accommodative Fed leadership outcome.

All eyes on Japan and beyond

Global liquidity concerns have been reinforced by developments in Japan. The Bank of Japan kept its benchmark rate unchanged at 0.75%, but the decision carried a notably hawkish tone. Inflation forecasts were revised higher in four out of six categories, and the bank reiterated its willingness to raise rates further should its outlook materialise. While initial market reaction included some relief, with long-dated JGB yields falling, the broader implication is that the next rate hike may arrive sooner than previously expected.

This matters well beyond Japan. A faster pace of tightening increases the risk of renewed pressure on the yen carry trade, which has been a significant source of global liquidity. Any meaningful strengthening of the yen could force deleveraging across risk assets, amplifying volatility in equities, credit, and crypto. Previous episodes have shown that carry trade reversals often act as global liquidity shocks rather than isolated currency events.

Against this backdrop, Bitcoin is undergoing a correction driven by a mix of macro and psychological factors. Renewed geopolitical tensions, including developments around Greenland and fresh tariff threats reminiscent of last October’s China-related concerns, have weighed on sentiment. At the same time, sustained selling by large holders has added near-term pressure. While the widely cited four-year cycle theory remains unconvincing from a fundamental standpoint, it has become increasingly self-fulfilling and is influencing investor behaviour.

Historically, Bitcoin has tended to react sharply to macro shocks, including trade disputes and episodes of yen carry trade stress, before stabilising and recovering as uncertainty fades. The current pullback appears consistent with that pattern, suggesting continued near-term pressure but no clear evidence of structural weakness.

Cautious behaviour has returned following regulatory uncertainty

Regulatory uncertainty adds another layer of caution. Progress on the US Clarity Act has stalled in the Senate Banking Committee due to disagreements over stablecoin reward structures. Originally designed to provide regulatory clarity and broadly supportive of Ethereum, the bill risks being diluted by political bargaining.

Fund flows reflect the more defensive tone. Outflows continued this week, extending last Friday’s shift in sentiment, with total withdrawals now reaching US$1.6B, the largest weekly outflow since November 2025. While volatility remains elevated, the broader picture is one of adjustment to shifting monetary and geopolitical conditions rather than a fundamental deterioration in the investment backdrop.