Polkadot News Today: ECB Sounds Alarm: Crypto and Equity Corrections Echo Dot-Com Bubble Risks

The European Central Bank has sounded the alarm over mounting risks to financial stability, warning that a correction in U.S. equity markets and the crypto sector could pose significant threats. ECB Governing Council member Alvaro Santos Pereira, also governor of the Bank of Portugal, emphasized the need for central banks to retain flexibility to respond to shocks, stating, "Should there be another shock or crisis, central banks must have the buffer to act decidedly to reduce interest rates and help the economy". His remarks come amid a volatile trading environment, with the S&P 500 on track for its steepest drop since April and cryptocurrencies retreating alongside broader risk assets.

JPMorgan analysts have identified retail investor behavior as a key driver of the current crypto market correction. Retail investors have sold roughly $4 billion of spot bitcoin and ether ETFs in November, far exceeding February's record outflows. This selling pressure contrasts sharply with robust inflows into equity ETFs, which have drawn about $96 billion this month. The analysts noted that while crypto-native traders contributed to October's correction through futures deleveraging, November's decline is primarily attributable to non-crypto investors using ETFs. "It would thus be a mistake to extrapolate the selling of crypto ETFs as a signal that retail investors are turning bearish on risk assets more broadly including equities," the report stated.

Meanwhile, Treasury Secretary Scott Bessent downplayed recession risks for the U.S. economy, despite the $11 billion hit from the recent government shutdown. He attributed inflationary pressures to the services sector rather than Trump-era tariffs and expressed optimism about 2026 growth prospects, citing easing interest rates and tax cuts. "I am very, very optimistic on 2026. We have set the table for a very strong, non-inflationary growth economy," Bessent told NBC. His comments align with National Economic Council Director Kevin Hassett, who predicted a "blockbuster" 2026 but acknowledged a "hiccup" in late 2025 due to the shutdown's lingering effects.

The ECB's concerns extend beyond crypto and equities to broader market concentration risks. A scenario analysis by MSCI highlighted vulnerabilities in U.S. tech valuations, drawing parallels to the dot-com era. With the information-technology and communication-services sectors at record weights in the MSCI USA Index and price-to-earnings ratios well above historical averages, a loss of confidence in AI-driven growth could trigger a sharp sell-off. In a modeled stress test, global semiconductors and cyclical industries could lose up to 63%, while defensive sectors like consumer staples and healthcare might gain up to 12%.

Compounding these risks is a liquidity crisis in decentralized finance (DeFi), where a $12 billion liquidity crisis remains, with 95% of capital unused. This underutilization highlights structural inefficiencies in DeFi markets, even as traditional finance grapples with its own rebalancing. Pereira's warnings underscore the interconnectedness of these risks, urging policymakers to maintain readiness for potential shocks. "We must keep this short-term risk in mind," he said, emphasizing the ECB's upcoming Financial Stability Review.