Markets are nervous: the AI rally fizzles out as crypto drops below $2.42 trillion.

Investors were worried about high prices and the growing doubts about how long Wall Street's AI-driven rally would last. The mood changed noticeably to risk-off, but not because of any sudden macroeconomic shock. Instead, it was because of a slow buildup of worries. The most important question was whether the market had priced in too much hope too soon. Mixed US economic data that showed the economy slowing just enough to make markets uneasy but not alarmed made this worry worse.



The ADP employment report for January showed that only 22,000 jobs were added, which is much less than the expected 45,000. This could mean that the job market is getting weaker. The ISM Services index, on the other hand, came in a little higher than expected at 53.8, which suggests that some parts of the services sector are still doing well. These signs made things unclear enough to make people wonder if the Federal Reserve would have to act sooner rather than later, especially since Chair Jerome Powell is leaving in May.



This tension was shown in the stock market. The Dow Jones Industrial Average rose by 0.53 percent, thanks to more defensive or cyclical stocks. The S&P 500 fell by 0.51 percent, and the Nasdaq fell by 1.51 percent. The difference showed that the leadership has been moving away from the tech-heavy style that has been in charge since late 2024. Software stocks took the biggest hit, showing that investors are tired of high multiples and the fact that most companies outside of a small group of AI beneficiaries don't have clear earnings visibility in the near term.



The VIX, which measures fear on Wall Street, rose to 18.64, its highest level in weeks. This shows that people are getting more worried. In this situation, it makes sense to spread your investments beyond just big tech stocks. This is why equal-weighted or low-volatility equity indices, as well as selective cyclicals like financials and industrials, and defensives like some healthcare segments, are becoming popular again.



The bond markets didn't make things any clearer. The yields on Treasury bonds went in different directions. The 2-year yield dropped 1.6 basis points to 3.553 percent, which shows that investors are betting on earlier rate cuts. The 10-year yield, on the other hand, rose slightly to 4.274 percent, which suggests that some investors still see inflation risks lasting longer. The US Treasury's decision to keep auction sizes the same didn't cause any new supply shocks, but it also took away any short-term reasons to extend the duration. Still, the fact that the Fed is expected to cut rates twice in the second and third quarters of 2026 supports a slow shift toward longer-term, high-quality fixed income, especially in developed and emerging market investment-grade debt.



The dollar's strength in the face of uncertainty was reflected in the currency markets. The DXY went up 0.18 percent to 97.616, and the greenback went up against all G10 pairs. USD/JPY rose to 156.86, partly because of political events in Japan. Prime Minister Sanae Takaichi is expected to win the election, which will lead to more aggressive spending on defence and fiscal matters. Even though the dollar is strong right now, its long-term outlook is still bearish. The DXY is most likely to go down because the Fed is likely to ease up while other central banks stay the same or only tighten a little. EUR/USD is currently at 1.1807, and it will benefit from a general weakening of USD/JPY over time.



Commodities told a story of long-term fundamentals and geopolitical risk coming together. Brent crude rose two percent to US$68 per barrel because there were mixed signals about US-Iran relations. Even though diplomatic talks are set to take place in Oman, President Trump's new threats and the visible buildup of troops in the area have raised fears of an escalation. That tension could easily bring oil prices back up to the US$80 level they reached last June, even though OPEC's planned supply increases should keep prices from going up too much in the short term.



At the same time, gold rose to $4,964 per ounce and silver rose 3.5% to $85. Both metals benefited from safe-haven demand and low interest rate expectations. The precious metals market is still fundamentally strong, but it can change quickly as macroeconomic stories change.



In Asia, the markets had a small relief rally. The Kospi in South Korea reached an all-time high, rising 1.6%, and the Shanghai Composite in China rose 0.8%, thanks to solar stocks that were reportedly boosted by visits from teams connected to SpaceX and Tesla. This small but important sign showed that foreign investors were once again interested in China's green tech sector.



The crypto market fell apart because of macroeconomic factors. The total market capitalisation fell by 6.61 percent to US$2.42 trillion, mostly because Bitcoin fell. Crypto is still very correlated with traditional assets, with 72% of the S&P 500 and 88% of gold, which shows that it is still a rates- and dollar-sensitive risk asset rather than a real hedge.



A violent unwinding of leveraged positions sped up the drop, with US$654 million in liquidations in 24 hours, US$197 million of which was in Bitcoin alone. The Crypto Fear & Greed Index fell to 11, which is deep in the "Extreme Fear" range and the lowest level since November 2025. This means that the market is in a capitulation phase, where price changes are less based on fundamentals and more based on forced deleveraging.



The US$2.42 trillion support level is now the main focus. If it stays here, it could cause a technical bounce toward US$2.61 trillion, which is the 78.6% Fibonacci retracement. But if it breaks lower, it could go down to US$2.28 trillion. The US Initial Jobless Claims report is due later today. If the job market looks like it's getting worse, it could make people more likely to expect the Fed to ease, but it could also make people less willing to take risks in the short term.



For now, a fragile balance has been struck between technical failures, leveraged unwinds, and bad macro sentiment. In the next 24 to 48 hours, we will know for sure if this pullback is a healthy reset or the start of a bigger correction.







The source is https://e27.co/markets-on-edge-ai-rally-fizzles-as-crypto-plunges-below-us2-42-trillion-20260205/







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