Crypto Assets Market Recent Pullback Analysis: Policy Uncertainty Triggers Risk Aversion

Last week, the Crypto Assets market experienced a significant pullback. Although the market generally attributed this to the "hawkish rate cut" remarks by the Federal Reserve Chairman, it is likely that this was only a secondary factor. The real trigger for capital panic was probably Trump's strong pressure on Congress regarding the short-term spending bill, as well as the uncertainty brought about by his threat to cancel the debt ceiling rules. These factors collectively ignited the market's risk aversion sentiment.

The Federal Reserve's Policy Stance Is Not the Main Reason

Last Thursday's FOMC rate decision was largely in line with market expectations, with a 25 basis point cut. The market attributed the decline in risk assets to two points: first, the lack of consensus in the decision-making process, and second, the upward revision of the target interest rate expectations for the next two years. However, a close analysis of Powell's statements reveals that his concerns about inflation seem to stem more from policy uncertainty rather than changes in macro indicators. At the same time, he remains confident about the economic outlook.

From the changes in the U.S. Treasury yield curve, it is evident that forward rates have indeed risen, but the impact on short-term rates is limited. This indicates that the market has some concerns about the forward economic outlook, but there is not much risk in the short term. Additionally, looking at the prices of federal funds futures contracts, the market's expectations for two future rate cuts were already reflected as early as November. Therefore, attributing the pullback to Federal Reserve policy risk seems to lack sufficient basis.

Macroeconomic data performs stably

From macro indicators such as the PCE index, employment data, and GDP growth, there are no obvious signs of deterioration in the US economy.

• The PCE index and core PCE year-on-year growth rate remain below 2.5%.
• The unemployment rate is stable, and non-farm employment growth in November is strong.
• GDP growth stabilizes, and no significant decline is observed in various sub-indicators.

These data are difficult to support the judgment of inflation reignition or economic recession in the coming year. Therefore, Powell's concerns are likely rooted in policy uncertainty rather than changes in economic fundamentals.

Trump's Pressure Triggers Market Concerns

Last Wednesday, Trump and Musk put strong pressure on Congress regarding the short-term spending bill, even threatening to eliminate the debt ceiling rules. This action raised concerns about policy uncertainty in the market, becoming a key factor in triggering risk-averse sentiment.

Trump calls for the abolition of the debt ceiling rule before officially taking office on January 20. Although this proposal was removed when the latest spending bill was passed, Trump's stance has raised market concerns. Considering his influence within the Republican Party, the possibility of abolishing the debt ceiling in the future cannot be ignored.

Currently, the ratio of public debt to GDP in the United States has reached a historic high of over 120%. In this case, abolishing the debt ceiling means that fiscal policy will be unconstrained for a long time in the future, making the impact on the dollar's credit system difficult to estimate.

Trump may want to create space for his tax reduction policy in this way. While tax cuts can stimulate the economy, they will reduce government revenue in the short term. Abolishing the debt ceiling allows the government to get through financial difficulties by continuing to borrow. However, this approach also increases long-term risks.

Impact on Crypto Assets Market

Trump's move has also undermined an important narrative in the Crypto Assets market – that the U.S. would establish a Bitcoin reserve to address the debt crisis. If the debt ceiling is directly abolished, the value of this narrative will be significantly diminished.

The current Crypto Assets market is in a phase of seeking new value support. In this context, it is reasonable for investors to lock in profits for risk aversion.

In the near future, paying attention to the policy direction of Trump's team will become a key focus for the market, and its importance may surpass other factors. Investors need to continuously monitor the relevant policy trends and their potential impact on the market.