Crypto Assets Market Pullback: Trump Pressures and Debt Ceiling Issues Trigger Risk-Averse Sentiment

Last week, the Crypto Assets market experienced a significant pullback. While the market generally attributed this to the Federal Reserve Chairman Powell's so-called "hawkish rate cut" comments, which raised concerns about inflation and economic recession, a deeper analysis reveals that this might just be a secondary factor triggering capital panic. The real impact came from Trump’s strong pressure alongside Musk on the Congress's short-term spending bill last Wednesday, as well as the uncertainty caused by the threat to cancel the debt ceiling rules, which ignited a risk-averse sentiment in the funds.

Powell's remarks have limited impact, macro data shows no significant risks

The FOMC interest rate decision early last Thursday met market expectations, lowering by 25 basis points. The market attributed the decline in risk assets to two factors: first, the dot plot showed a lack of consensus among this session's members; second, the median target interest rate for 2025 was raised to 3.75%-4.00%, with rate cut expectations revised down from 4 times to 2 times.

However, a close analysis of the changes in the U.S. Treasury yield curve reveals that although long-term rates have risen, their impact on the 1-year yield is minimal. This indicates that the market has concerns about the long-term economic outlook, but the risks in the short term are not prominent.

From the prices of the 30-day federal funds futures contract expiring on December 25, the market's expectations for the next two rate cuts had already been reflected as early as November. Therefore, the pullback can mainly be attributed to the apparent lack of sufficient basis for the Federal Reserve's future interest rate decisions.

Analyzing macro data such as the PCE index, non-farm employment, unemployment rate, and GDP growth details, it is found that the US PCE index has not shown significant increases recently, the unemployment rate remains stable, and non-farm employment even saw growth in November. GDP growth is also stabilizing, with no significant declines observed in various details. These data do not support the judgment of inflation re-igniting or an economic recession in the coming year.

It is worth mentioning that the continuous decline of the Dow Jones Index is mainly due to the significant downgrade of UnitedHealth Group ( UNH ), rather than systemic risk. The sharp drop in UNH's stock price is related to the murder of its CEO, which has sparked long-standing controversies over healthcare costs in the U.S., aligning with Trump's healthcare reform policy direction.

Trump Pressures Debt Ceiling, Causing Market Concerns

Last Wednesday, Trump joined forces with Musk to exert strong pressure on Congress regarding the short-term spending bill, even threatening to cancel the debt ceiling rules, which triggered uncertainty and risk-averse sentiment in the market.

On December 17, House Speaker Mike Johnson reached a short-term agreement with Democrats on government spending, but it was quickly rejected under Musk's criticism. Trump subsequently called on social media to abolish the debt ceiling rules, believing that these debt issues should be resolved by him.

Although the new temporary spending bill was ultimately passed, avoiding a partial government shutdown, Trump's expressed stance on abolishing the debt ceiling has raised market concerns. Given Trump's influence within the Republican Party and the fact that new congressmen will take office on January 3, the likelihood of abolishing the debt ceiling has greatly increased.

The U.S. debt ceiling is the maximum legal limit on the amount of money that the federal government can borrow, aimed at limiting the growth of government debt. However, it is also often used as a tool in the political games between the two parties. Currently, the ratio of U.S. public debt to GDP has reached a historical high, exceeding 120%. If the debt ceiling is abolished at this time, it means that the U.S. will not be subject to fiscal discipline for a long period, and the impact on the dollar's credit system is difficult to estimate.

Trump's desire to abolish the debt ceiling may be attributed to his goals of achieving tax cuts and reducing public debt while navigating a short-term debt crisis. Although tax reduction policies can boost economic vitality, they may lead to a decrease in government revenue in the short term. By abolishing the debt ceiling, Trump's team may hope to continue borrowing in the short term to get through the financial crisis.

Impact on the Crypto Assets Market

Trump's debt ceiling remarks have impacted Crypto Assets primarily because they undermine the narrative of Bitcoin reserves solving the debt crisis. If Trump were to directly abolish the debt ceiling rules, it would essentially weaken the value of that narrative indirectly.

The current crypto assets market is in a stage of searching for new value support, and this event has understandably led to profit-taking and risk aversion. Therefore, in the coming period, observing the policies of the Trump team will become a focal point of market attention, potentially taking priority over other factors.