Crypto Assets market fluctuates, M-head pattern appears

This week, the Crypto Assets market experienced significant fluctuations, with price trends displaying an M-shaped pattern. As January 20 approaches, the date when Trump officially takes office, the capital market has begun to price in the opportunities and risks following his election, marking the official end of the "new policy market" driven by emotions that has lasted for three months.

Currently, it is necessary to extract the focus of short-term market speculation from the complex information, which helps to make rational judgments about market fluctuations. This article will share observation logic from the perspective of non-financial professional enthusiasts, hoping to inspire readers.

Overall, the prices of high-growth risk assets, including Crypto Assets, may continue to be under pressure in the short term. The main reason is the widening term premium in the U.S. Treasury market, which has led to rising mid-to-long term interest rates, adversely affecting these assets. This phenomenon reflects that the market is pricing in the U.S. debt crisis.

Strong macroeconomic indicators, inflation expectations have not significantly worsened

To analyze the factors behind the short-term price weakness, it is necessary to start from the recently released important macroeconomic indicators. First, related data on U.S. economic growth, such as the ISM Manufacturing and Non-Manufacturing Purchasing Managers' Indexes, have continued to rise, serving as leading indicators of economic growth, indicating a positive outlook for the U.S. economy in the short term.

In terms of the job market, non-farm payrolls increased from 212,000 last month to 256,000, far exceeding expectations. The unemployment rate fell from 4.2% to 4.1%. JOLTS job openings surged to 809,000. The number of initial jobless claims continued to decline, indicating a positive outlook for the job market in January. These data suggest that the U.S. job market remains strong, and a soft landing seems almost certain.

In terms of inflation performance, as the December CPI has not yet been released, we can observe the one-year inflation expectations from the University of Michigan in the United States for an early indication. This indicator has rebounded from November to 2.8%, but it is still below expectations and remains within the reasonable range of 2-3%. From the changes in the yields of anti-inflation bonds (TIPS), the market does not seem to be overly panicked about inflation.

In summary, from a macro perspective, there are no obvious issues in the U.S. economy. The next step is to identify the core reasons for the decline in the market value of high-growth companies.

The long-term interest rates of U.S. Treasury bonds are rising, with a steepening bear market pattern leading to higher term premiums.

Changes in US Treasury yields indicate that over the past week, long-term rates on US Treasuries have continued to rise. For example, the yield on the 10-year Treasury has increased by nearly 20 basis points, further exacerbating the bear steepening pattern. The rise in Treasury yields has a greater suppressive effect on high-growth stocks compared to blue-chip or value stocks, primarily due to the following reasons:

1. Impact on high-growth companies:

• Rising financing costs are unfavorable for business expansion.
• Valuation under pressure, future cash flow present value declines
• Investors' preferences are shifting towards stable stocks.
• May reduce R&D and expansion expenses

2. Impact on Stable Enterprises:

• The impact is relatively mild, with lower dependence on external financing.
• The pressure of debt repayment has slightly increased.
• The attractiveness of dividends has relatively decreased.
• May face rising cost pressures

Therefore, the rise in long-term treasury rates has a significant impact on the market value of technology companies such as Crypto Assets. The key lies in identifying the core reason for the rise in long-term treasury rates against the backdrop of interest rate cuts.

The nominal interest rate calculation model for national bonds is: I = r + π + RP where I is the nominal interest rate, r is the real interest rate, π is the inflation expectation, and RP is the term premium.

The previous analysis shows that the U.S. economy is developing steadily in the short term, and inflation expectations have not significantly risen. Real interest rates and inflation expectations are not the main factors driving nominal interest rates. Therefore, the focus is on "term premium."

The observation period premium can use two indicators:

1. The ACM model estimates the level of term premium on U.S. Treasury bonds, with a noticeable increase in the 10-year term premium recently, which is the main factor driving the rise in yields.

2. Merrill Lynch Treasury Option Volatility ( MOVE Index ) has not fluctuated much recently. The MOVE is more sensitive to implied volatility of short-term rates, indicating that the market is not sensitive to the risk of fluctuations in short-term rates and has not made significant risk pricing for potential changes in Federal Reserve policies.

The rise in term premiums indicates that the market is concerned about the medium- to long-term economic development of the United States. Current economic hotspots show that this mainly focuses on concerns about the U.S. budget deficit.

The market is pricing in a potential debt crisis after Trump's inauguration.

In the future, attention should be paid to the impact of political information and stakeholders' views on debt risks in order to assess the trends in the risk asset market. For example, Trump's assertion of considering a national economic emergency for the United States might lead to the formulation of a new tariff plan under the International Emergency Economic Powers Act. Although this has intensified concerns about the trade war, the increase in tariff revenue has a positive effect on U.S. fiscal revenue and is expected not to cause drastic fluctuations.

In contrast, the progress of the tax reduction bill and the plan to cut government spending are the most noteworthy points in the entire game. These factors will directly affect the market's expectations regarding the U.S. debt crisis, thereby influencing the performance of risk assets.