Written by: @Web3_Mario

Summary: The cryptocurrency market experienced significant volatility this week, with the price trend forming an M-shaped pattern. This suggests that as Trump's inauguration on January 20th approaches, the capital market has quietly begun to price in the opportunities and risks of his election, marking the end of the "Trump effect" driven by sentiment that has lasted for 3 months. Now, we need to extract the focus of the short-term market game from the many confusing information, which will help us make rational judgments on the changes in the market trend. In this article, the author, as a non-financial professional enthusiast, will share his own observation logic, hoping to be helpful to everyone.

Macroeconomic indicators remain strong, and inflation expectations have not shown a significant increase, so they have little impact on the current price trend

First, let's look at the factors causing the short-term price weakness. Last week, many important macroeconomic indicators were released, and we will review them one by one. First, let's look at the US economic growth-related data, where the ISM manufacturing and non-manufacturing purchasing managers' index (PMI) continued to rise, indicating that the US economic outlook in the short term is relatively optimistic.

Next, let's look at the job market. We have extracted four data points for observation: non-farm employment, job openings, unemployment rate, and initial jobless claims. The non-farm employment data increased from 212,000 last month to 256,000, far exceeding expectations, while the unemployment rate also declined from 4.2% to 4.1%. At the same time, the JOLTS job openings also showed a significant increase, reaching 809,000. The continuous decline in initial jobless claims also indicates that the employment market outlook for January is relatively optimistic, and a soft landing seems to be a foregone conclusion.

Finally, let's look at the inflation performance. Since the December CPI data will be released next week, we can observe the performance of the University of Michigan 1-year inflation expectation in advance. Compared to November, this indicator has risen to 2.8%, but it is still within the reasonable range of 2-3% defined by Powell. Of course, the specific development is still worth watching. However, from the changes in the yield of the inflation-protected bonds (TIPS), the market does not seem to be overly panicked about inflation.

In summary, the author believes that from a macroeconomic perspective, there are no obvious problems in the US economy at present. Then, let's identify the core reason for the decline in the market capitalization of high-growth companies.

The continuous rise in medium and long-term US bond yields, the bear steepening trend, and the market's pricing of the US debt crisis

Let's take a look at the changes in US Treasury yields. From the yield curve, we can see that in the past week, the long-end yields of US Treasuries have continued to rise, with the 10-year Treasury yield rising by 20 basis points. It can be said that the bear steepening trend of US Treasuries has further intensified.

We know that the rise in Treasury yields has a greater impact on the prices of high-growth stocks (usually technology companies and emerging industries) than on blue-chip or value stocks, for the following reasons:

1. Impact on high-growth companies:

Increased financing costs: High-growth companies rely on external financing (equity or debt) to support business expansion. The rise in long-term yields increases the cost of debt financing, and equity financing also becomes more difficult, as investors demand a higher discount rate for future cash flows.

Valuation pressure: The valuation of growth companies is highly dependent on future cash flows (FCF). The rise in long-term yields means a higher discount rate, leading to a decrease in the present value of future cash flows and, consequently, lower company valuations.

Shift in market preference: Investors may shift from riskier growth stocks to more stable, dividend-paying value stocks, putting pressure on the stock prices of growth companies.

Limitations on capital expenditures: High financing costs may force companies to reduce R&D and expansion spending, affecting their long-term growth potential.

2. Impact on stable companies (consumer, utilities, healthcare, etc.):

Relatively mild impact: Stable companies usually have strong profitability and stable cash flows, with lower dependence on external financing, so the impact of rising interest rates on their operations is relatively small.

Increased debt repayment pressure: If there is a high debt ratio, the rise in financing costs may increase financial expenses, but stable companies generally have stronger debt management capabilities.

Decreased attractiveness of dividends: The dividend yield of stable companies may compete with bond yields. When government bond yields rise, investors may shift to higher risk-free returns, putting pressure on the stock prices of stable companies.

Inflation transmission effect: If the rise in interest rates is accompanied by an increase in inflation, companies may face cost pressures, but stable companies usually have stronger cost-passing abilities.

Therefore, it can be seen that the rise in long-term Treasury yields has a very obvious impact on the market capitalization of cryptocurrency and other technology companies. The key question now is to identify the core reason for the rise in long-term Treasury yields in the context of the rate cut.

First, we need to introduce the calculation model of the nominal yield of government bonds:

I = r + π + RP

Where I represents the nominal yield of government bonds, r is the real interest rate, π is the inflation expectation, and RP is the term premium. Here, we need to explain further. The real interest rate reflects the true return of the bond, not affected by market risk aversion and risk compensation, and directly reflects the time value of money and the potential for economic growth. π refers to the average inflation expectation in society, which can be observed through CPI or the yield of inflation-protected bonds (TIPS). Finally, RP is the term premium, which reflects the compensation for interest rate risk that investors demand when they believe that the future economic development is uncertain.

In the analysis of the first part, we have clearly stated that the current US economic development remains healthy in the short term, and from the TIPS yield, we can also observe that the inflation expectation has not shown a significant rise. Therefore, the real interest rate and inflation expectation are not the main factors driving the rise in nominal yields in the short term, so the problem has been focused on the "term premium" factor.

Observations on the term premium, we have chosen two indicators, the first of which is the ACM model's estimate of the term premium level in US Treasuries. It can be seen that over the past period, the term premium of the US 10-year Treasury has shown a significant upward trend, and from a numerical perspective, this factor is the main driver of the rise in US Treasury yields. The second is the Merrill Lynch US Treasury Option Volatility Estimate, also known as the MOVE index, and it can be seen that over the recent period, the volatility has not experienced a dramatic change, and under normal circumstances, the MOVE is more sensitive to the implied volatility of short-end rates, as it carries a larger weight. From this set of data, we can draw a conclusion that the market is currently not sensitive to the risk of volatility in short-end rates, and we know that short-end rates are mainly influenced by the Federal Reserve's decisions, so it can be said that the market has not priced in the risk of potential policy changes by the Federal Reserve, and therefore the recent panic over the 2025 Federal Reserve rate decision direction is not a direct factor, however, the continuous rise in the term premium indicates that the market is concerned about the long-term development of the US economy, and based on the current economic hotspots, this is clearly focused on concerns about the US fiscal deficit issue.

So it can be clearly stated that the market is currently pricing in the potential debt crisis risk in the US after TRON's inauguration. Therefore, in the coming period, observing political information and the views of stakeholders is still necessary to consider their positive or negative impact on debt risk, which will make it easier to judge the trend of the risk asset market. For example, last week's news of TRON declaring consideration of a national economic emergency in the US, as under a state of emergency, the International Economic Emergency Powers Act (IEEPA) can be used to formulate new tariff plans. This act unilaterally authorizes the President to manage imports during a national emergency. Therefore, the constraints and resistance to tariff adjustments will be further reduced, and this undoubtedly amplifies the concerns about the potential trade war impact that has already eased somewhat, but in terms of the most direct impact, the increase in tariff revenue will undoubtedly have a positive impact on US fiscal revenue, so the author believes that the impact will not be very severe. On the contrary, the progress of its tax cut legislation and how to reduce government spending are the most worthy of attention in the entire game, and the author will also continue to follow up on this.