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Crypto thrives as traditional markets falter: What’s driving the divergence?

The recent retreat in global risk sentiment, spurred by escalating concerns over the rising US deficit, has sent ripples across various asset classes, from US equities and Treasuries to commodities and cryptocurrencies, painting a vivid picture of a market grappling with uncertainty.

The implications are profound, and the data tells a compelling story of shifting investor priorities and economic pressures. Let’s dive into this multifaceted topic, exploring how the US deficit is reshaping global markets and what it means for the future.

The growing unease about the US deficit is at the heart of this shift in risk sentiment. For months, economists and investors have voiced concerns about the ballooning federal deficit, but recent events have brought these worries to a boiling point.

A Bloomberg report from May 22, 2025, underscores this tension, noting that a proposed tax bill could add trillions to the deficit, further straining an already stretched fiscal framework. This has rattled investors, who fear that unchecked borrowing could lead to higher interest rates, persistent inflation, or even a loss of faith in the US economy’s long-term stability.

The bond market, often a bellwether for such concerns, is flashing warning signs—most notably through a weak 20-year Treasury auction and a pronounced bear steepening of the yield curve. This dynamic, where long-term yields are rising faster than short-term ones, reflects a market bracing for tougher times ahead.

Take US equities, for instance. The S&P 500, a broad barometer of American corporate health, plummeted by 1.6 per cent on Wednesday, marking its worst day in a month. The Dow Jones Industrial Average and Nasdaq Composite followed suit, shedding 1.9 per cent and 1.4 per cent, respectively.

This wasn’t a isolated stumble but a broad-based sell-off, signaling that investors are pulling back from riskier assets. Why? The rising deficit fuels fears of higher borrowing costs down the line, which could squeeze corporate profits and dampen economic growth.

Higher Treasury yields also play a role—when bonds offer better returns, stocks lose some of their luster, especially for those seeking steady income. It’s a classic flight from risk, and the numbers bear it out: the equity market is feeling the heat of this deficit-driven anxiety.

The US Treasury market offers even more insight into this unfolding narrative. On Wednesday, Treasuries experienced an aggressive bear steepening, a term that might sound arcane but simply means that long-term interest rates are climbing faster than their short-term counterparts.

Yields on tenors beyond 10 years surged by more than 10 basis points, while the 2-year yield, tethered to expectations of Federal Reserve policy, edged up a more modest 4.9 basis points to 4.019 per cent. This divergence is telling. The Fed might still be poised to cut rates in the near term—hence the relatively stable short-end yields—but the long end of the curve is screaming concern about the future.

Investors are demanding higher compensation for locking their money into longer-dated Treasuries, likely anticipating inflation or a flood of government borrowing to finance the deficit. The weak 20-year auction only amplifies this sentiment; when demand for these securities falters, it’s a clear sign that confidence is waning.

Interestingly, the US Dollar Index didn’t follow the script you might expect. Despite rising Treasury yields, which typically bolster the dollar by attracting foreign capital, the index fell 0.5 per cent to 99.60, marking its third consecutive day of declines. This counterintuitive move suggests that deficit worries are overshadowing the yield advantage.

If investors are losing faith in the US economy’s fiscal health, the dollar’s appeal dims, even with higher rates on offer. It’s a fascinating twist—while yields climb, the currency weakens, hinting at deeper structural concerns that could ripple globally.

Amid this turmoil, gold has shone brightly, rising 0.8 per cent to close at US$3,315 per ounce—its third straight day of gains. This isn’t surprising. Gold thrives in times of uncertainty, serving as a safe haven when faith in paper assets falters.

With the deficit stoking fears of inflation and economic instability, investors are flocking to this timeless store of value. It’s a hedge against the unknown, and right now, there’s plenty of that to go around. The data backs this up: gold’s steady ascent mirrors the retreat in risk sentiment, a textbook response to the current climate.

Oil, on the other hand, tells a different story. Brent crude slipped 0.7 per cent to settle at US$65 per barrel, pressured by a report showing US crude inventories at their highest since July. This drop reflects a broader worry: if the global economy slows under the weight of deficit-driven uncertainty, demand for oil could soften.

Rising inventories suggest an oversupply might already be in play, compounding the downward pressure on prices. It’s a stark contrast to gold’s rally—while one asset benefits from fear, another suffers from faltering growth expectations.

Beyond the US, global responses are adding layers to this saga. Bank Indonesia, for example, cut its benchmark interest rate by 25 basis points to 5.50 per cent, aligning with market expectations. The Deposit Facility and Lending Facility rates also dropped to 4.75 per cent and 6.25 per cent, respectively.

This move could be a preemptive strike to bolster domestic growth amid a shaky global backdrop, though it risks weakening the rupiah if risk sentiment continues to sour. It’s a delicate balancing act—stimulus now might cushion the blow, but it could also expose vulnerabilities later. For now, it’s a sign that central banks worldwide are watching the US deficit drama closely, adjusting their own playbooks accordingly.

Asia’s equity markets offer a mixed picture. While Wednesday saw broadly positive performances, early Thursday trading tracked Wall Street’s decline, suggesting the US slump is casting a shadow. Yet US equity index futures hint at a potential rebound at the open, a glimmer of optimism amid the gloom. Markets are volatile, reacting to each new headline about the deficit and its fallout. Investors are on edge, and rightly so—the stakes are high.

Then there’s the cryptocurrency angle, which has turned heads with its defiance of traditional market trends. Bitcoin rocketed to US$110,730 on Wednesday, a fresh all-time high, before settling just below US$110,000. This surge, a 47.82 per cent climb from its April 6 low of US$74,434, coincided with Bitcoin Pizza Day—a nostalgic nod to May 22, 2010, when Laszlo Hanyecz traded 10,000 Bitcoins for two pizzas, then worth US$41.

Today, those coins would fetch millions, a testament to Bitcoin’s meteoric rise. The timing feels symbolic, but the rally’s roots run deeper. Strong buying pressure and a shrinking supply on exchanges suggest investors are piling in, viewing Bitcoin as a hedge against the chaos in traditional markets.

Ethereum’s story echoes this resilience. Up two per cent in Thursday’s early Asian session, it reclaimed the US$2,500 level, buoyed by whale buying. Exchange supply has dwindled to 18.73 million ETH, the lowest since August 2024, with over 1 million ETH flowing to private wallets since late April.

This hoarding signals confidence in future gains, and it’s paying off—Ethereum’s upward trajectory holds firm despite the broader market wobble. Unlike equities or Treasuries, these digital assets seem to thrive on uncertainty, drawing in those disillusioned with fiat systems strained by deficits and debt.

So, what does it all mean? The rising US deficit has unleashed a cascade of effects, eroding global risk sentiment and reshaping asset valuations. Equities and Treasuries are reeling, gold is basking in safe-haven demand, and oil is buckling under growth fears.

The dollar’s weakness underscores a crisis of confidence, while cryptocurrencies like Bitcoin and Ethereum soar as alternative refuges. It’s a tale of divergence—traditional markets buckle under fiscal strain, while digital ones chart their own course.

Looking ahead, the implications are vast. If the deficit continues to swell, Treasury yields could climb further, squeezing equities and amplifying economic headwinds. Gold might keep rising, but oil could languish if growth stalls. Central banks like Bank Indonesia will face tough choices, balancing stimulus with stability.

And cryptocurrencies? Their trajectory hinges on whether they can sustain this momentum as viable hedges. For investors, the key is vigilance—understanding how these pieces fit together will be crucial in navigating what’s shaping up to be a turbulent road.

In my view, this moment is a wake-up call. The US deficit isn’t just a domestic issue; it’s a global fulcrum, tilting markets in ways we’re only beginning to grasp. The data—from yield curves to crypto wallets—paints a picture of a world in flux, where old assumptions are tested, and new opportunities emerge.

I’ll keep digging, tracking the numbers and the narratives, because this story is far from over. For now, the retreat in risk sentiment is a stark reminder: in finance, as in life, uncertainty is the only certainty.

 

Source: https://e27.co/crypto-thrives-as-traditional-markets-falter-whats-driving-the-divergence-20250522/

The post Crypto thrives as traditional markets falter: What’s driving the divergence? appeared first on Anndy Lian by Anndy Lian.

Anndy Lian
Moody’s downgrade and crypto’s ascent: Decoding the signals of a shifting economic landscape

The global financial landscape is currently navigating a complex and volatile terrain, shaped by a confluence of macroeconomic uncertainties, shifting monetary policies, and evolving market sentiments.

On Tuesday, global risk sentiment took a noticeable step back as US equities retreated, snapping a six-day rally that had been fuelled by a temporary reprieve in trade tensions and optimism about economic growth. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite each declined by approximately 0.3 per cent to 0.4 per cent, signalling a pause in the bullish momentum that had characterised recent trading sessions.

This pullback, as reported by Reuters, was largely attributed to an absence of fresh catalysts to sustain the rally, leaving investors to grapple with persistent concerns about fiscal policy, rising debt levels, and the implications of a recent downgrade in the US credit rating by Moody’s.

These factors, combined with developments in the cryptocurrency markets and international monetary policy shifts, such as the Reserve Bank of Australia’s recent rate cut, paint a multifaceted picture of a global economy at a crossroads. Below, I offer my perspective on these interconnected dynamics, delving into the implications for markets, the US fiscal outlook, and the burgeoning role of cryptocurrencies like Bitcoin and Ethereum in this environment.

The retreat in US equities reflects a broader recalibration of investor sentiment, driven by mounting fiscal uncertainties in the United States. According to Moody’s estimates, the ongoing debate in the House of Representatives over a sweeping tax bill has intensified concerns about the trajectory of the US budget deficit, which is already projected to reach nine per cent of GDP by 2035.

The proposed legislation, which includes extensions of the 2017 tax cuts championed by President Donald Trump, alongside spending hikes and reductions in safety-net programs, could add trillions to the national debt, potentially exacerbating the country’s fiscal challenges.

Moody’s downgrade of the US sovereign credit rating from AAA to Aa1, announced late last week, has further amplified these concerns, marking the final major credit rating agency to strip the US of its top-tier rating. This downgrade, following similar moves by Standard & Poor’s in 2011 and Fitch in 2023, underscores a structural shift in perceptions of US fiscal health.

The downgrade has not triggered immediate panic, but it has refocused market attention on the long end of the US Treasury yield curve, where yields have risen sharply, reflecting a higher term premium demanded by investors wary of fiscal profligacy.

The US Treasury market, a cornerstone of global finance, is exhibiting signs of strain. On Tuesday, the yield curve steepened as long-end yields climbed, with the 10-year Treasury yield rising 4 basis points to 4.487 per cent and the 30-year yield approaching the psychologically significant five per cent mark, closing at 4.970 per cent.

This movement contrasts with a slight decline in the 2-year yield to 3.96 per cent, highlighting a divergence in market expectations about short-term versus long-term economic conditions. The steepening yield curve suggests that investors are increasingly concerned about the long-term implications of rising deficits and debt servicing costs, which Moody’s cited as key factors in its downgrade decision.

Higher yields on longer-dated Treasuries signal that bond investors, often referred to as “bond vigilantes,” are demanding greater compensation for holding US debt amid fears of unsustainable fiscal policies. This dynamic could have far-reaching consequences, raising borrowing costs for the US government, businesses, and households, and potentially crowding out private investment as interest expenses consume a larger share of the federal budget.

The US Dollar Index, which measures the dollar’s value against a basket of major currencies, fell 0.3 per cent to 100.12, marking its second consecutive day of declines. This weakening reflects a combination of factors, including reduced safe-haven demand as risk sentiment cools and concerns about the US fiscal outlook.

Historically, the dollar has served as the ultimate safe-haven asset during periods of global uncertainty, but recent market behaviour suggests a potential shift. Investors are increasingly turning to alternatives like gold, which rebounded 1.9 per cent to US$3,290 per ounce on Tuesday, driven by short covering and renewed interest in hard assets amid fiscal and geopolitical uncertainties.

The simultaneous decline in US equities, bonds, and the dollar, as noted in analyses from Reuters and CNBC, is reminiscent of market dynamics typically seen in emerging economies during periods of stress, raising questions about whether global confidence in US assets is beginning to wane.

In the commodity markets, Brent crude oil prices dipped 0.2 per cent to US$65 per barrel, reflecting uncertainty about potential US sanctions on Iran and their impact on global oil supply. While oil prices have been volatile, the lack of significant upward movement suggests that markets are balancing concerns about supply disruptions with fears of weakened global demand due to trade tensions and economic slowdowns.

Conversely, gold’s resilience underscores its role as a hedge against uncertainty, particularly as investors navigate the implications of rising Treasury yields and a weaker dollar.

On the international front, the Reserve Bank of Australia’s decision to cut interest rates by 25 basis points, marking its second rate reduction this year, highlights a divergence in global monetary policy. The RBA cited a more balanced inflation outlook as the rationale for the cut, which contrasts with the US Federal Reserve’s cautious stance. While US inflation has moderated to 2.3 per cent annually in April, as reported by Yahoo Finance, markets are now pricing in a potential Federal Reserve rate cut in September rather than earlier expectations for June.

This shift reflects ongoing uncertainty about the inflationary impact of tariffs and fiscal stimulus, which could push prices higher in the coming months. The RBA’s move has weakened the Australian dollar by 0.6 per cent to US$0.6416, signalling that global currency markets are also adjusting to divergent policy paths.

In Asia, equity indices displayed mixed performance in early trading, with no clear direction as investors digested the US market pullback and global economic signals. The lack of a unified trend in Asian markets underscores the uneven impact of global risk sentiment, with some regions buoyed by local stimulus measures, such as China’s recent shift to a looser monetary policy stance, while others remain cautious amid trade and fiscal uncertainties.

Turning to the cryptocurrency markets, Bitcoin and Ethereum have emerged as bright spots amid the broader market unease. Bitcoin surged past US$105,000, driven by a series of pro-crypto developments, including the Senate’s progress on a stablecoin bill and significant inflows into Bitcoin exchange-traded funds (ETFs). The bill, which aims to provide regulatory clarity for stablecoins, has bolstered investor confidence in the broader crypto ecosystem, signaling a potential mainstreaming of digital assets.

Similarly, Ethereum has reclaimed the US$2,500 level, supported by ETF approvals and whale buying, which reflect growing institutional interest. From a technical perspective, Ethereum’s price action is at a critical juncture. The token is testing the US$2,530 resistance level, with its 50-, 100-, and 200-week moving averages serving as potential support.

A breakout above this level could confirm a rounded bottom pattern, potentially propelling Ethereum toward US$2,850 or even its four-year high near US$4,100. However, a failure to hold above US$2,100 could trigger a deeper correction, underscoring the high-stakes nature of its current trajectory. Technical indicators, such as the flat Relative Strength Index and the Stochastic Oscillator’s tentative crossover, suggest a market poised for a decisive move.

The rally in cryptocurrencies contrasts sharply with the caution in traditional markets, highlighting their growing role as alternative assets in times of uncertainty. Posts on X reflect this sentiment, with users noting increased institutional flows and wallet activity in Bitcoin and Ethereum, driven by regulatory clarity and a shift away from traditional safe-havens like Treasuries and the dollar. This trend is particularly notable given Japan’s rising 30-year yield, which some analysts interpret as a signal of macro stress prompting capital flows into “hard” assets like cryptocurrencies.

In my view, the current market dynamics underscore a critical inflection point for the global economy. The retreat in US equities, coupled with rising Treasury yields and a weakening dollar, suggests that investors are increasingly skeptical of the US’s ability to manage its fiscal challenges without significant consequences.

The Moody’s downgrade, while not an immediate catalyst for a crisis, serves as a stark reminder of the structural risks posed by chronic deficits and rising debt servicing costs. The steepening yield curve and higher term premium indicate that bond markets are pricing in these risks, which could constrain economic growth by raising borrowing costs across the board.

At the same time, the resilience of gold and cryptocurrencies like Bitcoin and Ethereum reflects a broader search for alternative stores of value in an environment where traditional safe havens are under scrutiny. The pro-crypto developments in the US, including the Senate’s stablecoin bill and ETF inflows, suggest that digital assets are gaining legitimacy as part of diversified portfolios, particularly as fiat currencies face pressure from fiscal and geopolitical uncertainties.

However, the volatility in these markets, as evidenced by Ethereum’s precarious technical position, underscores the risks of chasing momentum without a clear understanding of the underlying fundamentals.

Looking ahead, the interplay between fiscal policy, monetary policy, and global trade dynamics will likely dictate the trajectory of risk sentiment. The US House’s ability to pass the tax bill without further exacerbating deficit concerns will be critical, as will the Federal Reserve’s response to evolving inflationary pressures. Internationally, the RBA’s rate cut and China’s looser monetary stance highlight the fragmented nature of global economic policy, which could amplify volatility in currency and equity markets.

For investors, a disciplined approach that balances exposure to traditional assets with selective allocations to alternatives like gold and cryptocurrencies may offer the best path forward in this uncertain environment. As markets navigate these challenges, staying attuned to both macroeconomic signals and technical indicators will be essential for anticipating the next major move.

 

Source: https://e27.co/while-stocks-stay-calm-bitcoin-rockets-to-us105k-after-downgrade-20250520/

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