Summary
Easing trade tensions and progress in stablecoin legislation have boosted markets, contributing to Bitcoin reaching a new all-time high.
Persistent fiscal concerns, compounded by a sovereign credit rating downgrade, have triggered outflows from dollar assets.
Bitcoin's strong performance following the downgrade marks a notable deviation from historical patterns observed in similar episodes, suggesting market participants may be exploring broader diversification strategies during periods of fiscal uncertainty.
Market Overview
Recent U.S.-China trade progress — including tariff pauses and selective cuts — has eased market tensions and reduced near-term recession risks. U.S. stocks have now recouped most losses since late February (S&P 500: -1.0% YTD), while Bitcoin has reached a new all-time high (+17.8% YTD), aided by progress in U.S. stablecoin legislation.
Figure 1: Weekly and YTD Performance – Crypto and Global Market Assets
However, while tariffs have declined from peak levels, they remain elevated compared to pre-trade war norms. At the same time, persistent Fed tightening and higher market yields (borrowing costs) pose dual challenges: growth is slowing amid stubborn inflation, and expansive fiscal spending may potentially reduce confidence in long-term fiscal sustainability.
These pressures appear to have driven global fund flows away from the dollar (DXY: –8.3% YTD) and contributed to a steeper Treasury yield curve — trends that may persist until policies are perceived as shifting towards enhanced fiscal control.
1. Digital Assets
Bitcoin rose 6.3% over the past week, reaching a new all-time high of US$110,797 while ETH remained largely flat. Among the top five cryptocurrencies by market capitalization, only Bitcoin has surpassed its high from the beginning of the year.
Figure 2: YTD Indexed Performance – Major Digital Assets
That said, ETH surged 43% the previous week (from ~US$1,820 to US$2,600) — its largest 7-day gain since 2021, when DeFi first gained prominence.
Figure 3: ETH Records Strongest Weekly Performance Since 2021
U.S. spot Bitcoin ETPs are on track for a sixth consecutive week of net inflows, pushing total inflows above US$8B — the third-highest six-week total since their launch in early 2024. This momentum has driven cumulative net inflows to a new all-time high of US$43.4B. In contrast, North American gold ETPs have recorded two consecutive weeks of outflows, signaling softer investor demand.
Figure 4: Spot Bitcoin ETF Inflows Hit New Highs as Gold Flows Turn Down
GENIUS Act Moves Forward in Senate
On May 19, 2025, the U.S. Senate advanced the GENIUS Act via a 66-32 cloture vote, opening the door for formal debate and amendments. While the bill is not yet final — requiring further Senate and House approval — potential enactment could come as early as July. The development has already led to significant discussion across the crypto industry and is broadly seen as a positive signal. Key preliminary provisions include:
"Payment Stablecoin" Defined: Excludes payment stablecoins from securities and commodities classification, which could materially impact DeFi tokens.
U.S. Issuance and Oversight: Only U.S.-licensed entities may issue payment stablecoins domestically; the bill also proposes oversight mechanisms for foreign issuers operating within U.S. jurisdiction.
Bank-Like Rules: Issuers will be subject to bank-level regulation, with a three-year grace period for digital asset service providers.
Reserve Requirements: Stablecoins must be backed by reserves in USD, Treasury bills, or similarly liquid assets.
No Issuer Yields: Licensed issuers cannot offer interest, reinforcing stablecoins as a medium of payment rather than an investment vehicle.
The proposed legislation introduces a clear regulatory framework for stablecoins, likely enhancing market stability, legitimizing the asset class, and drawing in traditional financial institutions. As a global regulatory leader, the U.S. could also shape international standards and promote alignment across jurisdictions.
However, the bill’s strict licensing and issuer criteria (e.g., federal or state-chartered institutions) may restrict innovation among smaller crypto projects and DeFi ecosystems — potentially impacting decentralization, a core tenet of the space.
2. Global Markets
Risk-off sentiment dominated heading into the current week, broadly pressuring U.S. assets. This was driven by a U.S. credit rating downgrade, uncertainty around an upcoming tax bill vote, weak demand at the 20-year Treasury auction, and persistent fiscal anxieties — all compounded by the absence of any supportive economic data.
Figure 5: Multi-Asset Performance – Equities, FX, Commodities, Bonds, Volatility
Equities:
The S&P 500 fell 0.88%, and the NYFANG Index dropped 0.48%, reflecting broad risk aversion across large-cap and tech-driven stocks.
FX:
The U.S. Dollar Index (DXY) declined 1.43%, while USD/JPY fell 2.37%, reflecting dollar weakness likely driven by U.S.-specific macro risks.
Commodities:
Gold rose 4.92%, benefiting from safe-haven demand. WTI crude oil declined 1.36%, potentially on concerns that OPEC+ may increase supply.
Bonds:
U.S. 10-Year Treasury prices fell (–0.38% return), impacted by the credit downgrade and fiscal instability. Japanese 10-Year government bonds also posted slight negative returns.
Volatility:
The VIX rose to 20.37 — a two-week high — signaling elevated market uncertainty.
3. Intermarket View
The correlation between Bitcoin and gold has declined from its April peak, driven primarily by a pullback in gold prices as tariff-related uncertainty subsided, while Bitcoin has remained resilient.
Figure 6: BTC 2M Correlation Matrix (vs ETH, S&P 500, Gold, DXY, US 10Y)
Macro Outlook: Downgrade in Focus
Moody’s downgraded the U.S. sovereign credit rating from its highest tier of AAA to Aa1 after markets closed on May 16, 2025 — a key focus for investors this week.
While the U.S. has long been viewed as the world’s safest debt issuer, the move follows prior downgrades by S&P in 2011 and Fitch in 2023. With Moody’s previously the last major agency to maintain a AAA rating, this action marks the loss of top-tier status across all three major rating agencies.
The downgrade highlighted ongoing concerns about U.S. fiscal health, with Moody’s attributing responsibility to both political parties. In response, the White House — via NEC Director Kevin Hassett — characterized the downgrade as backward-looking and highlighted current efforts to reduce spending and support growth.
Notably, all three major U.S. credit downgrades in history have occurred after the creation of Bitcoin.
Figure 7: Timeline of U.S. Sovereign Credit Downgrades (2011–2025)
The initial three-day reaction saw flows into traditional safe havens like gold — and notably, into Bitcoin — as U.S. assets, including the dollar, equities, and Treasuries, all weakened. This marks a subtle departure from historical patterns, with Bitcoin’s positive early response standing out.
However, the 2023 experience — where early reactions faded as rising yields and a stronger dollar eventually pressured markets — suggests caution. The outlook will hinge on how bond yields and the dollar evolve in the coming weeks, and whether this downgrade triggers a more lasting shift in sentiment than previous episodes.
Figure 8: Cross-Asset Performance (%) Following U.S. Sovereign Credit Rating Downgrades
The Week Ahead
The upcoming week is expected to be relatively light on the economic data front, with the U.S. observing Memorial Day on Monday, May 26. However, a scheduled speech by Fed Chair Powell that day warrants attention for potential monetary policy signals. Market activity may pick up from Tuesday, May 27, with the release of U.S. Durable Goods Orders and the start of the Bitcoin 2025 and ETHPrague crypto conferences. The main event of the week, however, will be the release of the U.S. FOMC Meeting Minutes on Thursday, May 29, which markets will closely analyze for deeper insight into the Fed’s policy stance.
Figure 9: Key Macro and Crypto Events for the Week of May 22–29, 2025
