Financial markets are exhibiting mixed signals as uncertainty continues to escalate. On February 25, the US debt ceiling was raised from $36.1 trillion to $40.1 trillion, signaling yet another substantial increase in government debt.
Consistent with historical trends, the benchmark 10-year Treasury yield responded by declining from 4.4% to 4.29%. While this might seem paradoxical, markets often view debt ceiling agreements as stabilizing events, which diminish short-term uncertainty, despite the implications of increased borrowing in the future.
Conversely, the stock and cryptocurrency markets, typically bolstered by lower bond yields as capital shifts towards riskier assets, have continued their downward trajectory that began last week. Since February 21, the S&P 500 has fallen by 3%, the Nasdaq100 has seen a dip of 5%, and Bitcoin has plummeted by 16%. The leading cryptocurrency is now trading 26% below its all-time high from President Donald Trump’s Inauguration Day, effectively negating the so-called “Trump pump.”
A concurrent drop in both stocks and bond yields is atypical and indicates increasing risk aversion and fears of an economic slowdown.
Cloud of economic uncertainty hangs over markets
Recent economic data from the US, released on February 21, has shown significant signs of decline. The University of Michigan’s consumer sentiment index fell to 64.7 in February, down from 71.7 in January. This is the lowest reading since November 2023, coming in below the preliminary estimate of 67.8, which was also the consensus among economists surveyed by Reuters.
Existing home sales decreased by 4.9%, and the S&P Global Purchasing Managers’ Index (PMI) dropped from 52.7 in January to 50.4, the lowest since September 2023. A reading just above the 50 mark, which distinguishes expansion from contraction, suggests stagnation in the growth of the private sector.
Adding to market uncertainty, trade tensions are escalating. On February 24, Trump announced that tariffs on Canada and Mexico “will go forward” following the expiration of a monthlong delay next week. His plans to impose 25% tariffs on the European Union, revealed on February 26, along with an additional 10% charge on Chinese goods, have fueled growing market anxiety.
In an interview with CNBC, Chris Rupkey, Chief Economist at FWDBonds, candidly stated,
“The economy is about to have the rug pulled out from under it as Washington policies are causing a rapid loss of confidence on the part of consumers.”
Rupkey further articulated, “The economy is headed for a crash landing this year. Bet on it. The bond market is.”
In the cryptocurrency realm, the Fear & Greed Index has plummeted to 10, indicating Extreme Fear, a stark change from the Greed conditions observed at the start of February.
Crypto Fear & Greed Index. Source: alternative.me
A mini-crisis to validate quantitative easing?
In January, former BitMEX CEO Arthur Hayes theorized that a standoff over the debt ceiling, coupled with hesitance to deplete the Treasury General Account, could push 10-year Treasury yields past 5%, potentially prompting a stock market crash and necessitating Federal Reserve intervention.
He suggested that this could provide President Trump with leverage to push the Fed towards a more dovish stance. In essence, a minor crisis might be utilized to justify quantitative easing and stimulate the economy.
Hayes believes that this mini-crisis should take place early in Trump’s presidency, specifically in Q1 or Q2, so he could assign blame to the leverage accrued during the Biden administration.
“A mini financial crisis in the US would provide the monetary mana crypto craves. It would also be politically advantageous for Trump. I expect we’ll revert to the previous all-time high, wiping out all of the Trump bump.”
Ironically, despite the debt ceiling increase occurring with little drama and 10-year Treasury yields falling, the stock market has still declined. The pressing question now is whether this situation may prompt interest rate cuts.
The Fed remains in a neutral stance, with recent economic data offering little justification for an imminent policy change. The latest CPI report as of February 11 showed inflation rising by 0.5% month-over-month, pushing the annual rate to 3%, both exceeding expectations. Fed Chair Jerome Powell has underscored that the central bank is not in a rush to lower rates further. Nevertheless, the combination of waning economic indicators and liquidity expansion may eventually compel the Fed to act later this year.
Related: Short-term crypto traders sent record 79.3K Bitcoin to exchanges as BTC crashed to $86K
Bitcoin price and M2 fluctuations are misaligned
Even in light of the current market downturn, optimism isn’t entirely absent, as a significant wave of liquidity expansion may be approaching. The growing M2 global liquidity supply could rejuvenate risk-on markets, particularly Bitcoin. However, this may require some time to materialize.
The M2 Global Liquidity Index 3-Month Offset serves as a valuable tool for predicting market movements driven by liquidity. This indicator shifts M2 money supply data forward by three months to assess its relationship with risk assets.
Crypto analyst Crypto Rover underscored this observation on X, stating:
“Global liquidity is significantly strengthening. Bitcoin will follow soon.”
Bitcoin vs M2 Global Liquidity Index (3M offset). Source: CryptoRover
Historical trends indicate that BTC typically lags around 60 days behind significant global liquidity shifts. The current decline fits neatly into this framework, which also suggests a robust rebound by June if liquidity trends continue.
Jeff Park, head of Alpha Strategies at Bitwise, echoed this sentiment:
“Bitcoin may still see lower levels in the short term as it thrives on trends and volatility, both of which have been recently absent. However, discerning institutional investors don’t need to seize every opportunity; they just cannot afford to overlook the most significant one. The largest wave of global liquidity is on the horizon this year.”
Jamie Coutts, a crypto analyst from Realvision, shared insights on how liquidity expansion influences Bitcoin prices:
“Two of three core liquidity metrics in my framework [global money supply and central bank balance sheets] have turned bullish this month while markets dive. Historically, this has been very beneficial for Bitcoin. The dollar is the next domino. Confluence reigns supreme.”
Macro and Liquidity Dashboard. Source: Jamie Coutts
This article does not provide investment advice or recommendations. All investment and trading endeavors carry risk, and readers should perform their own research when making decisions.
