US Equities Rebound While Cryptocurrencies Plunge Amidst Hawkish Fed Signals and Government Shutdown Risk

US Equities Rebound While Cryptocurrencies Plunge Amidst Hawkish Fed Signals and Government Shutdown RiskOn December 20th, US equity markets witnessed a dramatic turnaround, with all three major indices rebounding strongly after an initial dip to close in the green. However, the cryptocurrency market experienced a bloodbath, with Bitcoin plummeting over 12% from its recent highs, triggering widespread panic and resulting in over 430,000 liquidations across the network

US Equities Rebound While Cryptocurrencies Plunge Amidst Hawkish Fed Signals and Government Shutdown Risk

On December 20th, US equity markets witnessed a dramatic turnaround, with all three major indices rebounding strongly after an initial dip to close in the green. However, the cryptocurrency market experienced a bloodbath, with Bitcoin plummeting over 12% from its recent highs, triggering widespread panic and resulting in over 430,000 liquidations across the network. A record $680 million in net outflows from Bitcoin ETFs further exacerbated the situation. This divergence in market performance is closely linked to hawkish signals from the Federal Reserve and the looming risk of a US government shutdown.

After a brief initial downturn, the US stock market quickly recovered, ending the day with gains. However, cryptocurrency-related stocks were not spared, suffering significant losses. Coinbase, BitDigital, Canaan Inc., and MicroStrategy fell by over 3%, 3%, 3%, and 2%, respectively. Meanwhile, pharmaceutical giant Novo Nordisk's stock plunged 20% after disappointing results from its Wegovy weight-loss drug trial, sending competitor Eli Lilly's shares up over 7%.

On the economic data front, the November core Personal Consumption Expenditures (PCE) price index rose 2.8% year-over-year, slightly below the expected 2.9%, and 0.1% month-over-month, lower than the anticipated 0.2%. Despite the slightly weaker-than-expected PCE data, the emerging market currency index hit an intraday high, and the US dollar index briefly fell below 108. Ian Lyngen of BMO Capital Markets commented, "Overall, this round of data is consistent with the more moderate inflation picture that seems to be emerging in Q4. However, core inflation isn't low enough to prevent the Fed from pausing rate cuts in January."

Federal Reserve Chairman Jerome Powell's previously communicated hawkish stance added to market uncertainty. Federal Reserve official John Williams predicted US economic growth would slow to around 2% next year. He stressed that while inflation has fallen significantly over the past two years and continues to decline, the Fed needs to closely monitor data and remain data-dependent when adjusting monetary policy.

Beyond economic data and the Fed's policy trajectory, the impending risk of a US government shutdown further amplified market volatility. With the Republican-controlled House refusing to pass a temporary funding bill supported by President Trump, a government shutdown loomed within 24 hours. A senior investment strategist at RBC Wealth Management Asia noted that this event could exacerbate short-term market volatility, particularly against the backdrop of the Fed's hawkish pivot, amidst growing concerns about long-term inflationary pressures and US debt. President-elect Trump's post on TruthSocial, stating, "If the government is going to shut down, let it begin now," further fueled market uncertainty.

The cryptocurrency market's sharp decline is closely tied to the waning optimism surrounding Trump's election victory. On the evening of December 20th, Bitcoin briefly fell below $92,268, down over 8% from the week's high of $108,365. Other major cryptocurrencies, such as Ethereum and Dogecoin, also experienced significant drops. Although losses narrowed later, Bitcoin remained down over 5% at the time of publication. CoinMarketCap data showed that ten of the top twenty cryptocurrencies by market capitalization fell over 10%, with Dogecoin plummeting a staggering 17%. The total cryptocurrency market capitalization shrank by nearly $260 billion in a single day, a 7.35% drop, settling at $3.26 trillion.

During Bitcoin's rapid sell-off, significant capital fled the Bitcoin ETF market. Data from Sosovalue showed that on December 19th, 12 spot Bitcoin exchange-traded funds (ETFs), including BlackRock's iShares Bitcoin Trust (IBIT) and Fidelity's FBTC, experienced a record $680 million in net outflows, ending a 15-day streak of inflows. Simultaneously, Coinglass data revealed that over 434,000 accounts were liquidated in the past 24 hours, totaling over $1.4 billion in losses. Notably, cryptocurrency liquidations in December have far exceeded the total for the first eleven months of the year, reaching a yearly high of $1.707 billion on December 9th.

Bitcoin's sudden pullback followed a rally in the cryptocurrency market after Trump's election win. Trump's post-election pronouncements expressing support for cryptocurrencies made digital assets more vulnerable amidst the Fed's gradual tightening of monetary policy. QCPCapital analysts suggest that current market uncertainty, particularly surrounding Trump's upcoming inauguration and potential implementation of tariffs on US allies and adversaries, casts a shadow over the cryptocurrency market.

On December 18th, the Federal Reserve cut the federal funds rate by 25 basis points to a range of 4.25%4.50%, meeting market expectations, but the summary's announcement of a significantly lower number of rate cuts in 2025 (only two planned versus the market's expectation of four) sent shockwaves through the market. QCPCapital analysts believe that as the Fed slows its easing pace, market focus is shifting to the acceptance of crypto assets by traditional financial institutions.

The future of the Bitcoin market will continue to be influenced by both macroeconomic and industry-specific factors. Hani Abdallah, Senior Market Analyst at XTB, noted, "The interplay of monetary policy, institutional adoption, and geopolitical events suggests Bitcoin will remain highly sensitive to these factors through 2025." Chris Weston, Head of Research at Pepperstone Group, stated, "Caution is warranted in the short term; while this doesn't signify an immediate collapse, the momentum has clearly weakened, and buyers have lost the upper hand." These analyses suggest that the cryptocurrency market will face ongoing challenges in a complex macroeconomic environment and policy uncertainty.