• Risk rallied generally early last week due to 3 main issues:
1) fund rebalancing for the new quarter after huge price drops in Q3
2) market re-assessment of EU Investment Bank credit concerns
3) sudden BoE QE re-start caused market to consider if Fed would be next to choke
• BTC squeezed with equities to top out at $20,450 a couple of times, ETH to $1,400
• NFP data on Friday gave credence to the theory that the Fed will be last CB to pivot
• BTC and ETH sold off since to $18,950 and $1,270 lows with flows more mixed than last period
• Vols sold off, realised vols lower, despite a weak spot price, and riskies bid for puts
• This realised correlation implies the market is well hedged against downside moves
• The week ahead is all about CPI data, rates, and Ukraine.
Those looking for a bounce in risk have been disappointed, as NFP data was again quite strong, taking markets back to a ~75% chance of a Fed 75bp hike on 2nd Nov. BTC and ETH failed at the first hurdles, being $20,500 and $1,400, both of which now take on added significance as a result. Since the data on Friday both have trended lower, to lows so far around $18,950 and $1,270. Outside of the majors, DOGE received a 10% bump on Tuesday from Elon Musk resuscitating his Twitter deal, but has since given it all back.
Compared with the previous week, B2C2 flows have been much more mixed. By coin, BTC (52.8% buyer) has been preferred to ETH (52.5% seller). We have seen strong selling in DOG, LTC, ADA, SOL, and strong buying in MAT and AVAX. By region, the Americas were our better sellers at 53.0%; and by client category banks, exchanges, retail and OTC brokers were all better sellers.
Futures basis remains relatively stable, with BTC 3 month futures basis remaining around 1.5% annualised, while ETH 3 month basis has dropped 1% to 2.5% discount, indicating the market is starting to price in higher ETH yields.
Crypto vols have been sold, with the ETH curve being particularly hard hit. BTC mid curve vols have essentially dropped 2 vols to 64%, while ETH mid-curve has dropped 10 vols to 73%. Riskies are also a little lower in both pairs. Lower vols may look tempting, but owning gamma is a large negative carry trade currently, with 10 day realised vols in BTC down around 40%, and in ETH only 44%, so current vols are either overvalued or are pricing some large event risk this week.
The options market is also telling us something deeper: both implied and realised vols have fallen dramatically this week while flat price was moving lower. This correlation has played out despite the market paying a persistent premium to buy puts over calls, and therefore implies quite strongly that the market has little to fear of the downside, or in other words, that it is short.
The main macro data print for the week will be US CPI data which comes out on Thursday. Core CPI is expected at 6.5-6.6%, with a MoM change of 0.5%. While the market will again fret on a MoM number north of 0.6%, I suspect the bigger reaction would be on a lower number (south of 0.4% MoM core CPI), not simply because that number would be more unexpected, but because of market positioning too.
Such a lower number would introduce huge uncertainty around the next Fed meeting on 2nd November, as people would be forced to consider the possibility of an early Fed pivot. This would not only cause long USD positions to be unwound, but might also force players to buy USD puts to hedge against a short squeeze in risk.
The market will also have to keep its eyes on the increasing risk of the Ukraine war spiralling into something that nobody thought would happen. On one side we have a motivated force in the ascendency on the battlefield. On the other, a dilapidated and demotivated force subject to a leader who is both in control of a superior destructive force, and is also prone to emotional reactions to setbacks in the field, such as the recent airstrikes, which could easily escalate into something more sinister. If we continue down this route, expect prices to head south, and become more volatile, very quickly.
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