• Generalised sell-off as market prices in tighter monetary conditions
• LUNA the worst performer, DOGE the best
• Perps funding negative, term futures basis lower, OTC interest to borrow alts
• Implied vols stabilised at lower levels; interest to accumulate longer dated calls
In general, the week has been heavily negative for risk, and crypto has felt almost in lock step with equities. The catalyst for the downward trend was Lael Brainard, who, on Tuesday night, suggested that the Fed may reduce the size of the balance sheet much more aggressively than the market expected. The Fed minutes revealed that the change would not be so large, but the damage to sentiment was done, and markets have continued lower.
On the week, BTC and ETH have dropped 8-9%, a cluster of mid-caps (SOL, DOT, MATIC, AVAX, ADA) were down 15-20%, and LUNA dropped 25% so far. The outperformer has been DOGE, which rallied 25% on the back of the Musk/Twitter announcement, and has since sold off to be unchanged on the week. Today, a report revealed that Musk will not be joining the board of Twitter after all, but DOGE has yet to react.
Analysis of our flows shows that clients had a strong preference to buy BTC over ETH for the past week. We saw better selling in SOL, AVAX, DOT, LNK, XLM, EOS, UNI, and MATIC, and better buying in ADA, LUNA, XTZ, and BNB. Broken down by client category, our buyers were funds and exchanges, whereas selling came from OTC brokers. Regionally, APAC were the standout buyers.
In the lend/borrow market, demand to borrow stablecoins remains tepid, but we have seen fresh interest to borrow coins. Many altcoin swaps are trading at quite deep discounts, meaning the OTC borrow is cheaper than the synthetic. The term borrows imply somewhat of a commitment to hedging the risk of lower prices. Term futures on the majors are implying lower funding rates, with 3 month annualised basis having dropped approximately 2% to the 3-4% range on major exchanges.
In options, vols have drifted lower in the front as realised vol has failed to pick up, despite the move lower in price towards the bid side of the risk reversals. In the longer dates however, vols are a little higher, which has been driven by buying of longer dated (Dec+) BTC calls, for example 80k strikes, and also for Jun ETH calls struck at 5000 and higher.
The wires remain full of risk-negative headlines. Today we must consider the continuing polarisation of Western politics, and the real possibility that, within 2 weeks, France could have a far-right leader. We must also consider the disturbing stories emanating from the Shanghai COVID lock-downs. And of course, the war in Ukraine rumbles on, with its pain and suffering, and with all the collateral damage it implies for our societies and our economies.
In terms of economic data, the Chinese inflation numbers for March show both producer and consumer prices beating expectations. The biggest release of the week will probably be US consumer prices for March (Tuesday), forecast to rise from 7.9% in Feb to 8.4%, and core inflation from 6.4% to 6.6%. Analysts will be watching for a growing gap between headline and core numbers, the most difficult element for the Fed to control. On Thursday we have the ECB rate decision and monetary policy statement. The ECB is arguably in a worse quandary than the Fed, with the March inflation print at 7.5%, and many parts of the economy possibly in recession already. Lastly, on Thursday we have US retail sales, consumer sentiment, and jobless claims.
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