Flow Analysis

By: Adam Farthing

As predicted, last week was defined by the CPI print which came in huge at 7.5% YoY. Inflation has been surprising to the upside for a year, so the Fed, still buying assets, is now well behind the curve. Consequently the market reaction was violent, with massive moves in short end rates, and the usual spill-over effects into risk assets. The 2yr yield has risen 25bp to 1.60%, tightening the 2y/10y spread from 57bps to 40bps and equities have sold off quite hard.

Crypto didn't really react much to the data; in summary it had a good start to the week, but a weak close. Within the ecosystem, positions are being moved to the safety of BTC, which has comfortably outperformed most other coins over the week. In this environment, it will be crucial for BTC to hold on to support in the $39-41k area. Further weakness at the start of this week will clearly imply that the recent rally was just another bear market bounce.

For yet another week, crypto exchanges and banks have remained our biggest buyers while family office clients have again turned sellers. By region, we also see a continuation of the recent trend for APAC and EMEA to be better buyers, with Americas biased to selling. By coins, our clients have been better sellers of SOL, MATIC, AVAX and LUNA, and better buyers of DOT, LINK, BNB and UNI.

Futures basis is a little lower over the week, with 1-month basis down 0.5-1.0%, and longer dated basis down 1-2% across most major exchanges. On the OTC side, we see little interest to borrow fiat/stablecoins across our OTC franchise. Overall, futures and rates markets are showing no indication of a change to the bear market environment.

In crypto options, ATM vols have been relatively stable, with gamma supply from DOV auctions being met by demand for vol from those pricing in a higher risk to asset prices in light of the events last week. Of course, the two camps do not offset exactly: the DOV net sell calls, and the risk hedgers demand puts, so while ATM vols are unchanged, put skew has moved up sharply. March 10 delta riskies are now 15 vols for puts in BTC and 23 vols in ETH, up from 7 vols on both a week ago, and close to recent highs in late January.

Today the market’s focus will be on the Fed closed board meeting. This is probably the only chance there is for the Fed to raise rates before the March meeting. US data for the rest of the week includes retail sales on Wednesday and housing and jobs numbers on Thursday. Beyond that, the market will clearly be focused primarily on developments in Ukraine, which remains an asymmetric risk because consensus is for nothing to happen: either the consensus is correct, or something happens and the market moves lower.

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