Week of 24 to 30 Oct
In a Nutshell
Last week, we observed that despite the overheated CPI numbers causing an initial kneejerk reaction to the downside, most markets fought back and eventually printed bullish engulfing candles to the close – a real sign of seller exhaustion.
Last forward a week, it is notable how sentiments and narratives have quickly followed price. Expectations for a 100-bps hike in next week’s 2nd Nov FOMC have virtually vanished, with expectations today even trickling towards a 50-bps hike.
Sentiments have been largely risk-on – egged by the fact that central banks around the world are showing signs of pivoting and stalling their respective rate hikes.
The Bank of Canada, who’s hiking regime has largely been a leading indicator of the US Fed’s so far, raised its benchmark interest rate by 50bps instead of an expected 75bps yesterday.
BTC and ETH had both been showing incredible signs of resilience the previous 4 weeks, with both markets holding on to their key support levels at a time when the S&P 500 was making new lows on a weekly basis.
Coupled with historical volatility at a record low, signaling that a large percentile move was nearer than far – the relative strength of the crypto markets hinted that if macro markets reversed, the reversal in crypto would be swifter and stronger than in equities markets.
Crypto news wise, there had been no significant catalyst within the crypto market that we could pinpoint as potential triggers for the move up, meaning that the rally was largely in participation with the increasing risk-on sentiments brewing since the start of the week.
Current evidence and forensics of this recent crypto leg up seem to point towards a short squeeze type move, rather than an organic spot driven rally.
1w implied vols are now back within the 50 handle, a level within the usual vol territories we are accustomed to. As spot continues to largely trade within its June to current 18k to 25k range, vols are likely to remain unremarkable.
More interesting is the 25D skew, which has completely reversed on the 1w, with calls now trading at a slight premium as compared to puts – a complete evaporation in short term bearish sentiment.
Idiosyncratic observations wise – ETH is simply trading as a highly beta / more volatile play to BTC at this point of time, with sentiments similarly reflecting an abandonment of downside protection towards more short term bullish outlooks.
Macro
As we wrap up a highly eventful week, this would be an opportune time to recap and digest some rather high magnitude and significant events that have taken place in the previous week, shaping the macro-environment potentially for the weeks to come.
In our market update last week, we observed that despite the overheated CPI numbers causing an initial kneejerk reaction to the downside, most markets fought back and eventually printed bullish engulfing candles to the close – a real sign of seller exhaustion. Traders riding the short side (an easy play since the mid of August) should then have taken real caution that signs of a major reversal were close.
Fast forward a week, it is notable how sentiments and narratives have quickly followed price. Expectations for a 100-bps hike in next week’s 2nd Nov FOMC have virtually vanished, with expectations today even trickling towards a 50-bps hike. Sentiments have been largely risk-on – egged by the fact that central banks around the world are showing signs of pivoting and stalling their respective rate hikes. The Bank of Canada, who’s hiking regime has largely been a leading indicator of the US Fed’s so far, raised its benchmark interest rate by 50bps instead of an expected 75bps yesterday.
Fig. 1 – Target Rate Probabilities for 2 Nov 2022 Fed Meeting – Source: CME Fed Watch
This led to a cascading effect on the DXY (US Dollar index), which in turn has given room for risk assets like equities and crypto and (even US treasuries) to run. The DXY has had its first major break of its uptrend since Early August, and is now trading close to it’s pivot level at 109.22. It remains to be seen if DXY bounces at this level, but further weakness and trading below it’s pivot should inevitably spill over continued confidence into risk-on assets.
Fig. 3 – U.S Dollar Currency Index – Source: TradingView
Putting a damper onto the otherwise bullish sentiment, tech sector earnings, specifically that of Microsoft, Meta and Google have seen massive misses this week, resulting in the Nasdaq closing more than 2% below. Otherwise, equities have largely shaken-off these misses and marched upwards without the FAANG stocks contributions.
Crypto
BTC and ETH had both been showing incredible signs of resilience the previous 4 weeks, with both markets holding on to their key support levels at a time when the S&P 500 was making new lows on a weekly basis. Coupled with historical volatility at a record low, signaling that a large percentile move was nearer than far – the relative strength of the crypto markets hinted that if macro markets reversed, the reversal in crypto would be swifter and stronger than in equities markets.
In the last 7 days, BTC has risen 8.8% while ETH has gained 21% - with both markets significantly outperforming the move up in equities.
Crypto news wise, there had been no significant catalyst within the crypto market that we could pinpoint as potential triggers for the move up, meaning that the rally was largely in participation with the increasing risk-on sentiments brewing since the start of the week.
The strong move up was likely fueled in part by short liquidations across the perpetuals and futures markets. 80% of the liquidations took place on FTX alone, amounting to more than $500m of short positions. This is wildly significant, given that these liquidations (amounting to more than $1.1b over the course of two days) was the highest notional of short liquidations seen in the market since July 2021. Current evidence and forensics of this recent crypto leg up seem to point towards a short squeeze type move, rather than an organic spot driven rally.
Fig. 4 – Total Liquidations across Exchanges – Source: Coinglass
Option Vols
Implied vols finally saw a significant bid this week as spot markets finally came to life, seeing the biggest two day move in more than a month. 1w implied vols are now back within the 50 handle, a level within the usual vol territories we are accustomed to. As spot continues to largely trade within its June to current 18k to 25k range, vols are likely to remain unremarkable. More interesting is the 25D skew, which has completely reversed on the 1w, with calls now trading at a slight premium as compared to puts – a complete evaporation in short term bearish sentiment.
BTC
· 1w implied: 55.2 vol vs average of 43.0 vol last week
· 1m implied: 57.0 vol, vs average of 53.6 vol last week
· 1w R/R: -0.65% favouring Calls vs average of 8% favouring Puts last week
· 1m R/R: 4.7 % favouring Puts vs average of 12% favouring Puts last week
ETH
ETH Implied vols have likewise gotten a breath of life this previous week, gainly more significantly relatively to BTC. This is expected given the larger magnitude of the move in ETH versus BTC this week. Idiosyncratic observations wise – ETH is simply trading as a highly beta / more volatile play to BTC at this point of time, with sentiments similarly reflecting an abandonment of downside protection towards more short term bullish outlooks.
· 1w implied: 73.9 vol vs average of 52.7 vol last week
· 1m implied: 79.4 vol, vs average of 65.4 vol last week
· 1w R/R: 2% favouring Calls vs average of 13% favouring Puts last week
· 1m R/R: Flat vs average of 12% favouring Puts last week
Technical Levels
BTC Levels
· R2 26,000 (Top of Upwards Channel)
· R1 21,500 (Mid of Upwards Channel + 100DMA)
· Pivot 20,500 (Pivot Level)
· S1 19,500 (Second Pivot Level)
· S2 17,500 (June Lows)
ETH Levels
· R2 2,000
· R1 1,750
· Pivot 1,500 (Key breakout area)
· S1 1,250 (Mid of previous range)
· S2 1,050 (Range Low)