Week of 14 – 20 Nov 2022
In a Nutshell
§ US Equities and bonds were unleashed to the upside last Thursday, following a much softer than expected CPI reading for the month of October (Actual 7.7% vs 8.0% Expected)
§ This was now the 5th consecutive lower YoY reading in 5 months, but more significantly, also considerably below expectations, missing by 0.3%.
§ The impact on target rate probabilities moving in December was also large. Markets are now almost fully pricing in a 50bps hike in December, and with rather solid ground to do so.
For the first time since the current rate hike regime began, numerous stars are aligning to signal a strong case for a slowdown in hikes.
§ Powell has stated a data-dependent view was the way forward and this time – the data seems to be making a point.
§ It has been a relatively quieter week as compared to the explosion of volatility experienced in the previous week from the FTX implosion.
§ Institutional players have been especially affected by exposure to FTX International and Alameda - many of which have seen significant capital still stranded on the exchange.
§ Genesis has emerged to be one of the companies most impacted – with multiple business lines separately affected. Most significantly, Genesis Capital (their lending arm) announced to all clients that they were pausing all withdrawals due to liquidity issues.
§ Not only are we now concerned with the contagion stemming from FTX/Alameda, but we now have contagion from Genesis to contend with as well.
§ On the bright side, despite the multitudes of negative developments without respite, prices have held up relatively well. BTC remains in the 16k range, while ETH is holding 1200 – this is showing real hints of seller exhaustion at these levels.
§ In BTC, front end vols especially eased off significantly over the last day 7 days – with what initially started as “peak fear” during the climax of the FTX blow-up.
§ ETH vols have come down even more dramatically as compared to BTC, from a 150 handle previously down to just 90.
§ Much in BTC applies to ETH as well, both still trading in lock & step post FTX. Fear and caution remain to be the dominant theme across the board, as we are seeing higher correlations within crypto, and higher demand for puts.
Macro
US Equities and bonds were unleashed to the upside last Thursday, following a much softer than expected CPI reading for the month of October (Actual 7.7% vs 8.0% Expected) – the first real signs that inflation on a YoY basis may have peaked. This was now the 5th consecutive lower YoY reading in 5 months, but more significantly, also considerably below expectations, missing by 0.3%.
At that time already pricing in a 50% probably of a 50bps hike in December FOMC due to other weaker economic data (NFP and Unemployment had also come in weaker than expectations), the soft CPI reading was a like a spring uncoiling in a violent fashion. The S&P and Nasdaq closed 5.6% and 7.5% in the green respectively.
Fig 2. Target Rate Probabilities for 14 Dec 2022 Fed Meeting. Source: CME FedWatch
The impact on target rate probabilities moving in December was also large. Markets are now almost fully pricing in a 50bps hike in December, and with rather solid ground to do so. For the first time since the current rate hike regime began, numerous stars are aligning to signal a strong case for a slowdown in hikes.
To recap, economic data has shown signs of weakening, YoY CPI is strongly on a downtrend, and Powell himself stated in the most recent FOMC as well that a time for a slowdown in rate hikes could be as soon as the next meeting (although he also caveated that the Fed were not necessarily in a rush to slowdown the pace of hikes). But to surmise, Powell has stated a data-dependent view was the way forward and this time – the data seems to be making a point.
Crypto
It has been a relatively quieter week as compared to the explosion of volatility experienced in the previous week from the FTX implosion. After an explosion underwater, it takes awhile for the bodies to rise to the surface. While the intensity and capitulation from the previous week may well have receded for now, market participants are no less on their toes.
Thus far, numerous stories and accounts of hedge funds with significant amounts of capital stuck on FTX have arisen (Galois Capital, Ikigai Fund etc), but with hundreds of companies registered under the overall SBF Empire, it would have required more than just sheer luck to have completely evaded the web of contagion that is slowly emerging.
Institutional players have been especially affected by exposure to FTX International and Alameda. Firstly, with FTX’s superior portfolio margining systems, wide range of assets and deep liquidity – FTX was an exchange used virtually by all crypto market makers, many of which have seen significant capital still stranded on the exchange.
Genesis has emerged to be one of the companies most impacted – with multiple business lines separately affected. Most significantly, Genesis Capital (their lending arm) announced to all clients that they were pausing all withdrawals due to liquidity issues. Not only are we now concerned with the contagion stemming from FTX/Alameda, but we now have contagion from Genesis to contend with as well.
On the bright side, despite the multitudes of negative developments without respite, prices have held up relatively well. BTC remains in the 16k range, while ETH is holding 1200 – this is showing real hints of seller exhaustion at these levels. For now, BTC seems to consolidate around a new 15.5k to 17.5k range. What’s remiss is that with how favourable the rest of the macro markets had been – BTC would likely have been trading upwards of 25k if this FTX blow-up did not happen. For now, we continue to range. ETH supports and resistances lie around 1100 and 1350 respectively.
Fig 2. BTCUSD Daily Chart. Source: TradingView
Option Vols
Front end vols especially eased off significantly over the last day 7 days – with what initially started as “peak fear” during the climax of the FTX blow-up. Since then, vols have stabilized back into the 70 handle, only slightly above levels before FTX. 25D skew still shows much evidence of destruction this previous week, with puts still trading at a significant premium to calls, although greatly abated as compared to the previous week.
BTC
· 1w implied: 73.1 vol vs average of 98.4 vol last week
· 1m implied: 84.8 vol vs average of 83.6 vol last week
· 1w R/R: 16% favouring Puts vs average of 28% favouring Puts last week
· 1m R/R: 6.7% favouring Puts vs average of 24 % favouring Puts last week
ETH
ETH vols have come down even more dramatically as compared to BTC, from a 150 handle previously down to just 90. Much in BTC applies to ETH as well, both still trading in lock & step post FTX. Fear and caution remain to be the dominant theme across the board, as we are seeing higher correlations within crypto, and higher demand for puts.
· 1w implied: 96.3 vol vs average of 152.3 vol last week
· 1m implied: 111.4 vol, vs average of 116.5 vol last week
· 1w R/R: 21% favouring Puts vs average of 26% favouring Puts last week
· 1m R/R: 7% favouring Puts vs 25% favouring Puts last week.
Notable Flows:
BTC
1. 1350x 31-Mar-23 23000 Call bought
2. 250x 25-Nov-22 15000 Put sold
3. 225x 18-Nov-22 16000 Put bought
ETH
1. 3750x 25-Nov-22 1300 Call sold
2. 1050x 30-Dec-22 700/1500 Bear Risk Reversal bought
3. 2250x 25-Nov-22 1050 Put sold
Technical Levels
BTC Levels
· R2 20,000 (Reclaim of Monthly Open )
· R1 17,500 (June 2022 Lows)
· Pivot 16,200 (Pivot Level, current low)
· S1 14,000 (2019 High)
· S2 12,500
ETH Levels
· R2 1,650
· R1 1,450
· Pivot 1,250 (Previous key breakout area)
· S1 1,000 (Key psychological level)
· S2 850 (June 2022 Lows)