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Dealers are back in selling low, buying high territory, magnifying all moves.
Main FOMC highlights:
1. keeps "ongoing increases"
2. adds inflation "has eased somewhat"
3. Changes "pace" of future increases with "extent"
"The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."
Bond volatility remains a key component of the global macro puzzle here. SPX vs MOVE (inv) needs little commenting.
Tech upside has been the main pain trade (outlined here on Jan 8). The last time NASDAQ was up more than 10% in January was in 2001. This was after having seen significant multiple contraction the year before. NASDAQ continued to go down by more than 50% for the rest of 2001.
Who needs longer dated volatility when you can trade the 0DTE stuff? The crash in longer dated SPX vol is extreme. Barclay's great derivatives team notes: "...it’s as if the S&P vol market has forgotten that today’s Fed, which has pledged to do whatever it takes to restore inflation to its 2% target, is not the 2011 ECB, which famously pledged to “do whatever it takes” to preserve the euro."
Huge macro week, but the EURUSD skew has remained "calm", despite the "spread" between Fed and ECB growing wider...not to mention the huge euro long. We share the view from Goldman's FX sales desk: "...short-datedEURUSD puts could end up being this week’s best value in gamma."
Earnings misses have not mattered thus far this earnings season. Bad data has not mattered, and neither have bad earnings. The equity market is in no mood to go down right now.
Last year was all about the crowd running delta 1 shorts and didn't need downside protection. Skew moved sharply lower as a consequence. This year the crowd is being forced into chasing longs, and are in need for downside protection, hence the well bid skew. Watch this closely...
SPX has moved in tandem with Federal reserve balances (bank reserves at the Fed). Note the latest gap forming. The crowd is forced to chase this market, but make sure to watch this gap closely...
BTC price action generally tracks the 2017/18 cycle, but trading volumes are low, and crypto company credit risks remain. Morgan Stanley's ETH PAVA speculative indicator has reached an extreme high.
Early in the month, and now we have a rally...but could crypto funding in the month of January actually register a big fat zero? Like some (many) ECM bonuses...
More of the spot up, vol up behavior for forgotten Bitcoin. Second chart shows the 35 delta skew, also moving higher, as upside "chasing" makes a come back.
Bitcoin is extending the most recent surge. We stick with our upside call spreads logic from Monday (here). Make sure to roll into higher strikes dynamically in order to capture max optionality. Note the 200 day coming in slightly higher. We have not traded above it since Jan 2022. 20k is the "psychological" level to watch.
Long crypto is unique these days. That is part of the reason we continue to feel comfortable with our latest squeeze BTC logic (here). Charts show JPM's position proxy based on open interest in CME Bitcoin and Ethereum futures contracts.
Let's see if the latest mini move higher reignites some "institutional" interest. One things is sure, the trend is not overly exciting...making the squeeze even more exciting.
Bitcoin is trading above the 100 day moving average as of writing. We have not seen that since the early November crash. On Monday we outlined our short term BTC squeeze logic and we wrote: "One way to play a possible break out move in BTC is via shorter dated call spreads." This has worked well, but don't forget to roll into higher strikes in order to max out the "greeks". 18500 is a first bigger resistance. Booking some profits and rolling into higher strikes is a strategy we like. Note the 200 day still way higher and the negative trend coming in slightly higher.
...even BTC is moving higher. BTC looks to be closing above the range highs. Second chart shows the short term chart moving in tandem with NASDAQ.
Bitcoin volatility has come down sharply. One way to play a possible break out move in BTC is via shorter dated call spreads. Skew is not dirt cheap, but given the implosion in vols, playing directional bets in BTC looks relatively attractive.
BTC is currently pushing higher, trading at 17200 as of writing. BTC has been stuck inside a massively boring range. A close here or higher and we could be seeing some upside momentum kick in.
Bernstein highlights 5 arguments on why one still should believe in crypto despite the current bear cycle and FTX-like catastrophes that have weighed on investor confidence.
1. With maturing internet adoption, crypto still has decades of application-led growth. Crypto only touches 5% of total internet users
2. Crypto's survival instinct is that every crypto winter (in 2014 and 2018 before) is as brutal, but the industry has always come back
3. Ethereum & its ecosystem represents this application-led growth. Gautam believes that value within crypto will migrate from the speculative crypto assets to more utility and application-driven ecosystems such as Ethereum and its related Layer-2 platforms
4. FTX contagion effects are isolated to select players with FTX only 10% of the global trading volumes, and have strengthened the blockchain financial economy
5. Regulation is coming but adds legitimacy to the space for institutions to participate and will be a net positive in the long run in our view.
Bitcoin transformed from the most exciting to the most boring asset. Many shattered dreams and it is incredible to see it become this boring. Second chart shows Bitcoin's volatility implosion, ending the year at lows. Once again, do not confuse direction with pace...
Go figure where the break even is for most...
Asia was never bullish, but the "reversal" in US and Europe has been huge.
NFT sales peaked at $7.1B this past January. Since then, the digital certificates of ownership have experienced a significant decline in demand. Last month, the combined sales of the top 5 marketplaces dropped to the lowest level since July 2021 — when OpenSea was the only open marketplace among them. Funding to NFT, gaming, and metaverse startups has also taken a plunge — falling to its lowest level since Q2’21 last quarter.
The majority of bitcoin has not moved for over a year, which indicates that it is being used for investment purposes.
So small you cannot even see it.....(apart from in Miami nightclubs). GS: "We expect falling asset prices to a drag on spending in 2023, but crypto price declines to contribute only marginally to this drag"
Only 1/3 of the total...GS: "The total market cap of cryptocurrencies has declined by ~$1.5tn from its peak, but the hit to US investors is likely ~$500bn"
Crypto’s total market cap has fallen by around 70% since its peak in May 2021, to levels below $900bn, a correction roughly in line with that of the first ‘crypto winter’ in 2018.
The most boring chart of boring BTC continues to stay constant. Zero institutional inflow...
We are learning more about the balance sheet, creditors and users of FTX through documents published in relation to the bankruptcy and hearings. The largest proportion of customers were registered in the Cayman (22%) and Virgin Islands (11%); we note that the locations likely host a large number of hedge funds from around the world. 8% of users were in China, despite historical limitations on trading crypto in that country. Great Britain (8%) and Singapore (6%) had the next largest proportion of users. Only 2% of FTX users were from the US, which may seem low but aligns with the assumption that US funds may have registered elsewhere and FTX.US was only 5% of revenue in 2021. There are more than 1 million creditors, with the 50 largest unsecured creditors owed $3.1bn, each owed from $21mn to $226mn, with 10 owed at least $100mn. We compiled a list of companies that have declared exposures to FTX here. Information relating to the case will be revealed and analysed by the markets in coming weeks and months.
Time to adjust the bids to even lower levels?
Sanford Bernstein has a decent write-up on crypto lending, basically concluding that it takes all the bad stuff from traditional lending and then makes it slightly worse.....Bernstein: "The big crypto leverage blowout happened because of off-chain lending. Off-chain lending is somewhat like pawn broking. You go to a physical pawn broker, offer gold as collateral. The lender evaluates the gold for its authenticity & value, offers you a loan amount at a certain loan-tovalue (LTV). In crypto, you offer your Bitcoin to a Crypto prime broker, who offers you a loan on certain LTV. Except, lender has to build in more cushion for Bitcoin's volatility and Bitcoin's authenticity is on the blockchain. However, there are a few things that can go wrong - 1. You can offer an aggressive LTV, not accounting for volatility. 2. You can build in some subjectivity, and say this borrower has a great balance sheet, and they have 1M followers on Twitter, so I might allow them to borrow more than the collateral. Thus, off-chain crypto lending is not very different from traditional lending, the lender has credit criteria and they apply judgement. And the judgement can be wrong and the risk filters are not built for extraordinary circumstances, which happen all too often in crypto frontier tech. Thus, crypto takes all the bad stuff from traditional lending and then makes it slightly worse" (Sanford Bernstein)
A month ago we suggested to look at elevated tech vols and use it for yield enhancement (here). We wrote: "For must be longs overwriting continues to look like an attractive "yield enhancing" strategy." Since then vols in stuff like Apple have reset big as the stock continues to do nothing...