Market Wrap #3: 75 is the New Hundred
After the June FOMC meeting, Chair Powell acknowledged that the Fed’s decision to hike 75bps had been influenced by firming of inflation expectation measures, including the rise in the Fed staff’s index of Common Inflation Expectation (CIE). Following the recent jump in June’s CPI print at 9.1% versus the 8.8% expectation, the market has started to price in a 100bps hike this month. However, since the June FOMC meeting, inflation expectations have notably softened.
5–10 year inflation expectations were revised down by 0.2pp in the final June UMich report, and market-based measures of inflation expectations have materially declined. This softening of inflation expectations is one reason why we expect FOMC to not accelerate the near-term hiking pace and continue to deliver the expected 75bps hike.
Chart of the Week
The sentiment shift has started to show under the hood in crypto options derivatives market as BTC’s 25Δ skew has largely narrowed down in the past few days, indicating more optimism (a major shift compared to a few weeks ago!).
Open interest metrics are also indicating the same sentiment over the weekend, with P/C OI dipping to 0.62 despite the gradual demand for downside puts the week prior. Comparing it against total volume, put volumes have indeed shallowed and P/C volume ratio has declined sharply to 0.79, painting the same less-bearish narrative.
Despite some hopeful silver linings that we have this week, some dark clouds continue to loom as news broke that OpenSea is looking to let go 20% of the team while miners’ are seemingly faced with a soft stop loss level that is not out of reach from the current levels.
JP Morgan analysts wrote that the fight for survival among Bitcoin miners has been inducing an increase in mining efficiency and reduced Bitcoin’s production cost. They estimated that the effort to increase efficiency has brought down the cost of mining a single Bitcoin from around $20k at the beginning of June, to $15k last month and currently at $13k. With the ongoing energy crisis, the hard floor on Bitcoin’s mining cost may be harder than expected to crack.
Coincidentally (or not), drawing fib extensions using Dec 2017 high, Mar 2020 low and Nov 2021 high, the next Fib retracement support level currently hovers at ~USD13k (marked in red). Probably nothing.
The information presented is not investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. As always, please do your own research.
Market Recap
1. EUR dips below Dollar parity for the first time in 20 years
Ukraine Russia war caused an energy crisis in EU. ECB is trying to curb inflation and cushion a slowing economy where it aims to raise borrowing costs. The US Fed is raising interest rates at an accelerated rate, causing yields on US Treasury Bonds to surge higher than EU’s debt — driving investors to the dollar and away from euros.
Weaker currencies used to be welcomed as a means to stimulate economic growth. This is now undesirable due to inflation, making imports expensive. EU CPI jumped to 8.6% in just a year.
On a broader level, the euro’s weakness against the dollar helps European exporters as it makes their products more competitive and boosts earnings. US account for more than 40% of sales for 70 EU MNCs, including Sanofi and Aegon NV. It also comes as a relief to travelers to Europe, reducing the cost of their trips.
2. The highest US inflation in 40 years at 9.1%
The previous CPI forecast was 8.8%, and the previous quarter’s forecast was at 8.6%. Core prices increased by 5.9% in June from 2021. The Fed raised its interest rates to temper demand in hopes of curbing inflation. CPI is believed to have reached its peak and slower inflation increases can be expected over the longer run compared to recent months.
3. Celsius’s Chapter 11 bankruptcy
The crypto lending platform’s business model became untenable as crypto prices collapsed. They are currently reorganising and restructuring the company. However, only certain customers are allowed withdrawals, on a first to act basis.
4. Russia banned all forms of crypto as a form of payment — Ruble is the only accepted monetary unit
Putin signed a law forbidding the use of cryptocurrencies or digital assets as forms of payment for goods and services locally. The law is expected to be implemented by holding crypto exchanges and businesses liable for infractions. However, Russian central bank is considering accepting the use of crypto for international payments.
Economic Summary/Market Stats
7d Market Update
Crypto
❇️ BTC: +3.75%% to $21,201
❇️ ETH: +18.21% to $1,350
❇️ SOL: +12.41% to $39.49
❇️ Overall Crypto Market Cap: +1.43% to $1.012T
🥴 Bitcoin Fear & Greed Index: Extreme Fear (24/100)
Equities
🔻 S&P 500: -0.46%
❇️ DJ Industrial Average: +0.03%
🔻 Nasdaq 100: -1.17%
🔻 Hang Seng Index: -1.61%
❇️ Stoxx Europe 50: +0.12%
Rates
💸 USDC Supply APY: 0.44%
💸 ETH Supply APY: 0.81%
💸 BTC Supply APY: 0.02%
💲3-Month US Dollar Libor: 2.74%
💲US Treasuries 2-Year: 3.124%
💲US Treasuries 10-Year: 2.919%
Key Economic Releases
21 July (Thurs)
8.30am ET: Initial jobless claims (median forecast 237k, previously 244k).
8.30am ET: Philadelphia Fed manufacturing index (median forecast 1.9, previously -3.3)
10am ET: Leading economic indicators for June
