Lone Dove

Crypto Market Week in Review (21 October 2022)

Markets

This week the investors returned to risk assets. Stocks advanced due to the positive start of the quarterly reporting season. Banks, airlines, and Netflix inspired a positive mood in the stock market, indicating that US consumers are still in a good shape. However, a strong US economy implies a tighter rates path, so bonds continued plunging.

The most interesting macro story is developing in Japan, where the currency falls more than 30% this year as its central bank continues a very loose monetary policy, being a lone dove among the major central banks. The Bank of Japan still pursues a zero-rate policy and quantitative easing, anchoring the 10-year yield at 0.25% despite global bond yields rallying a lot this year. The difference between the 10-year yield in USD and JPY skyrocketed from 1.25% at the end of 2021 to 4% now, making JPY assets extremely unattractive and slaughtering the JPY exchange rate. If (when) the Bank of Japan capitulates and ends the quantitative easing, it will likely be a knee-jerk large drop in stocks, bonds, and most other assets.

The 10-year yield of US Treasuries (blue) and Japan government bonds (green)

Bitcoin and Ethereum were flat for the week, continuing trading in a very narrow range. Historical volatility of Bitcoin (as measured by BitMEX BVOL index) is near all-time lows.

Bitcoin 30-day annualized historical volatility (BVOL index)

It seems that the very low historical volatility entices sellers of implied volatility since many option-focused research notes suggest selling the volatility. For example, Genesis Volatility in the latest weekly review said “this is one of the best vol. selling environments for BTC”. That may hold true for some time, but we wonder if it’s reasonable to sell volatility at relatively cheap levels in the current very uncertain macro environment.

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