Rates Hikes to Pause?

Crypto Market Week in Review (03 February 2023)

Markets

The markets were in a positive mood this week. Stocks rallied and bonds moderately advanced. The S&P 500 reached its highest level since August.

The week was particularly eventful. There were monetary policy decisions by 3 major central banks (the Federal Reserve, the Bank of England, and the European Central Bank), a lot of quarterly reports, including Apple, Alphabet (Google), and Amazon, and also a big chunk of the US macro data.

The central banks were generally more dovish than expected, indicating a possible rates hike pause in the next few months. The Bank of England was the most dovish one, making the case for no further hikes. The Federal Reserve discussed a disinflation theme and hinted that hikes may end in May. It looks like the Fed is tired of fighting the markets, and starts to align its view with the current market pricing. Most importantly, the Fed did not push back against the recent bond and stock rally, which loosens financial conditions and so may contradict the monetary policy tightening. “He almost kind of gave a green light to what’s been taking place,” – Bloomberg cited a chief economist of III Capital Management, referring to the Fed’s Chair.

This week's data showed that hedge funds and other speculators had made a historically large bet against the bond rally. CFTC net speculative positions in 10-year US Treasury futures reached the highest level since the fourth quarter of 2018. That has been a very good mid-term contrarian indicator, as speculators usually amassed big shorts at bond price lows (rate highs) and big longs at bond price highs (rate lows).

CFTC Net Speculative Positions in 10-year US Treasury Futures and 10-year US Treasuries Yield

Cryptocurrencies were modestly up. Bitcoin advanced by 2% and Ethereum increased by 3%. The token of OKX exchange (OKB) reached an all-time high, rallying above its 2021 maximum price.

OKB/USDT

Bitcoin implied volatility was flat, but Ethereum’s implied volatility increased. Thus, the implied volatility ratio of Ethereum to Bitcoin increased to 1.21 from 1.15 as of last Friday, normalizing from the relatively low level.

This week was very eventful, and the next one is quieter. It would be reasonable to expect lower implied volatility in the very short term since the next week has much less market-moving news. However, the Bitcoin volatility curve inverts, anticipating higher volatility in the very short term. We wonder what the volatility market sees.

Bitcoin 7-day and 30-day at-the-money Implied Volatility

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.