Summary June 2022
- Performance has been historically poor for all asset classes as we now cross the midpoint of the year
- BTC and ETH declined by 60% and 70% YTD, respectively, and the combined cryptocurrency market has shrunk by a stunning USD1.3 trn to less than USD 1trn
- Falling valuations, margin calls, and liquidity having drained out of the markets have contributed to a severe deleveraging, dragging some lenders into liquidation
- While markets navigate through inflation, volatility, and disruptive headlines, sustainable price stabilisation requires a return of confidence in the space
Alongside the ongoing market correction, the Fed has stepped up its efforts against the surge in prices, hiking interest rates by 0.75 percentage points in mid-June, which was its most significant increase since 1994. This escalated recession worries. First-quarter GDP contracted by 1.6%, and the Atlanta Federal Reserve’s GDPNow tracker points to another 1% decline in economic output for the second quarter. Jerome Powell underlined his commitment to deal with price stability unconditionally, hence decoupling from the traditional policy of preserving growth. Falling inflation and rising recession risk point to a more selective approach to tangible assets.
Last semester saw the broader market index easing by 20.6%, posting its largest first-half decline since 1970, and stumbling into bear market territory. Near-term equity drawdown remains elevated as the market anticipates a mild and short-lived recession. Fixed income remains exposed mainly to wider credit spreads (both sovereign and corporate), eroding real returns. Facing worsening inflation and recession expectations, bonds and stocks remain caught between “a rock and a hard place”. Any repricing of traditional assets, namely high-growth tech stock (NASDAQ -30% YTD), could further spill over onto crypto asset valuations.
With capital increasingly taking risk-off positioning, the total value locked (TVL) in DeFi protocols mainly hosted on Ethereum has experienced a dramatic unwind over the last month. This is attributable to: 1) Leverage being closed out either by unilateral decision or via liquidations; 2) The value of crypto assets collateral falling, as tokens locked in DeFi protocols are repriced at lower valuations; 3) A liquidity crunch catching financial services crypto firms (Celsius, Voyager) in the crosshairs, prompting emergency re-financing schemes or restructuring. According to Glassnode, TVL on Ethereum has declined by USD124 bn (-60%) over the last six weeks, driving total TVL down to USD81 bn.
Most positioning and forward-looking risk appetite indicators have turned more negative YTD, but have rebounded from extreme bearish levels. The BTC psychological level of USD20,000 is currently being tested, but the sentiment remains fragile, with most market participants reluctant to take any meaningful directional bets. Any near-term stabilisation is unlikely without a better macro momentum and balanced economic policy responses from the Fed or ECB to bring down inflation without triggering a recession. The market would also come to embrace a risk-on stance again once the central banks and the belligerents in the Ukraine have finally fired off all of their ammunition.