Market Deep Dive: Economic uncertainties shake global markets and digital assets

The week was rife with events that shaped both the traditional financial space and the crypto industry.

On the macro front, the Central Bank of China made waves on Monday with an unexpected 15 basis point reduction (to 2.50%) in interest rates, dragging the Chinese yuan down to its lowest level since November of last year. This rate adjustment appears to be a response to the recent economic data, which signals deterioration.

The real estate sector experienced an 8.5% downturn in investments YoY, and unemployment for those aged 16-24 hit 21.30% in June, with unofficial estimates suggesting it could be as high as 50%. Consequently, the announcement of Peking that they no longer will publish figures on youth unemployment starting with immediate effect is fueling concerns about China’s economy. Compounding these issues, China’s real estate giant, Country Garden, is struggling with a $194 billion debt, while indicators suggest that the financial sector, especially real estate-invested asset managers, is also strained.

On Tuesday, US Retail Sales for July also brought surprises, with a 0.7% MoM rise, overtaking the 0.4% consensus and surpassing the previous month’s 0.3%. This, along with the stronger core retail sales figures, led to a spike in the 10-year Treasury yields: to a 2023 high of 4.27%, indicating a robust US economy with a reduced likelihood of imminent rate cuts.

On Wednesday, FOMC minutes expressed fears about the persistent pace of inflation, suggesting that additional rate hikes might be necessary if conditions do not change. Markets saw this as a bearish signal, and while bitcoin lost its 29k resistance level, the S&P 500 Index closed negatively. This brings me to another point, which shows that by mid-August, the 30D correlation of BTC with the S&P 500 had increased to 41%, and with US investment-grade bonds, it reached 33%.

In the labyrinth of the crypto sector’s financial intricacies, the bankrupt companies, FTX and Genesis, have reached a settlement, slashing FTX’s initial $4 billion claim to $175 million. This step aids in simplifying their financial restructurings; then again, FTX’s outstanding debt to Genesis is around $226 million.

During the first three days of the week, BTC mainly traded in the range of USD 29,600 and 29,000, while ETH traded in the USD 1,815-1,845 range. While some bearish crypto signals came in on Wednesday after the FOMC minutes, the crypto market experienced one of its steepest single-day declines of the year on Thursday. BTC and ETH plummeted to lows of $25,000 and $1,540, respectively, before recovering slightly to trade around $26,500 and $1,690.

Factors such as Evergrande’s bankruptcy declaration in New York and a WSJ disclosure about SpaceX divesting its BTC assets worth $373M added to the turmoil. In the last 24 hours, crypto traders faced liquidations of over $1.04bn, reaching its highest level in a day since June 2022.

The 30-day at-the-money implied volatility for BTC has increased more than 14% to 49%, while the ATM volatility of ETH rose 13% to 42%. The negative spread between BTC and ETH options reinforces last week’s assumption that ETH’s price may be more stable in August compared to BTC.

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