Market deep dive: Macro factors remain rigid, and crypto market is still reeling in

BTC$ is currently trading at 30.1k, 1.5% lower over the past 7 days, while ETH$ is trading at 2k, almost 4% lower. Equity markets also suffered this week with the Nasdaq closing 3.5% lower compared to last Friday.

Volatility remains elevated with the VIX trading close to 30 and the front end of the term structure in contango, which means investors still have to pay a risk premium to go long volatility via futures.

Economic data was mixed this week. On Monday (and worse than expected), April figures from China came out: Industrial Production (YoY) printed at -2.9% vs. the expected +0.7% and Retail Sales (YoY) at -11.1% vs. the expected -6%, showing the effect of the ongoing zero Covid policy.

On Tuesday, the preliminary GDP figures from the European Union and US Retail Sales came out: they were slightly better than expected.

However, the macro environment remains difficult, and unless we see some real success in the global fight against inflation, markets will stay choppy. The burning question is if the high inflation we currently see is mainly supply driven through the harsh lockdowns in China breaking supply chains, and the war in the Ukraine pushing energy and food costs higher. If yes, inflation might end up flattening out as long as the situation does not get any worse, even without very aggressive hikes from central banks. If however, the inflation is more demand driven due to overheated economies with a shortage of labour and too dovish central banks, then the textbook price/wage spiral is a possible scenario, where employees will demand higher wages, and in return companies increase prices further. In this case, central banks would need to slow the economy down, and in the worst case, risk a recession. Any new information in this regard will have a large impact on future price actions.

In the crypto space, we see the dust slowly settling from last week’s Luna debacle. Many retail investors and crypto firms were hit badly, and in South Korea, the parliament is requesting answers: there will most likely be trials. But there is a positive side to this. Even though Luna and UST were among the top cryptocurrencies, their failure had very limited spillover effects apart from the obvious price action. The market continued functioning well at all times, despite investor fears. Tether, the largest stablecoin (backed by fiat) traded below 1, and there were large redemptions, but ultimately it recovered and is now trading at 0.999.

If the last week was a stress test for the crypto world, the verdict would be a pass.

In other news: another ETH 2.0 update was released. The ETH Ropsten Testnet merge is expected on June 8. Switching from one consensus mechanism to another is a complex change that requires multiple tests. The latest estimate for the mainnet launch is now in the final quarter of the year.

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