Market Deep Dive: September Volatility, FOMC Impact, and More

As we navigated the complexities of the FOMC week, the “September effect” took hold, leading global markets to experience increased volumes and volatility after a typically quiet August. BTC hit its weekly low of $26,200 last Friday, trading within the $26,400-$27,500 range this week. Meanwhile, ETH traded between $1,570-$1,670, marking its weekly low yesterday afternoon. Given these movements, ETH’s value has decreased relative to BTC, reaching a 14-month low and falling below the pivotal 0.06 ETH/BTC ratio for the first time since the Three Arrows Capital (3AC) implosion in July 2022.

In the crypto space, the markets largely overlooked the positive news regarding the postponement of the Mt. Gox payout to 2024. The official delay announcement could have instigated a short squeeze, reminiscent of the aftermath of the SEC vs. GBTC verdict last month.

On Tuesday, the Eurozone’s CPI data came in slightly below last month’s 5.3% (YoY: act. 5.2%, exp. 5.3%), still significantly above the targeted inflation rate of 2%. This raises questions about the ECB’s upcoming rate hike decisions, particularly following their recent rate increase and indications of concluding the rate hike cycle. In the US, building permits in August saw a 6.9% rise from 1.443 million in July (MoM: act. 1.543M, exp. 1.440M), further bolstering USD appreciation since mid-July (DXY above 105; currently just shy of its 2023 high from March).

From a macro perspective, the most significant event this week was the FOMC meeting on Wednesday. The Federal Reserve opted to keep its interest rate at 5.50%. Though the rate remained constant, the updated dot plot revealed a shift in policy stance, indicating one more rate hike by the end of 2023 and revised anticipated terminal rates for 2024 and 2025. Contrasting with June’s forecast of four 25bps rate reductions in 2024, only two are now projected. As a result, the hawkish undertones of the FOMC meeting (with interest rates staying higher for longer) pushed US yields higher (10-year yields reaching 4.5%; a 16-year peak) and pulled down risk assets, including crypto assets and US equity markets. On another note, the UK’s CPI release outperformed expectations (YoY: act. 6.7%, exp. 7.0%), swiftly lowering the odds of a BoE rate hike from 80% to 50% on Thursday.

On Thursday, both the GBP and the CHF experienced declines as their respective central banks held rates steady (CHF: 1.75%, GBP: 5.25%). This was notable since a rate hike for both nations was widely anticipated by market experts. Additionally, US Initial Jobless Claims were reported at 201k, surpassing the projected 225k.This afternoon, the S&P Global US manufacturing index at 48.9 surpassed the anticipated 48 and remains in contraction. The services index for September was 50.2, a tad below the forecasted 50.6.

Key economic events to watch next week include the German CPI, US GDP, and Fed Chair Powell’s speech on Thursday, as well as the UK GDP, EUR CPI, and the Manufacturing report from China on Friday. Moreover, markets are keeping a close eye on the debt ceiling issue. If unresolved by next week, US federal agencies risk potential shutdowns starting October 1.

A brief look at the crypto volatility landscape reveals that both BTC’s and ETH’s 30-day at-the-money implied volatilities remained nearly unchanged at 37% (+0% WoW) and 30% (-1% WoW), respectively. Observing the 25-delta skewness for BTC and ETH indicates a decline in options across all expiration dates, suggesting that market players are prioritising downside protection with puts over seeking upside potential with calls.

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