Net liquidity’s impact, precious metals surge, and the enigma of compressed crypto volatility.
Week-over-week performance:
- BTCUSD: 27,050, -2.33%
- ETHUSD: 1,811, -1.9%
- US02Y: 3.98%, -1bp
- DXY: 102.47, +1.07%
- GOLD (USD/OZ): 2,007, -0.74%
- NDX: 13,413, +0.91%
- VIX: 17.1, -11.5%
- VVIX: 94.65, +2.90%
On the macro side:
Let’s start with a key observation: rate hikes are proving effective, and we are now witnessing the delayed impact of the aggressive monetary tightening.
Surprisingly, investors do not appear concerned about the possibility of a US default. Despite an increase in credit default swap (CDS) rates, which serve as insurance against default, the VIX remains largely unchanged. With the VIX hovering around 17, it indicates a level of complacency similar to the situation during the 2011 debt ceiling impasse, which saw a spike in the VIX shortly after the US received its first credit downgrade.
Considering interest rates, the implied overnight rate market anticipates more than three rate cuts by the end of the year. However, Fed Chair Jerome Powell seems inclined to maintain an extended pause. At this stage, I align myself with the Fed’s expectations.
Stocks continue their upward trajectory as Mega Cap tech companies deliver solid earnings across the board. Notably, Apple and Microsoft have propelled indices higher, and their market dominance is evident. To put things in perspective, Apple’s market capitalisation now matches that of the bottom 200 companies in the S&P 500.
An interesting theme in the current risk-on rally is the correlation between liquidity and the relative performance of the Nasdaq-100 versus the S&P 500. Despite the aggressive tightening of liquidity, risk assets are resilient, defying expectations.
Chart 1: Fed net liquidity vs. Nasdaq 100/S&P500
Chart 2: Overall liquidity vs. S&P500
Furthermore, the ratio between copper (COMEX:HG1!) and gold (COMEX:GC1!) is trending downward. This suggests that investors are favouring precious metals over industrial metals, indicating a defensive move amidst a slowing economy.
On the crypto side:
The crypto market remains in a state of cautious anticipation, characterised by depressed volatility. This unique situation is a result of opposing forces at play, which are keeping prices within tight ranges. While there is compelling evidence for a potential rise in prices, there are also strong arguments supporting the possibility of new lows. In my view, volatility is likely to pick up before the summer break, driven by upcoming conferences in Miami, London, and other locations.
- Let’s examine BTCUSD:
BTCUSD is currently trading within an upside channel, with the RSI in the 40s. I still anticipate further consolidation above $25.2k. The key resistance level to watch is $31.2k, but I believe we will continue to see range trading between these two levels for some time.
- Now, turning our attention to ETHUSD:
ETHUSD failed to break the head and shoulders pattern and is now once again trading within the consolidation zone of 1,716-1,856. The 30-day realized volatility stands at 49%, while the 30-day implied volatility is at 47%. It is worth noting that the current volatility levels defy historical norms, considering the significant VRP that has been observed in the past. This deviation is not due to a lack of interest in volatility products as Open Interest suggests; rather, it is a consequence of systematic volatility sellers who continue to sell volatility, even at these low levels, in large quantities. If the VIX experiences a substantial increase from 17 to 25, we can expect crypto volatility to surge from 50 to 120. My bias is that this heavy short-volatility positioning will lead many market participants to significant losses. Thus, I maintain a cautious stance, and am still biased towards higher volatility.
- Regarding altcoins:
QNTUSD is currently trading within a bearish triangle pattern, with 30-day realised volatility at 42%. Notably, QNT has previously demonstrated impressive gains of over 100% within a month. If we break the pattern to the upside, we can anticipate a substantial move towards previous highs. However, failing to break the pattern suggests we may be approaching levels seen before the rally.
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