OTC Desk Market Update: Ethereum Spot ETF Delays and Market Volatility
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
Macro Update
Core CPI and its Implications
Excluding volatile food and energy costs, the U.S. Core Consumer Price Index (CPI) inflation measure increased by 0.1% monthly and 3.3% annually. These figures were lower than the forecasted 0.2% and 3.4%, respectively. The annual increase for the core rate was the smallest since April 2021, indicating a positive trend in inflation control. This data suggests that the Federal Reserve’s efforts to curb inflation may be yielding results.
Factors Influencing the Inflation Rate
A 3.8% decrease in gasoline prices played a significant role in holding back inflation for the month. This decline offset the 0.2% increases in both food prices and shelter costs. Housing-related expenses, which account for about one-third of the CPI weighting, have been one of the most persistent components of inflation. The slowdown in the rate of increase for shelter costs is another encouraging sign for the economy.
Federal Reserve’s Stance and Market Expectations
While the Federal Reserve targets an annual inflation rate of 2%, the June CPI report provides further evidence that price trends are moving in the right direction. The CPI peaked above 9% in June 2022, prompting a series of interest rate hikes that concluded in July 2023. Since then, the central bank has maintained its benchmark borrowing rate between 5.25% and 5.50%.
Contrasting PPI with Recent Inflation Data
The higher-than-expected Producer Price Index (PPI) reading appears to contradict recent data suggesting a decline in inflation. This discrepancy is particularly notable when compared to the CPI data released just a day earlier. The June CPI showed a cooling trend, with headline inflation decreasing on a monthly basis and settling at 3% year-over-year. It’s important to note that economists and investors typically place more emphasis on consumer-focused inflation readings like the CPI, rather than the producer-focused PPI.
Crypto Market Overview
Implied and Realized Volatility
In recent market activity, both implied and realized volatility have spiked after weeks of underperformance. Realized volatility increased to its highest level for both Bitcoin (BTC) and Ethereum (ETH) on Monday, with BTC in the high 50’s and ETH in the high 70’s. Since then it has reverted to the low levels we experienced over the last few weeks.
Implied volatilities have also risen, especially in short dated options with the front weekly expiries exploding by about 20 points and the one-month expiries increasing by around 10 points. Volatility carry has become positive in both BTC and ETH, which could invite back gamma sellers who have yet to return after the mid-week 4th of July holiday created nervousness and lack of appetite to aggressively trade volatility. Recent inflation data has already begun to influence macro markets and we will pay close attention as to whether this will lead to increased volatility trading activity once the new week begins.
Additionally, the ongoing delays in the launch of U.S.-listed Ethereum Spot ETF continue to weigh on the market. Although the launch is anticipated soon, the uncertainty surrounding its timing and the potential inflows it could generate are contributing to the current volatility dynamics.
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Term Structure and Skew
Term structures for both BTC and ETH have shown inversions, with short-dated expiries increasing significantly compared to the longer-dated ones. BTC saw the front-end rise by about 15 points, while the back-end increased by only two to three points. A similar pattern was observed in ETH, with the front-end moving up by approximately 20 points and the long-end by two to three points.
BTC’s one-month skew has flipped back into calls, along with the one-week skew becoming even more pronounced as traders push BTC back above $60,000 USD. This trend is mirrored in ETH, as rumors surrounding its spot ETF and the launch date continue to intensify. ETH still exhibits a positive call skew in the one-month expiry.
Interestingly, long-term skew in ETH has remained steeper than BTC for calls throughout the year, indicating a persistent bid despite recent short-term declines. This steep skew term structure has become a pattern, where short-term skews flip in response to market movements, while long-term skews maintain a call premium, reflecting ongoing positive long-term sentiment among traders.
Options Flows and Positioning
Option volumes are up week-over-week but still down relative to the flows we saw on Monday. Open interest sits at around $24 Billion USD, up more than 100% from a week ago, showing how quickly demand in this market can flip once short term sentiment shifts.
The $60,000 USD strike in BTC is where the highest concentration of short gamma is across maturities. The higher strikes show that gamma well supplied to dealers at the $62,000, $63,000 and $64,000 USD strikes, leaving them long gamma.
ETH’s closest strikes with a high concentration of negative gamma are $3,500 and $4,000 USD, with $3,100 USD showing a large positive gamma position. With the ETF launch getting closer this kind of positioning is not unusual as it typically reflects traders selling options to capture the premium being priced into the spot ETF launch.
As always, our team is here to assist you and provide services tailored to your specific needs. If you would like to discuss these topics further, we invite you to book a meeting with our team.
To schedule a meeting, please visit NDAX OTC | Bitcoin and Crypto OTC Trading Desk or contact your OTC representative directly. We look forward to assisting you on your investment journey.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.