OTC Desk Market Update | What’s Next After the Increased Implied Volatility in Crypto Markets?
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
Macro Update
?United States (U.S.)
Consumer Inflation Data Shows Mixed Results
The biggest economic news of last week was U.S. inflation data.?The U.S. Consumer Price Index (CPI) inflation measure showed mixed results, with headline CPI rising 0.2% in the month and 2.5% annually, in line with expectations. The headline annual inflation print of 2.5% represents the lowest inflation in the U.S. since March 2021, when inflation first began to accelerate during the COVID-19 pandemic. Core CPI, which excludes more volatile food and energy prices, rose 0.3% on a month-over-month basis and 3.2% annually, which was significantly above expectations. Equity markets initially sold off when this data was released, but quickly recovered and turned positive for the week. Perhaps one reason why markets ultimately interpreted these results as dovish was that the price increases within the CPI basket were concentrated in the shelter component. Shelter costs rose 0.5% in August, and a measure of CPI excluding shelter showed inflation at 0%. Economists know that the CPI shelter data lags real-time costs, which are currently falling across the country, meaning that headline CPI may soon be showing below-target inflation if current trends hold.
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Producer Price Inflation Shows Normalization
This past week also contained a report on the Producer Price Index (PPI). This metric came in at 1.7% on a year-on-year basis, slightly lower than the 1.8% expected. Monthly PPI increased 0.2%, right in line with expectations. This is the lowest that producer prices have been since February 2024. PPI is a critical input into future CPI measures, adding more confidence to the thesis that inflation is slowing in the world’s largest economy. ?
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Consumer Sentiment Improves, Clouding Recession Outlook
Outside of inflation, the other major data released last week was on the topic of consumer sentiment. The University of Michigan Consumer Sentiment Index rose to a headline reading of 69.0 in September versus 67.9 in August. This represents a four-month high and reflects improved confidence in consumer spending power and anticipated declines in inflation. Within the survey, one-year inflation expectations fell to 2.7%, the lowest reading since December 2020, though inflation expectations among consumers are still trending higher than headline CPI inflation. ?
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Europe (E.U.)
ECB Continues Easing Eurozone Interest Rates
The European Central Bank (ECB) cut rates by 25 basis points last week, bringing the key interest rate in the Eurozone to 3.50%, their second rate cut of the easing cycle. With Eurozone inflation recently coming in at 2.2%, the ECB has established the conditions for further rate cuts if growth metrics continue to be weak and if other global central banks, particularly the U.S. Federal Reserve, embark on their own easing policy.
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The Week Ahead in Global Macro
While particularly quiet in Canada, the week ahead contains significant economic news in the U.S., U.K. and Europe. Most importantly, on Wednesday, September 18th, the U.S. Federal Reserve will announce their decision regarding interest rates and publish their updated economic projections. A rate cut is universally expected, with financial markets roughly split between expectations of a 25 or 50 basis point cut. This announcement, while carefully telegraphed in advance by Fed Chair Jerome Powell, will carry symbolic and practical significance, as it will be the first rate cut of the cycle and will likely give cover to other major central banks to continue their own easing policy.? Additional data to watch this week includes U.S. Retail Sales data on Tuesday, September 17th, CPI inflation data in both the U.K and Europe on Wednesday, September 18th, and an interest rate decision from the Bank of England on Thursday, September 19th.
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Crypto Market Overview?
Over the past week, both Bitcoin (BTC) and Ethereum (ETH) have experienced notable shifts in implied volatility (IV), term structure, and options flows. The increased implied volatility coupled with stable realized volatility (RV) suggests that market participants are preparing for potential future volatility. The steep contango and rightward skew in both assets indicates a cautious outlook, with investors actively seeking downside protection. The robust demand for put options highlights a prevailing sense of uncertainty and risk aversion within the crypto market.
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Implied and Realized Volatility
Over the past week, Bitcoin's implied volatility has exhibited a moderate increase. At the start of the week, IV for Bitcoin was approximately 52%, reflecting market expectations of higher future volatility. By the end of the week, IV had risen to around 56%. This uptick can be attributed to recent market developments, including macroeconomic news and fluctuations in global financial markets. In contrast, Bitcoin's realized volatility has remained relatively stable. The 7-day realized volatility was recorded at about 48%, suggesting that the actual price movements have been somewhat less dramatic compared to market expectations. This divergence between IV and RV indicates that market participants are anticipating potential price swings that have not yet materialized. Ethereum's implied volatility has followed a similar pattern to Bitcoin, with a noticeable increase. Starting the week at 58%, Ethereum’s IV climbed to 62% by week’s end. The rise in IV for Ethereum was influenced by increased trading activity and speculation around upcoming network upgrades and broader crypto market trends. Ethereum’s realized volatility showed a slight uptick, moving from 50% at the beginning of the week to 53% by the end. Although there was a minor increase, Ethereum's RV remained relatively aligned with historical norms, suggesting that the recent price movements have not been excessively volatile relative to past performance.
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Term Structure and Skew
The term structure of Bitcoin’s volatility has shown a steep contango over the past week. The volatility for near-term expiries (1-week to 1-month) has been notably higher compared to longer-term expiries (3-month to 6-month). This suggests that the market expects elevated volatility in the near term, potentially due to upcoming events or market uncertainties. The skew for Bitcoin options has shifted slightly to the right, with out-of-the-money (OTM) puts gaining more premium compared to calls. This skew adjustment indicates a growing demand for protective puts, reflecting increased caution among investors. The put skew is a common feature in uncertain or bearish market conditions. Ethereum’s term structure has also shown a pronounced contango, with short-term volatility being significantly higher than long-term volatility. The market expects more immediate volatility related to Ethereum-specific events, such as network upgrades or scaling solutions.
The skew for Ethereum has displayed a similar rightward shift, with increased premiums for OTM puts. This is indicative of heightened concern over potential downside risks, as traders seek to hedge against possible adverse price movements.?
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Options Flows and Positioning
Bitcoin
Recent options flows for Bitcoin have revealed a significant increase in buying activity for out-of-the-money (OTM) puts and calls. The volume of put options has surged, indicating a growing interest in downside protection. Conversely, call options, while also active, have seen less dramatic increases compared to puts. Current positioning data suggests that investors are predominantly hedging against downside risk. There is a noticeable increase in the open interest for put options at strike prices below the current market price, reflecting concerns about potential bearish movements. Call options open interest has remained relatively steady, indicating less aggressive bullish sentiment.
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Ethereum
Ethereum's options market has seen a substantial uptick in activity, particularly in out-of-the-money (OTM) puts. The buying interest for puts has intensified, reflecting investor sentiment focused on hedging against possible declines. Call options have experienced moderate interest but not to the same extent as puts. The positioning in Ethereum’s options market shows a pronounced shift towards protective strategies. Open interest in OTM puts has increased, aligning with the market’s cautious stance. There has been less enthusiasm for calls, suggesting a more conservative approach among traders.
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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.