SignalPlus Morning Briefing 10 Nov 2022
Good morning and welcome to SignalPlus’s daily commentary.
An extremely down and gloomy day for most asset classes with crypto contagion spilling over to TradFi with equities trading off over 2%. Positive developments out of a possible Russia-Ukraine de-escalation, as well as more balanced results out of the US mid-term elections were largely ignored with the focus squarely on the FTX fallout. However, with that being said, the correlation of S&P prices with BTC has started to wane materially compared to earlier in the year, and we believe this will continue as digital assets continue to (unfortunately) fall out of vogue with the mainstream narrative given the latest developments.
Going into today’s main CPI release, while the market is looking for a ~0.35% print in core, the real whisper number is probably a touch lower, and thus we expect a consensus print to actually be bearish for fixed income (higher rates), especially with the June 2023 terminal rates still -10bp lower than last week’s levels.
Back closer to home, as the industry continues to deal with the fallout of FTX’s incredible fall from grace, there are shades of Lehman’s ghosts here with the credit fallout and counterparty unwinds that might take many months to unravel. While the most direct investment by and lending exposures to Alameda can be somewhat seen in their observable wallets, the domino effect of stuck deposits, token de-listings, an impaired Solana ecosystem (with 14% circulating supply about to become unstaked), wrapped tokens losing their collateral backing, and an ongoing drain of CEX reserves will lead to longer term structural damages to our ecosystem.
Most importantly, with the loss of trust in even some of the industry’s most revered figures, and with regulators now swarming onto the scene (Coindesk: FTX Faces US Justice Department Probe), we expect overall trading liquidity to fall drastically, and for relative value and arbitrage spreads to grow much wider in the weeks or even months ahead. While we are praying and hoping for a more amicable outcome for the sake of our industry, credit unwinds and legal receiverships take a notoriously long time to unfold (quarters and years), so risks must be pared down and bil-lateral exposures be scrutinized much more than ever before. Prices are obviously skewed to the downside regardless of where the absolute levels are, and investment horizons must be stretched out even for the most confident of hodlers. Time must be allowed to run its course.
Good luck and stay safe with the rough waters ahead everyone.
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