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SignalPlus Morning Briefing?—?18 May 2023

SignalPlus

Democratizing Options for Digital Assets

发布日期: 2023年5月18日

US Equity markets showed the first signs of a positive breakout?yesterday on the back of a strong rally in regional bank shares, and encouraging signals for a debt ceiling compromise to be reached by the end of the week. Western Alliance Bancorp led the rally in bank shares after announcing that deposits had increased by more than expected over the past week, with the?KBW regional banking index rallying by over 7.2% for its best 1-day performance since Jan 2021.

On the Congressional side,?Wednesday’s meeting between President Biden and House Speaker McCarthy turned out to be much more amicable than feared,?with both sides agreeing to enter into a more intense structure of negotiations on spending restraint that should pave the way for an eventual debt ceiling lift. McCarthy further stated that while negotiations are still ‘far apart’,?he saw the potential for a deal to be had by ‘the end of the week’, and that all sides are in agreement to avoid a US technical default that could take place as early as June.

While the headlines are positive, it’s probably helpful to consider the likely details of the potential deal. Any Republican compromise will likely?include some cap on government discretionary spending into 2024–2025, along with recapturing unused funds previously reserved for COVID-19 precautions. This will result in some sort of a?fiscal drag (less spending) and weighing on GDP as we head into the 2024 election year, and the?Treasury will also look to substantially replenish their TGA (working capital) account?as it has now fallen to sub $100bln. A?refilling of the TGA requires liquidity to be drained from the system?(cash back to Treasury), by possibly as much as $600–800bln in the next few months, though the final amount can only be determined later depending on how much funding is sourced via RRP (reverse repo) vs spot outright drainage.

In summary, a?deal compromise is helpful in avoiding an embarrassing technical default, but will likely result in a fiscal drag to GDP, and overall liquidity being drained from the system in the immediate aftermath.

The?palable improvement in risk sentiment, strong equity price action, and positive momentum from recent economic data and debt ceiling talks have continued to push front-end treasury yields higher?by around +6bp with a bear flattening. Following Pfizer’s mega bond deal from yesterday, another 11 issuers announced their issuance on Wednesday, taking the WTD’s supply of corp paper to a chunky ~$50bln and leading to some duration indigestion. Furthermore,?June FOMC odds have now edged back to a 25% chance of a hike?versus basically 0% a week ago, though it’s interesting that the market still expects the rates trajectory to pivot immediately after, and still pricing in 75bp of cuts to be had before year-end.?Expectations for the Fed to hike have resurfaced due to the tremendous performance of equities, with the?Nasdaq 100 now back at the interim peak right at August’s Jackson Hole, when ‘Peak-Hawkish’ Powell was out in full force?to jawbone asset prices lower. We would be on the lookout for the?risk of bond yields breaking meaningfully higher from here over the next weeks.

Unlike the rally in stocks, Bitcoin continued to struggle with Gold prices breaking below $2000, and the imminent liquidity-drain from the debt ceiling resolution to weigh on prices. Furthermore,?‘native’ macro fundamentals on crypto continue to look poor, with stablecoin volumes, market cap, NFT transactions and active developer activity in a bit of a freefall. Volatility also remains heavily depressed, with BTC realized vol and momentum falling precipiously, and IV unable to muster any rally with RV stuck in the doldrums. The?last 24 hours actually saw a fair bit of Put buying interests?in July expiries with strikes around the $20k-$25k area, and we are sympathetic to this view as well and expect the path of least resistance is for lower prices for now.