SignalPlus Morning Briefing 30 Jan 2023
Equities eeked out a small gain to end a very strong week, with a friendly set of economic data and dovish expectations into next week’s FOMC helping to offset an expected lacklustre earnings season thus far.
Simialr to the price action earlier in the week, a Goldilocks-like US data slate (weaker consumption, better sentiment, slowing inflation expectations) is seen to pressure the Fed to fold towards the market’s more aggressive easing outlook, leading to a continued risk-on drift with equities higher, yields lower, credit spreads tighter, and volatility softer. The upcoming FOMC meeting will be a tricky one for Powell, with the market pricing in a mere 5% chance for a 50bp hike, thus forcing the Fed to uncharacteristically shock the market with a 50bp move, or try to achieve the impossible with a “hawkish” 25bp hike. The Fed has historically rarely flip-flopped on hike increments month-over-month, meaning that any downshift in hikes will likely signal a trend change, which might soon be followed by pauses and a switch towards easing.
We have seen approximately 38% of S&P 500 market cap companies reporting results, with mixed results so far as most companies were able to meet their heavily battered-down EPS forecasts, but with lower revenue and forward looking guidance. Furthermore, as we alluded to earlier last week, the US Federal Government officially hit their debt limit of $31.4T last week, leaving the market to deal with a long period of political standoff as Republicans will likely demand a variety of spending cuts in exchange for agreeing to raising the limit, with a hard limit to come between June and October of this year. While it is implausible to see a scenario where the US will default on its obligations due to a self-imposed restriction, we have had 5 recent debt-ceiling episodes in recent years (1995–96, 2011, 2013, 2015, 2021), and the worst outcome was in 2011, where the S&P 500 sold off 17% from peak to trough over a period of 22 trading days. All the other periods saw negligible declines within normal gyrations of <4% moves.
From a technical perspective, the Nasdaq is at a critical juncture with the tech-heavy index rounding out what looks to be a double-bottom against the 2022 trendline, and we might soon see a resolution to this move post FOMC and an extremely busy earnings calendar to round out possibly the busiest week of 2023 thus far.
Finally, on crypto, BTC/ETH were unable to keep its winning streak alive for a 4th consecutive week, with a small dip on Friday with positions much more balanced now and prices creeping up against resistance levels.
While crypto has handily outperformed most macro asset classes YTD with a 35%+ return, the buoyant price action has taken place with lacklustre participation as popular metrics such as new addresses, active addresses, DeFI TVL, stablecoin market cap and inflows are still stagnating versus year-ago levels.
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With crypto prices unable to gain much further headway, implied vol has stalled in the past week as well after a strong rally in the first two weeks, with RV momentum flattening backout as animal spirits failed to take hold unlike previous bull-runs. BTC risk-reversals flipped into positive territory to favour calls for the first time since 2021 as underweight participants continued to seek upside expsoure, while ETH skews remain more balanced despite the impending Shanghai upgrade.
From a correlation perspective, despite the overall mainstream dis-interest with crypto, price correlation of BTC/ETH remains highly positively correlated with the S&P and negatively correlated with DXY since the pandemic began. In fact, while the correlation sensitivity has gone down somewhat in recent months, the R-squared value (between crypto and the S&P 500) has actually been increasing as crypto is still trying to find a new valuation anchor in the post-FTX world.
With underlying activity still lacklustre, prices against technical resistance, and sentiment models such as BTC unrealized PNL (NUPL) showing a sharp rebound already from the recent rally, we think the easiest part of the rally is now unfortunately behind us. In the near-term, we continue to expect crypto prices to largely play second-fiddle to how TradFi risk sentiment and US equities will performpost FOMC and earnings, though we are growing more cautious of a sharper near-term pullback, especially in certain altcoins, given how far prices have come in a hurry versus underlying on-chain fundamentals.
Best of luck in your trading to a very busy week ahead!
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