.png)
Summary
Very happy 2023 and best wishes for the coming year from the Turing Capital team. We start with the 2023 newsletter with a closed market today, Monday, in most of the main markets, however, the week is full of relevant and highly sensitive data for the market. In this edition we will talk about the liquidity present in the system, which has clearly conditioned the future of risk assets during 2022 and which we believe will again be a key factor for 2023. Don't fight the FED.
Macro and news
Relevant data for this week:
Tuesday: Unemployment and Inflation Germany
Wednesday: US mortgages, ISM manufacturing PMI USA, FED minutes.
Thursday: Trade balance Germany, Trade balance USA, ADP employment USA,
unemployment USA
Friday: Eurozone Inflation, US payrolls, ISM non manufacturing PMI USA
Unfortunately, the year is reset but macroeconomic and market conditions are not reset. We start 2023 with a very heavy backpack from 2022.
- Highest technology sector layoff rate since 2001
- Worst drop in stock market valuations in the technology sector since 2001
- The most important war since World War II
- Most aggressive Fed monetary policy in decades
- 2.5 Trillion $ in crypto losses
- Worst year ever for fixed income markets
- Worst year ever for portfolios 60-40%.
- $SPX losing only 20% $SPX losing only 20% $SPX losing only 20% $SPX losing only 20% $SPX losing only 20%
The cycle of rate hikes initiated by the FED is the most aggressive in 40 years and its effects on economies are only now beginning to be noticeable.
The "Tightening" phenomenon is a global scale phenomenon, the following chart is impressive
Banks appear to be starting to turn off the tap to consumers
Such an aggressive rate hike cycle has strong spillover effects on various sectors. The U.S. housing sector is in free fall. At Turing Capital we believe that it is necessary to pay special attention to everything related to housing in the United States, it is very possible that some type of credit event may occur due to the strong stress that this sector is going through, which in our opinion is far from having reached a floor.
As expected, the U.S. real estate market is dragging down and infecting the rest of the economies.
Mortgage rates in the United States have experienced a rise during 2022 not seen before. They have jumped from 2.5% to 7% in less than a year. As they say, the housing cycle is the business cycle. It appears that economic activity as measured by ISM manufacturing correlates well with mortgage rates and their year-over-year changes.
The dispersion between the average price of housing and the average income of workers has reached unprecedented levels.
This is the first time in 40 years that money supply growth is negative. Yet it is still 5% above the "trend equilibrium point". That gives us an idea of the barbaric stimulus that has been injected in recent years. 2023 will be the year when we will feel the real "monetary hangover."
These are Goldman Sachs' Wealth effects projections
Cryptos: spot, derivatives and on Chain metrics
Bitcoin
We start 2023 with the same message and with the same caution, we stress these five points as fundamental for the crypto ecosystem
1) There is latent uncertainty about how the crypto ecosystem will respond in a recession and downturn environment.
2) The correlation of the crypto ecosystem with risk assets, which has been at its highest during 2022. The crypto ecosystem must stop being considered as a "stock" with high beta to SPY and QQQ.
3) The correlation of crypto market cap with money supply growth is a reality that cannot be ignored. The reduction of central bank balance sheets will continue its course in 2023.
4) A crypto regulatory framework on a global scale is presumed to be imminent after last year's major events and should not be considered as dangerous. A regulatory clarification that does not kill the original idea of decentralization would allow many entities to dive into the ecosystem by being able to include crypto assets within their investment policies and give a serious turnaround to the crypto winter we are immersed in.
5) Role of halving in an environment of global recession and multilevel crisis of the crypto ecosystem.
On a technical level, with no notable changes from last week, the market remains below the VPOC of $16800, with the dominant operating event being a sharp turnaround in value from the test of the previous relevant highs of $18200.
27/12/22
02/01/23
As long as the price remains below this VPOC, control is seller. After the sell-off that occurred after testing the previous relevant high, it is up to the buyers to demonstrate that they are regaining control, which is not the case at the moment.
The order book remains strongly protected at the bottom, with no relevant changes at the top.
The skew, which measures the difference between the IV (implied volatility) of OTM puts and the IV of OTM calls, is again significantly sloping, indicating that fear is returning to the market and OTM puts are once again in demand.
skew 27/12/22
skew 02/01/23
The volatility curve at the money in a normal contango situation, continues to experience a tightening in the short part belonging to the nearest maturities. It seems that the market is starting to discount volatility in the short term.
ATM IV 12/27/22
ATM IV 02/01/23
December 30 marked the last major options expiration of the year, leaving a sharp drop in the open interest
Open interest in Calls falls to levels similar to the beginning of last year. Recall that the fall from historical highs of BTC began in November 2021 and was intensifying from the second quarter of 2022.
The next major maturity is for March 2023, the max pain level is the same as the one we had for the last December maturity, the 19000$.
Activity in the flow of options is at a low level, but it is to be hoped that after the Christmas holidays it will begin to pick up and return to a situation of normality.
In our opinion, the main driver to keep an eye on is the evolution of the SPY and the Nasdaq. Risk assets are in a situation of clear weakness after the Fed and ECB meeting, sales in these markets could cause contagion to the crypto ecosystem, a trend that has been occurring since the beginning of last year. More details in the specific section on stock markets.
Ethereum
Like bitcoin, in an absolute state of lethargy with no change from last week. Price remains anchored to the $1200 volume composite Vpoc. The market is in equilibrium awaiting the next operational event.
27/12/22
02/01/23
Classic markets
The market continues to defend the 3800 level, which has clearly established itself as the most important level in recent weeks, a loss of which would undoubtedly open the door to a torrent of selling. The market makers' hedging activity with respect to JPM's monstrous necklace has managed to keep the market close to the 3835 strike throughout last week. In this day and age, the influence and power of the derivatives market over the spot market is total. The new JPM collar is as follows: short call 4030 + put bear spread 3600/3040 expiring 31/03/23.
SP500 Futures 12/27/22
SP500 Futures 02/01/23
The 3800 points as a line in the sand for the market.
As we said last week, any bullish scenario would necessarily require the recovery of the vpoc of 3960 points.
Gamma profile 12/27/22
Gamma profile 02/01/23
The market gamma profile is bearish and shows a lot of interest in the 3800, 3750 and 3700 puts, which have increased their gamma notional significantly after the past Opex. The 3835 strike, which comes from the JPM collar, has already stopped offering support and stabilization to the market.
As a final note, the sharp drop in liquidity in the system at the end of 2022 should be highlighted. As we have said on previous occasions, the markets are facing a new enemy, the reduction of the central banks' balance sheet.
Net Liquidity is the portion of liquidity available to circulate freely within the economy, resulting from the Fed's Balance Sheet expansion through Quantitative Easing (QE).
Net Liquidity = Tot Balance Sheet - (TGA + RRP)
NetLiquidity=TotBalanceSheet-(TGA+RRP)
The liquidity inside the Treasury General Account (TGA) and the Reverse Repo Facility (RRP) is subtracted from the Total Assets in the Federal Reserve's balance sheet because effectively removed from circulation.
.png)
