Summary

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It has been 24 days since FTX announced bankruptcy, Blackstone has limited the withdrawals of some of its real estate funds, global manufacturing PMIs are in clear contraction and numerous technology companies have announced massive layoffs. A complicated panorama with which we end this year 2022 and which forces us to be extremely cautious for 2023, with a lot of uncertainty on many fronts.

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It seems inevitable that the market will rotate from short-term narratives about the Fed's Pivot to a progressive assimilation of a recession, with falling corporate margins and thus falling earnings. The big question in our opinion for 2023 will be, soft landing or hard landing?

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Macro analysis

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Relevant data for this week:

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- Wednesday: Euro GDP

- Thursday: Speech Lagarde, Unemployment USA

- Friday: USA PPI

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At the macroeconomic level, last week was very relevant, and we place special emphasis in this newsletter on the already very palpable deterioration of numerous indicators of economic activity on a global scale.

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China PMI Manufacturing November: 48; EST. 49.0

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Industrial production in South Korea fell by 3.5%, the largest drop since April 2020 (peak of the covid crisis).

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Chicago PMI manufacturing: 37.2

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Levels below 40 in the last 55 years have indicated recession. This has occurred 8 out of 8 times in the past.

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PMI < 50 => contracción económica

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Consumer confidence in Germany off any reading from previous years.

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It is often said that the economic cycle is the real estate cycle, let's focus on the U.S. housing market. It seems clear that the correlation between the real estate sector and the balance sheet of central banks is undeniable.

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The housing bubble in the US is deflating at full speed.

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Pending home sales are down 37% compared to last year, the worst figure since 2002.

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The aggressive cycle of interest rate hikes by the Fed has caused an explosion in the size of mortgage payments. Inflation hits citizens in the basic basket, but in turn they have to face higher payments on their mortgages.

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Let's not forget that the benchmark 30-year mortgage rate in the US has jumped from 3% to 7% in less than a year. This has never happened before, and clarifies why Black Rock has decided to freeze redemptions in its real estate funds.

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Regarding inflation and leaving aside Wallstreet that sees things where there are not, there is a lot of narrative about the inflation peak, some data from previous weeks indicate a slight drop in inflationary pressures, but nevertheless, core inflation does not abate.

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The best way to eliminate inflationary pressures is to kill economic activity and thus demand.

According to this interesting chart showing the correlation between ISM manufacturing and inflation, it is bound to come sooner or later.

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If economic activity indicators begin to give these readings, it is impossible not to think about the fall in company margins and profits. Estimates of declines in profit growth are already notable.

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And they still have plenty of downside room according to these charts:

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Let us also take into account the balance sheet reduction program of central banks, which are not only in the midst of a rate hike cycle but also "trying" to withdraw liquidity from the system. Excess liquidity, which in our opinion has been the main cause of much of our ills in the West.

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Last week's data show a drop in ECB assets by almost 300 Billion, the most severe drop in the entire historical series.

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With all of the above summarized, we believe it is necessary to take a deep breath to be truly aware of the macroeconomic environment we are going through, knowing the context is essential for correct decision making. Among the "curious" narratives currently prevailing, we hear loudly: it is the most discounted recession in history and therefore it will not happen. We can discount that tomorrow the sun will rise in the east and it will happen, regardless of the fact that such an event is widely discounted. The markets and especially the equity markets will have to internalize two key issues in 2023; bad news is bad news, central banks are not an economic agent.

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Cryptoassets: Spot, Derivatives and On Chain Metrics

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The big question remains open, is there still a correlation between classic assets and crypto assets? The answer will not be immediate, we must follow the market dynamics to determine if this will be the case. We insist that the risk of a contagion event derived from the FTX / Alameda bankruptcy is still very present, we are still in the middle of the crypto storm.

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Bitcoin

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Our main scenario is still a reversal of all the selling pressure after the FTX event with a view to the main vpoc (volume point of control) of around $19200. Last week we demanded the price to consolidate the HVN (high volume node) below 16600, it was the first battle to be won by buyers.

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The market swept the lows of the FTX drop and found demand to push the price to test the vpoc of $16600. The sellers' reaction upon reaching the vpoc was quite poor in terms of downward movement leaving a rising low.

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The consolidation above the vpoc of $16600 is in process, although we will be closely watching the evolution of the rest of the risk assets, the SPY is starting to show signs of weakness in this recent bear market rally. Bitcoin has managed to reach the top of the range marked in blue and as we have said consolidating above $16600. It is now when buyers have to push to unbalance all this structure, key moment.

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The order book is still strongly protected on the downside, and with some relevant moves on the upside, it appears that the upper boundary wall has partially disappeared leaving the market with less impediments to attack higher levels.

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The skew, which measures the difference between the IV (implied volatility) of OTM puts and the IV of OTM calls, has experienced a very noticeable relaxation. The panic and climax readings are now behind us, the market seems to be free from the prevailing fear of the last few weeks.

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skew 11/28/22

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skew 06/12/22

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Realized volatility and implied volatility are once again walking hand in hand, experiencing a severe decline since the FTX event.

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In terms of delta (market aggression) on Binance perpetual futures, it seems that the strong selling pressure has subsided, and some buying pressure (positive delta) is beginning to be seen, although such purchases are not overwhelming.

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Let's not forget at any time the correlation between risk assets and BTC. Clearly bitcoin has not accompanied the evolution of these last weeks of the DXY, SPY and QQQ. The FTX / Alameda event obviously has a lot to say in this. The question we have been asking for several weeks now is the same as always, if the SPY-QQQ begin to correct, how will bitcoin react? We will find out sooner rather than later.

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We continue to observe outflows of Bitcoins from exchanges, such dynamics can be considered as moderately bullish, it is correct to think that many market participants keep their Bitcoins in their cold wallets.

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As we have already reviewed in previous newsletters numerous metrics indicate that we are going through a stress similar to the capitulation processes of previous phases. The moment is critical and it is easy to think that the maximum pain has already taken place, however, be careful with mining again, if bitcoin goes below the "production cost" the selling pressure could continue, as miners will have to capitulate in their reserves and even in their activity.

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We are seeing the 3rd largest Bitcoin miner sell-off of all time. The stress level of Bitcoin miners today is second only to 2 other times. the other 2 times? Bitcoin was only $290 and $2.10.

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The Bitcoin protocol just reduced mining difficulty by -7.3%, the largest downward adjustment since July 2021. Given the low prices,,, rising energy costs and debt burden, the mining industry is under extreme stress.

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This difficulty adjustment is in response to Bitcoin's falling hash rate. This has resulted in yet another inversion of the hash-ribbons, as the 30DMA dips below the 60DMA. The last hash reversal occurred in early June 2022.

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Ethereum

No remarkable changes with respect to last week, although it seems that buyers have managed to consolidate above the vpoc of 1225, it is the first battle won that we demanded from buyers If the market really wants to reverse the prevailing situation, the value area marked in white has to show clear signs of re-accumulation. After consolidating at the $1225 level, the market must look for the top of the range and then try to unbalance the entire commented structure. On the other hand, a breakout and an inside test at the vpoc of $1225 would nullify this first sign of buying strength.

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Classic markets

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Last week we asked the market to validate the selling control of 3980 and it did, however 4100 has acted as a clear resistance that has not managed to cross at any time. This level was already marked in the gamma profile of SPY and SPX options after the last OPEX.

The market may enter in negative gamma in the 4000 points zone, the break of this level may mean a turning point to the bullish sentiment of the last weeks.

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SP500 Futures 11/28/22

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SP500 Futures 06/12/22

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The market as we can see in the chart shows a clear demand zone that has been defended on numerous occasions (green arrows). Let's not forget that all this upper value area is held by a price spike with zero auction as a result of the November US inflation data.

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Gamma profile SPX 30/11/22

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Gamma profile 06/12/22

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A rejection of the gamma call wall at 4100 and a market that has zero gamma so close at 4000 is a big risk for the bulls. If the market enters negative gamma the Market Maker will hedge in favor of market movement increasing market volatility.

A consistent break and consolidation below this zero gamma level of 4000 should put us on alert and even more so considering the level of complacency the markets have experienced in recent weeks.

The VIX is still at levels of 20, a level that has been a clear market reversal zone in all previous impulses.

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The market continues to insist on ODTE (0 days to expiration) options, continuing this dangerous game of intraday leverage after OPEX. The avalanche of purchases of ATM and ultra-short-term expiration calls is completely changing the classic functioning of gamma models and thus the hedging activity of Market Makers, who in this case must cover their sold options by buying underlying and forcing the market even further upwards.

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Bullish impulses have a new enemy since the beginning of the year, the QT of the Fed's balance sheet. It is important to follow how this drain on the liquidity present in the system may affect financial asset valuations. For the time being, market overvaluation seems to continue, which could become more pronounced as the Fed continues its balance sheet reduction program.

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It is often heard that the entire market is positioned to the downside, but this statement does not seem to be true, as flows continue to flow into equity funds. Retailers in turn remain highly exposed to equities, and this year's falls have by no means caused these market participants to capitulate.

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We continue to see stock market valuations with a lot of room for downward movement

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The data does not lie and it does not look like the bear markets will end before the recession has started.

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