Summary

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The economic reports pulled the markets in different directions last week. They opened with the oil price spike, depressing investors’ risk appetite, and closed on a positive note on signs of a cooling labor market. The most relevant data of this quiet easter week was Friday's payrolls report, which was broadly in line with expectations.

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As the outlook for risk assets now completely hinges on the Federal Reserve’s monetary action steps, which, in turn, are exclusively driven by economic data, each new economic report draws outsized attention and moves the market up or down, according to the outcome versus expectations. 

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Following last month’s banking crisis, investors have become more convinced the Federal Reserve will cut rates in the second half to ward off an economic downturn. Such bets have pushed bond yields lower, supporting the giant tech and growth stocks that hold sway over broad equity indexes.

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Huge week ahead that comes loaded with a wealth of highly sensitive data and reports for the markets. The main news will be March’s CPI and CPI ex. Food & Energy (Core CPI) on Wednesday. At the same time, the earnings season for Q1 2023 officially begins. As usual, the season begins with the banks and other financials; but there are also some non-financial companies scheduled to dispatch their financial results in the coming days.

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It’s been a pretty quiet week for Bitcoin and the crypto market as it trades at just $28,000. However, there is still some news on the horizon, such as the Dogecoin pump and dump, MicroStrategy continuing to increase Bitcoin holdings and Binance still in the authorities' focus and accumulating problems; Binance's U.S. affiliate struggles to find a bank to take its customers' cash and Binance Australia Derivatives license canceled by securities regulator.

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Macro and news

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Big week ahead: U.S. March CPI is coming out

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US March ISM was out last week at 46.3, the lowest since May 2020, the month after the COVID recession ended.

ISM started surveying in 1948. As this chart shows, this is the 16th time the ISM has been 46.3 or lower.

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PMI tends to lead corporate earnings growth by about a year. Below, we shifted the PMI index forward by 12 months and plotted it against SPX trailing 12-months EPS growth.

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With the latest ISM data the Atlanta Fed's model growth forecasts have gone in just 3 weeks from 3.5% to 1.7%.

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U.S. initial jobless claims actual: 228k vs 198k previous; est 200k

U.S. continuing jobless claims actual: 1823k vs 1689k previous; est 1700k

U.S. Unemployment rate 3.5%, Exp.  3.6%, Last 3.6%

Avg hourly earnings 0.3% M/M, Exp. 0.3%, Last 0.2%

Avg hourly earnings 4.2% Y/Y, Exp. 4.3%, Last 4.6%

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Banking Crisis:

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The banking sector drama has subsided and is being pushed out of the headlines by the latest economic reports and the markets’ constantly changing assessment of how these data points may affect the Fed’s policy. However, the regional banks’ troubles are far from over. The smaller lenders are bleeding deposits, with some of them running away to the perceived safety of large banks, but with even more of the savers ditching banks altogether and moving to money market funds (MMFs), which are better than banks at passing along the Fed’s interest rate hikes to their clients. At a time when it’s possible to gain 4.5% p.a. basically risk-free in an MMF, many savers don’t see any reason to remain devoted to their banks, even if the Fed virtually pledged an all-deposit blanket guarantee.

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Since the Fed began to raise rates in March 2022, total deposit outflows from the US banking sector is now $967.5bn, almost $1trn, the biggest outflow on record.

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Since Fed began to raise interest rates, amount of money in US money market funds has increased by $700 Bn to hit fresh ATH at $5.25 Tn

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Commercial bank lending dropped nearly $105 billion. The most since 1973.

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The International Monetary Fund warned this week of “vulnerabilities” among so-called non-bank financial institutions, saying global financial stability could hinge on their resilience. The Bank of England called attention to the same issue last month. JPMorgan chief executive Jamie Dimon said that the banking crisis increased the odds of U.S. recession and the current crisis is not yet over, there will be repercussions from it for years to come.

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Global investors surveyed by Bank of America in the middle of the recent banking crisis pointed to a group of US non-banks, rather than traditional lenders such as the newly defunct Silicon Valley Bank,  as the most likely source of a credit crisis. But what exactly are non-banks and how risky are they?

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The term encompasses financial firms, other than banks, that provide all manner of financial services, including lending to households and businesses. It’s a diverse cast list: non-banks range from pension funds and insurers, to mutual funds and high-risk hedge funds.

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And the sector is big. According to the Financial Stability Board (FSB), a body of global regulators and government officials, non-banks had about $239 trillion on their books in 2021, accounting for just under half of the world’s total financial assets.

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Non-bank assets make up nearly half of all global financial assets

Non-bank financial institutions (NBFIs) accounted for 49% of all global

 financial assets in 2021, or $239 trillion. That's up from 42% in 2008.

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Some of the risks that non-banks run increase when interest rates are rising, as they are now. The sector’s larger size means its troubles could, on their own, destabilize the entire financial system but they could also spread to traditional banks through real and perceived interconnections.The European Central Bank called out the “persistent vulnerabilities” in the non-bank sector, including “the risk of substantial credit losses” if its corporate borrowers started to default amid a weakening economy.

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Shadow banks cannot access emergency funding from central banks in times of stress and governments cannot be expected to use taxpayer funds to recapitalize a failed shadow bank, public authorities have limited tools to mitigate contagion risks.

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Some regulators are also concerned that certain corners of the sector are particularly exposed to an SVB-style run on its assets that could, in turn, create losses for traditional lenders. A notorious example is the collapse of US fund Archegos Capital Management two years ago, which caused about $10 billion worth of losses across the banking sector. More than half of that was sustained by Credit Suisse (CS), which counted Archegos among its clients. The hit contributed to a string of scandals and compliance failures that have plagued the Swiss lender in recent years, eventually leading to an emergency takeover by rival UBS (UBS).

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Crypto News

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This week witnessed a proliferation of updates on the development of various central bank digital currencies CBDCs. India broke into the scene with an ambitious objective. India revealed that it aims to attain a user base of 1m individuals for its digital rupee initiative. It is presently in the pilot phase involving over 13 banks and 15 cities.

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The crypto community received insight into the potential direction of the digital euro project following comments made by Christine Lagarde, the President of the European Central Bank (ECB), during a prank call. Lagarde revealed during the call that the ECB has intentions to control payments associated with central bank digital currencies. This statement sparked a backlash from cryptocurrency advocates.

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Gary Gensler, the Chairperson of the Securities and Exchange Commission (SEC), addressed issues related to cryptocurrency regulations and consumer protection during a budget hearing for the fiscal year 2024. During the budget hearing, Gensler emphasized that laws are already in place to regulate the cryptocurrency industry and promote consumer protection. He stated that, despite these regulations, many crypto companies have failed to comply with them, leading to a recent cluster of enforcement actions.

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Furthermore, the US Department of Treasury issued a warning last week, highlighting how digital assets pose a risk to national security. The Treasury stated that the increasing adoption and use of cryptocurrencies could threaten financial stability and undermine existing regulatory frameworks.

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The concerns and uncertainties surrounding Binance gained some modest steam this week due to a mixture of speculations and confirmed developments. 

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On Tuesday, Changpeng “CZ” Zhao, CEO of Binance, addressed rumors that he had been included in Interpol’s red notice list in response to the CFTC’s charges against Binance. In a tweet, Zhao denied these allegations, noting that the purported “proof” was fabricated. He further urged the crypto community to continue to ignore unfounded speculations.

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On Thursday, the Australian Securities and Investments Commission (ASIC) announced revoking the Binance Australia Derivatives platform.

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Binance US, the United States arm of the global crypto exchange, has been experiencing difficulties in establishing a new bank partner to serve as a fiat on-ramp and off-ramp for its clients in the country. The exchange has been relying on middleman banks to store funds on its behalf, after the recent failures of Silvergate and Signature Bank left it without banking services. According to a Wall Street Journal report on April 8, Finance US needs a bank to directly hold its clients' U.S. dollars. However, recent attempts to establish direct banking relationships with banks such as Cross River Bank and Customers Bancorp have failed. The regulatory crackdown on banks with crypto clients is another factor contributing to the exchange's struggles. 

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The exchange stated that it "was transitioning to new banking and payment service providers over the next several weeks," adding that some U.S. dollar deposit services would be temporarily impacted during the transition. Currently, Binance.US is holding customer funds via the financial technology firm Prime Trust, and a spokesperson for Prime Trust stated that all funds received from clients are stored through its banking partners.

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Musk paid $44 billion for Twitter and is now apparently using it as some sort of pump-and-dump scam for Dogecoin.

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In a move that may have looked like a late April Fools joke, users checking Twitter this week found the familiar bird logo was replaced with a Shiba Inu, the internet-famous dog that's also the symbol of Dogecoin cryptocurrency.

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The cryptocurrency surged in value, with Dogecoin gaining nearly 30% overnight after Twitter changed its logo Monday, though it remains far below its 2021 peak. Twitter's owner, Elon Musk, has been a longtime booster of Dogecoin and is currently facing a lawsuit accusing him of manipulating its value. Dogecoin quickly dived on Thursday after Twitter appeared to revert back to its normal blue bird logo

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Data from the on-chain analytics platform, Lookonchain, informed that two of the five largest Dogecoin whales sold 1.4B DOGE amid the price surge (worth about $121 million).

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April 12 marks the end of one of the most patient waits in blockchain history. From then on, Ethereum investors can finally withdraw a $31 billion stash of ETH that started piling up at the tail end of 2020. That’s due to Ethereum’s latest upgrade, dubbed Shanghai, which unlocks close to 18 million so-called “staked ETH” from the blockchain—about 15% of all that’s in circulation.

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Shanghai upgrade grants about half-a-million validators, each had to provide at least 32 ETH (now about $57,000), the right to withdraw their funds. So far, stakers have earned about a million ETH in rewards, about 0.9% of Ethereum’s total market capitalization.

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Shanghai adds a host of other upgrades, known as Ethereum Improvement Proposals (EIPs). The most important ones, EIP-3651, EIP-3860, and EIP-3855, restrict transaction costs for technical applications, which could go some way to reducing fees on the otherwise expensive Ethereum blockchain.

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Facebook and Instagram have announced that they will stop supporting NFT on April 11, 2023. This means that digital items on Instagram will stop working, including articles with digital items. Additionally, Facebook and Instagram will no longer maintain a connection or link users’ accounts with third-party e-wallets. Users can no longer view their digital items in the related tab or manage their third-party e-wallet connection settings.

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Jared Grey, the head chef of Sushi, a Japan-based decentralized autonomous organization (DAO), recently issued a statement in response to a subpoena from the United States Securities and Exchange Commission (SEC). Grey reassured the Sushi community that, as far as he knows, no one associated with Sushi has violated U.S. federal security laws.

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However, the fact that Grey is cooperating with the SEC suggests that the agency is taking its investigation seriously. It is possible that the agency may uncover evidence of wrongdoing, either by individuals associated with Sushi or by the organization itself. If this were to occur, it could have significant implications for the wider DeFi ecosystem. 

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While it is unclear at this stage whether the SEC will issue further subpoenas or take any other action, it is clear that the agency is taking a close interest in this emerging area of finance. As the DeFi ecosystem continues to evolve, it is likely that regulatory scrutiny will only increase.

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Cryptos: spot, derivatives and “on chain” metrics

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Bitcoin has been stuck in the $26500 and $29000 range for almost 4 weeks and with clearly decreasing volume.

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Following previous analysis, the test to the VWAPs has provoked enough buying initiative to conquer again the high volume node of $23000. Once this level was conquered, the market went on to break the local highs with an astonishing and at the same time dangerous verticality. We have been consolidating for more than 4 weeks in this $27000-29000 zone. We believe that retractions to lower zones are necessary to unload leverage and as an effective unbalancing process of the marked value area.It should be noted that the movement has reached the third standard deviation of the VWAP anchored at the FTX event low in a movement that in our opinion is too vertical.  

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Bitcoin 03/04/23

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Bitcoin 10/04/23

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It is clear that this area of value is under demand control, it is now where buyers must demonstrate that this structure will imbalance in favor of demand. The effective imbalance of a value area is always the most delicate moment.It is necessary to contextualize this value area with higher time frame charts, it is certainly a key moment for bitcoin.

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As we can see in the previous chart, we are in an important confluence zone; VWAP anchored from highs and VWAP anchored from 2020 lows .We consider it absolutely necessary for a consistent bullish scenario that demand manages to break these VWAPS and consolidate above them. 

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The upper major value area is trying to unbalance, it is still very uncertain if the market is going to offer us a bearish unbalance failure and end of the bear market or if it is a break and test below this value area. Undoubtedly, as we have said before, a key moment.

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Market and on chains metrics:

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We feel some concern looking at Binance's latest flow data. It's clear that customers are heading for the exits, are beginning to, and/or are not interested in providing inflows.

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Withdrawals are flying out the door: BTC & ETH

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Global exchanges are removing BUSD from their reserves. Binance’s stablecoin reserves have also plummeted. Customers are withdrawing stablecoins from the platform.

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Institutional and retail support for the last centralized platform standing appears to be starting to crumble. As we have discussed in previous newsletters, Binance's outsized market share is a risk in itself to the entire ecosystem. Binance has come under regulatory scrutiny and this is not a minor issue to ignore.

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Classic markets

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The swift interventions by authorities worldwide to prevent systemic banking contagion have caused remarkable euphoria in the risk markets. The SP500 futures have risen almost vertically over the past two weeks with no room for corrections. The market has managed to break the VWAP anchored at the previous highs but on really low volume, we expect a pullback for this week as the main scenario. We do not see a significant advance possible without a prior rest or digestion of the perceived gains. Volume has been a critical missing in the entire up move that started at the March lows.

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03/04/23 SP500 futures big picture

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10/04/23 SP500 futures big picture

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The lack of volume and the negative discrepancies with the market breadth are symptoms of weakness of the rally, SPX could suddenly have sharp drops for any news of medium importance.

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March had two OPEX (standard one and JPM collar roll) that influenced market behavior, now it remains to be seen which is the real direction the market wants to take. As we said last week, if macro and market events remained calm, all the massive bearish positioning generated by the fear around the banking crisis would be fuel for a short squeeze on all these puts. This week's market favorite, U.S. CPI, will provide the volatility that we did not have during the Easter holiday.

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The gamma profile of the market indicates that it seems difficult for the market to break through the 4100 - 4150 gamma wall before the inflation data. The market after the short squeeze two weeks ago is clearly biased to the upside driven by a false sense of strength in the face of any event. However, there is no riskier situation than when there is no perceived risk.

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