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Summary
Big week ahead: US and Germany Q1 GDP, Bank of Japan decision, UK banks, and US big tech earnings. The economy remains in expansion, but cracks have recently appeared, suggesting that the labor market and economic activity are about to cool. With Microsoft, Alphabet, Amazon and Meta Platforms all slated to report earnings this coming week, investors are turning their attention away from bank earnings to Big Tech. That’s because just a handful of large-cap tech stocks powered the S&P 500’s gains during the first quarter despite banking turmoil, uncertainty about the Federal Reserve’s plan to stabilize prices and recession fears.
Guidance will be of utmost importance for traders watching for signs that the economy could be headed for a recession, and which companies will be able to weather it. That’s been a key theme since the beginning of earnings season, as continued uncertainty about inflation, the Federal Reserve’s plans to tame it and the possibility of recession loom over Wall Street. Investors are trying to gauge whether the Federal Reserve will keep hiking rates to fight inflation after a widely anticipated 25 basis point hike at its May policy meeting. Many expect the central bank to cut rates later this year to loosen the grip of higher borrowing costs on the economy.
The tech sector last week was tinged in the red thanks, in part, to Tesla's poor results. The electric car maker's quarterly gross margins missed expectations, causing its shares to fall more than 10% on the week. AT&T, meanwhile, fell 8.5% on the week after posting a 20% decline in year-over-year revenue.
This week, the crypto industry was largely dominated by regulatory developments. Industry leaders continued to express concerns about the regulatory climate in the United States, with some firms contemplating migrating in response to the Securities and Exchange Commission’s (SEC) crackdown. In contrast, European Union lawmakers approved MiCA, a new crypto licensing framework. With the vote, it became the world’s first large jurisdiction to enact complete crypto legislation. The decision comes after a discussion in which legislators overwhelmingly endorsed ideas to require crypto wallet providers and exchanges to get a license to operate throughout the region.
After a period of strong growth, Bitcoin and Ethereum have both recorded strong declines around 10% this past week. Bitcoin’s $27,000 price zone is being breached. Its market capitalization has declined to under $530 billion after tapping $600 billion days ago. Its dominance over the alts, though, has taken a breather and is close to 46%.
In effect, the 10% drop of Bitcoin in the last three days dropping from the mid $30,000 to current levels of $27,000, marks one of the most intense periods of long liquidation since the start of the year. According to data presented by crypto derivatives analytics Coinglass, long position liquidations exceeded $150 million.
Macro and news
Having seen the US consumer recover strongly in January with a retail sales surge of 3.2%, the edge has come off a little in recent months as consumer spending slowed in February and March, by -0.2% and -1% respectively. The instability caused by the banking turmoil will also have affected economic output at the end of the quarter, although we probably won’t know the full extent of that until we get later revisions. The strong labour market and resilience in wage growth seen in the first part of the quarter are likely to offer a strong personal consumption component. Expectations are for the US economy to slow slightly from 2.6% in Q4 to 2%, while personal consumption is expected to rebound strongly from the 1% seen in Q4.
With the recent weakness in the Japanese yen, and it being the first meeting as central bank governor for Kazuo Ueda all eyes will be on the Bank of Japan this week to see whether Ueda lays out the ground for a possible tweak to the bank's current yield curve control policy. In comments earlier this month, Ueda was careful not to say too much that was different from his predecessor Kuroda. At his first press conference, Ueda stuck with the script of his predecessor by saying the current policy remained appropriate under current economic conditions.
We’ll get earnings from some of the world’s biggest companies next week, including big tech firms Apple, Amazon, Google parent Alphabet, Microsoft, and Meta Platforms. Other noteworthy companies scheduled to report earnings will include Coca-Cola Company, McDonald’s, Visa, Mastercard, Verizon, T-Mobile, UPS, Raytheon, GE, Boeing, ADP, Intel, ExxonMobil, and Chevron, among others.
Just under one-fifth of S&P 500 companies have reported earnings so far. Of these, 76% have reported EPS above estimates, in line with the trailing five-year average of 77%, according to FactSet. However, the information technology sector is one of six sectors expected to post a year-over-year decline in earnings. Google parent Alphabet is expected to report net income fell 16% in the first quarter as revenue from cloud services grew at the slowest pace since 2016. A slowdown in cloud growth could also negatively impact Microsoft, which is expected to report earnings unchanged from a year ago.
We expect the FED to pause rate hikes next month after the overnight policy rate reaches 5% - 5.25%, and then leave policy unchanged for the remainder of the year, however, the bond market is pricing in about two rate cuts by the end of the year, while the FED claims no rate cuts With the end of tightening now in sight, cyclical peak in long-term yields could be done.
Quantitative tightening (QT) has slowed global credit creation meaningfully, which is likely to have a drag impact on the economy. Global QT is expected to accelerate in the coming months, which will inevitably have an impact on risk assets.
Debt ceiling
President Biden is running out of time and options to avert an unprecedented default on the federal debt, as House Republicans make increasingly clear that they are willing to court economic catastrophe unless they secure major policy concessions from the White House.
What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.
The legislation, which Republicans plan to vote this week, is meant to force Mr. Biden to negotiate over raising the debt limit, which is currently capped at $31.4 trillion. Unless the cap is lifted, the federal government, which borrows huge sums of money to pay its bills, is expected to run out of cash as early as June. The House Rules Committee said on Friday that it will meet on Tuesday to consider the bill and possibly advance it to a floor vote.
Since Republicans took control of the House in January, Biden’s top aides have expressed confidence both privately and publicly that they can force the GOP to raise the limit on federal borrowing without even partially acquiescing to conservative demands to cut spending.
US 1 and 5-year credit default swaps (CDS) rise as jitters about the debt ceiling prompt hedging demand.
Reverse engineering the implied default probability requires a bit of playing around with standard CDS assumptions. The standard Bloomberg CDS valuation calculator declares the implied probability of a US default from these CDS levels as sub-2%.
It is noteworthy that Central bank gold purchases reached the highest level since 1967. What are we missing?
Banking Crisis:
The Federal Reserve’s policy pendulum has swung back to inflation fighting. Following a tense few weeks of having to stave off a potentially crippling financial crisis, policymakers have turned their attention back to battling stubborn inflation that threatens to send the economy into recession later this year. With the banking problems seemingly at bay for now, Fed officials have made it clear in recent remarks that tight monetary policy is likely to be around for a while, and a pivot is unlikely. However, we are of the opinion that the banking turmoil is far from over and that regional lenders face the risk of losses on commercial real estate loans.
US regional banks have been at the center of the worst financial turmoil since the 2008 crisis. The small and mid-sized regional banks remain "an area of concern" because of their increased lending exposure to the commercial real-estate sector (CRE), which is grappling with high vacancy rates and may come under stress. Over the last 12 to 18 months, most of the bank lending that has occurred in America has come from US regionals and most of that lending has actually gone into commercial real estate.
Expected drawdowns in commercial property prices compared to the GFC. Morgan Stanley.
Fund managers see commercial real estate as the most likely source for a systemic credit event.
Many experts have warned the US commercial real-estate sector (CRE) could face problems as high borrowing costs and tighter credit conditions following the recent banking turmoil complicate matters for big property owners as they seek to refinance loans. Nearly $450 billion in commercial real-estate debt is due to mature in 2023 - meaning a final payment on those loans are due.
Since the onset of the pandemic, banks have ramped up their exposure to CRE sector debt. Regional banks’ share of financing into the CRE sector rose from 17% in 2017 to 27% in 2022, making it the largest source of funding for the sector.
We can highlight two interrelated concerns. The first is that regional banks may be saddled with bad debts should their real estate debtors default. The second is that the sector will be starved of capital as regional banks, already under stress, are unable to continue lending to the sector.
The problem is not confined to the US. Europe’s CRE market is backed by €1.5trn of debt, with approximately €310bn of new or replacement borrowing issued each year to keep the market moving. Cracks are already beginning to appear, the banking crisis is not a one-day story as the market has assumed.
Small banks live off CRE cause they struggle with efficiency, economy of scale, & alternative product lines.
Commercial real estate prices in Europe are taking a serious bath: 20% down in the last 12 months. Banks in the Nordics but also in Spain, France, NL and Germany are quite exposed to the sector. Central Banks can backstop liquidity issues, but can't do much about this.
Credit Crunch?
It is time to keep a close eye on financial conditions, a significant tightening of bank lending standards often leads to a recession, and lending standards are tightening significantly. Seems that a credit crunch is looming, corporate credit crunch is just getting started.
Crypto News
This week, the crypto industry was largely dominated by regulatory developments. Industry leaders continued to express concerns about the regulatory climate in the United States, with some firms contemplating migrating in response to the Securities and Exchange Commission’s (SEC) crackdown. In contrast, the European Union had more clarity, as the parliament approved proposals in the Markets in Crypto Assets (MiCA) bill.
On April 17, the SEC declared its readiness to regulate decentralized finance (DeFi), which critics say would slow down or impede the sphere’s growth. SEC chairperson Gary Gensler confirmed that DeFi would not be exempt from their supervision. They plan to modify the definition of “exchange” to include decentralized platforms such as DEXs.
Reports from April 16 revealed that the SEC served crypto exchange Bittrex a Wells Notice, alleging that it breached regulations by not registering as a broker-dealer, clearinghouse, or exchange. On April 17, the SEC charged Bittrex “for failing to register as a national securities exchange.” The exchange criticized the SEC’s action, noting that it always complied with the law and is keen to clear its name in court. The company also criticized the move as part of a more comprehensive campaign to stamp out cryptocurrency from the United States.
SEC Chairman Gary Gensler appeared at an oversight hearing before Congress, where many questions related to the FTX bankruptcy were discussed at length. During the oversight hearing, committee chairman Patrick McHenry asked whether Ethereum (ETH) is a security or a commodity. Gensler was non-committal in his response, stating that particular crypto tokens should be evaluated based on the Howey test. Gensler appeared to have dodged several questions during the oversight hearing, exemplifying the extensive case of regulatory unclarity.
With regulatory ambiguity in the United States, domestic companies are turning their attention overseas for investment prospects. In particular, Coinbase is reportedly considering the UK as a “hub of web3 innovation.” At the same time Coinbase also disclosed that it had procured an operating license in Bermuda and is planning to establish an offshore derivatives exchange there.
The Bank of England (BoE) announced on April 17 that it plans to create new rules for stablecoins to safeguard financial stability. Jon Cunliffe, the deputy governor of the BoE, said the upcoming stablecoin regulations would be designed like commercial bank money. However, unlike bank deposits, stablecoins will not have the same protection against failure.
EU Parliament approves MiCA, making the European Union the first significant authority to implement full crypto guidelines. The regulations will cover all cryptocurrencies and businesses providing related services not overseen by current financial laws.
Cryptos: spot, derivatives and “on chain” metrics
Bitcoin posts biggest weekly loss in five months. Bitcoin faced selling pressure in the week ended April 23 as bond yields rose and the U.S. dollar liquidity declined. The leading cryptocurrency by market value fell by 9% to $27,600, registering its largest single-week percentage loss since early November.
The top value area is being dominated by sellers. The price has gone through the entire structure reaching the lower part of the range. Currently this structure is in an imbalance phase with break and test below the upper high volume node at $28000. In case of bearish imbalance the levels to watch are $25700, level of confluence with the top of the major range and the VWAP anchored from the lows of the spike started inside the main value area.
Bitcoin 17/04/23
Bitcoin 24/04/23
Going into more detail, we note the prevailing weakness in this upper value area. We have an operating event of weakness, upthrust, secondary test and movement to the bottom of the range (sow, sign of weakness). At the moment the minor anchored VWAP marked on the chart is acting as support, however the break and test below $28000 is done.
If the bulls want to salvage this situation, they have to trigger a bearish imbalance failure and recapture the $28,000 high volume node. On the bearish side, watch out for the loss of $25700.
Market and on chains metrics:
Despite the impressive YTD rally in bitcoin, flows have been rather subdued in ETFs.
On-chain data shows a large amount of Bitcoin supply dormant for more than 7 years ago has moved recently, a sign that may be bearish for the price. The movement of such an old supply has generally led to a drop in the price of the cryptocurrency in the past. The relevant indicator here is the “Spent Output Age Bands” (SOAB), which tracks the number of coins that each age band in the Bitcoin market is currently moving.
While sizable Bitcoin trades occur on a daily basis, it’s not often that coins that old see the light of day again. Some suggest that when old coins are being spent more often, it may indicate a shift in confidence to hold the crypto asset, often spurred by periods of market volatility.
It seems like the cryptocurrency has usually observed the formation of local tops whenever the indicator has displayed such a spike in its value. The reason behind these highs looks to be at least in part the selling pressure put on the market by these investors.
Longs liquidations have been severe during this week. As Cointelegraph reported, April 19 saw the largest amount of long liquidations of 2023 so far. Nearly a total of 200 million of longs have been liquidated with the recent declines
Prior to last week's declines, open interest was at the highest level since the FTX crash. The break of $30000 has come with a parabolic rise in open interest, which carries high risks due to the leverage dragged down by the market.
As we have indicated in previous newsletters and looking at the trading volume ratio between spot and derivatives, it appears that much of this explosive upward movement has been led by derivatives. We insist that an upward movement has to be accompanied by organic growth in spot.
TUSD claims 50% market share on Binance. It took less than one month for Binance’s BTC-TUSD pair to become the largest bitcoin market on the exchange (and in the world). On March 22, Binance halted its zero-fee trading program for 13 BTC trading pairs. The exchange also re-listed its BTC-TUSD market and removed trading fees for the pair, making it the only fee-less pair on the exchange.
When looking at trade volume for the top three BTC pairs on Binance, we can see a dramatic drop ever since Binance changed its fee policy. TUSD has grown from nothing to around $60mn an hour, but this is paltry compared with USDT’s average of nearly $1bn an hour before fees were re-implemented .Liquidity remains a major problem in the ecosystem.
Classic markets
Bank of America's fund manager survey shows how most investors seem to be hiding in big tech stocks as a ''safe haven'' equity trade and nobody wants to be long US Dollar anymore. It seems that the long tech trade is starting to become very crowded. The top 20 stocks make up only 29.17% of the S&P 500, however contributed to 7.08% of the indexe´s total 7.55% return. Let's hope that earnings do not disappoint, because the unwinding of these positions could be epic.
S&P 500 is poised to have its smallest monthly trading range since 2017, which has triggered an almost unprecedented volatility crunch. This phenomenon is forcing strategies that are controlling their exposure via volatility into the market and we are now hearing that also hedge fund clients are adding length again "on a FOMO thesis", according to Goldman Sachs. Numerous risk-based strategies like Vol-Control Funds, Risk Parity and CTAs have been increasing their equity exposure in this lower vol environment. This has led to a consistent underlying bid for stocks, further helping to dampen volatility.
The recent decline in volatility stems more from strategic equity positioning than any widespread economic optimism. The market more than ever is dominated by flows, flows that are “price agnostic” and do not even remotely attend to fundamental or macroeconomic criteria.
CTAs are all in !
Vol control funds are all in !
We believe that once the OPEX is over and the flows derived from it are gone, the market faces a potentially risky situation as these "support" flows are lost. The market faces the big earnings week dominated by "price agnostic" flows. We will pay close attention to the market if it enters a negative gamma regime once last Friday's OPEX has been overcome. Let's remember that a market in negative gamma could bring back volatility.
At the same time, liquidity in the global system is once again dwindling following recent interventions by the authorities to alleviate the banking crisis. As we can see in the chart, there is always a certain lag between liquidity and market performance.
17/04/23 SP500 futures big picture
24/04/23 SP500 futures big picture
The anchored VWAP shown in the chart has been acting as support for the last week, a clear area of buying initiative in the recent positive market gamma regime. We are living within the smallest monthly trading range since 2017, with really overlapping sessions and a very low volume with respect to its daily average. We are cautious in our approach to scenarios due to the "lottery" behavior that earnings always entail, although our bias is short-sighted.
The focus for bearish scenarios will be on the previously mentioned anchored VWAP and the zero gamma level, consolidation below it could lead to a return to volatility. On the long side, the market clearly has to consolidate the gamma call wall of 4150-4200, which in our opinion is very tricky to achieve. Even after overcoming OPEX, the upper wall is still intact.
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