Summary

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We have had the toughest week to start the year. The FED keeps alive the hope of a pivot and a softlanding, a scenario that the market insists on discounting since the end of last year. Big tech earnings disappointed and the battery of macroeconomic data had a mixed reading, which we will analyze in detail in this newsletter.

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After the euphoria of January and after the FED day, it is now that the market must truly justify the valuations of risk assets, consolidating levels and avoiding that the recent movement does not remain a bear market rally. The macroeconomic and market environment is at a level of uncertainty not seen in decades, the market, its participants and the highest authorities live from day to day, expectant of whether the discounted scenarios will materialize or not.

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Macro and news

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Relevant data for this week:

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The Fed hiked 25 bps, the ECB 50 bps and the BOE 50 bps in line with expectations, however, in the first instance the Fed statement provided a marked hawkish tone, inflationary pressures seem to be easing but remain elevated and employment remains strong, the committee even mentioned increasing the target range for rates.

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During the press conference, the hawkish tone of the statement disappeared completely. Powell provided just enough to keep "Fed Pivot" hopes alive:

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“..The global picture is improving, we see continued subdued growth, no recession with inflation coming down slowly. Disinflationary pressures could boost economic activity, I continue to think that there is a path to a soft landing…”

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The Fed is now taking a meeting by meeting approach, and did not deny or confirm potential rate cuts. As soon as the labor market weakens, the Fed will begin to pivot. The Fed is keeping the door open. 

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However, we have seen this week how the market is once again thinking about another 25 bps hike in the month of June, as reflected in the Fed's forward rates.

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At Turing Capital we are of the opinion that inflation will subside but will remain high for a long period of time, so the market will have to start internalizing that it will not be able to front run central bank rate policies. Inflationary pressures include variables that are uncontrollable by the highest monetary authorities.

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Macro data

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German gdp (qoq) (q4) actual: -0.2% vs 0.4% previous; est 0.0%

German gdp (yoy) (q4) actual: 0.5% vs 1.2% previous; est 0.8%

German retail sales (yoy) Dec: -6.4% vs -1.8%

German retail sales (month to month) Dec: -5.3% vs 0.2%

Germany's once sizable export surplus falling off a cliff, more than halved YoY <€80bn in 2022 due to rising energy costs, the lowest figure since 2000 and 5th decline in succession

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Eurozone gdp (qoq) actual: 0.1% vs 0.3% previous; est -0.1%

Eurozone gdp (yoy) actual: 1.9% vs 2.3% previous; est 1.7%

Euro area dec. producer prices rise 1.1% m/m; est. -0.4%  

Euro area dec. producer prices rise 24.6% y/y; est. +22.4

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Japan (dec p) industrial production (mom) actual: -0.1% vs 0.2% previous; est -1.0%

Japan (dec p) industrial production (yoy) actual: -2.8% vs -0.9% previous; est -3.6%

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South Korean Exports (Y/Y) Jan: -16.6% (est -11.1%; prev -9.6%)

• Imports (Y/Y) Jan: -2.6% (est -2.6%; prev -2.5%)
• Trade Balance (Y/Y) Jan: -$12.69B (est -$9.273B; prevR -$4.692B)

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China January official PMI:

• Manufacturing PMI 50.1 Est.49.8 Prev.47.0
• Non-Manufacturing PMI 54.4 Est.52.0 Prev.41.6
• Composite PMI 52.9 Prev.42.6

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Chicago PMI Suffers Longest 'Contraction' Streak Since Lehman: 44.3, Exp. 45.0, Last 44.9

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US employers in January announced the most job cuts since 2020, according to data compiled by Challenger, Gray & Christmas, Inc. Businesses reported 102,943 cuts in the month, more than twice those announced in December and up 440% from January 2022.

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Friday's Nonfarm payrolls data was spectacular, however it hides a significant adjustment factor. +517k seasonally adjusted vs. -2,505 unadjusted, which brings us to a record seasonal adjustment factor of over 3 million, and that, dear readers, is how you turn a 2.5 million job plunge into a 517k gain.

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Macroeconomic data from the major economies continue to show severe deterioration, it seems really complicated that the market and the main authorities can continue to think about a softlanding scenario on a continuous basis over time. The softlanding rhetoric is going to become strong in the coming weeks around the strength of U.S. employment.

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Market mentality around jobs:

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1. Jobs data stronger than expected, buy stocks a soft landing is possible

2. Jobs data weaker than expected, buy stocks the Fed will pivot

3. Jobs data as expected, buy stocks we avoided a recession

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Let's not forget the following chart, unemployment at minimums and strong curve inversion are not usually good traveling buddies, at least history confirms them.

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Generally the early stages of a recession always resemble those of a soft recession, as growth and inflation decline but not yet to alarming levels, perhaps we are now at this very moment. As markets embrace this soft landing narrative, the lack of resolve Powell showed on February 1st regarding easing financial conditions could pose an extra problem, adding fuel to the fire. We are undoubtedly facing a highly complex macroeconomic and market situation of great uncertainty, so we insist, lead feet and caution.

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Softlading is is an old familiar story:

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Earnings

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All of FAANG missed on earnings, Apple reports first earnings miss in nearly 7 years.

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Amazon 

eps 3.0c vs est 17c

operating income $2.7b, est. $2.51b

net sales $149.2b, est. $145.8b

aws net sales $21.38b, est. $21.76b

operating income $2.7b, est. $2.51b

oper margin 1.8%, est. 1.85%

online stores net sales $64.53b, est. $65.03b

net sales $121.0b to $126.0b, est. $125.55b

Google

q4 eps  $1.05, estimate  $1.18 !!!

alphabet 4q rev. ex-tac $63.12b, est. $63.24b

alphabet 4q youtube ads rev. $7.96b, est. $8.27b

alphabet 4q google services rev. $67.84b, est. $68.9b

alphabet 4q google cloud rev. $7.32b, est. $7.3b

Apple 

revenue $117.15b, est. $121.14b

eps $1.88, est. $1.94

Revenues:

IPhone $65.78B vs $67.8B est

Mac $7.74B vs $9.386B est

IPad $9.48B vs $7.84B est

Services $20.77B vs $20.358B est

Wearables $13.48B vs $15.271 est

Ford Motor 

eps $0.51 est $0.62

revenue $44 billion estimate of $41.87 billions

Qualcomm

adj eps $2.37 (est $2.35)

revenue: 9.46b (est $9.61ln) 

sees q2 rev $8.7b to $9.5b (est $9.58b)

sees q2 adj eps $2.05 to $2.25 (est $2.29)

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S&P 500 results for Q4 have been pretty disappointing so far. A greater share of member companies have missed analyst EPS expectations since at least 2014 with the exception of the March 2020 pandemic distortion. Positive earnings surprises have been smaller than unusual. 

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Cryptos: spot, derivatives y on chain metrics

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On the technical side, unchanged from last week, the bullish momentum continues to give climatic signals, we look for corrections to validate that move and bring a real change in character within this core value area. The market should confirm that buyers are in control within this value area thus reversing the downtrend we have been experiencing since early 2022.

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Bitcoin 30/01/23

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Bitcoin 06/02/23

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Return to Profitability

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Taking ratio between Realized Profits and Losses, we can identify structural changes in dominance between the two. Following the collapse in price action after the Nov 2021 ATH, a regime dominated by losses ensued, driving the Realized P/L Ratio below 1, with increasing severity with each subsequent capitulation in price action.

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Nevertheless, we can observe the first sustained period of profitability since the Apr 2022 exit liquidity event, suggesting initial signs of a change in profitability regime

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Variants of the SOPR (Spent Output Profit Ratio) metric can be used to inspect the aggregate profit multiple locked in by a variety of market cohorts on any given day.

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For the Short-Term Holder cohort 🔴, it can be seen that STH-SOPR is now trading above a value of 1.0 on a sustained basis, displaying the first burst of profit taking since March 2022. This reflects the large volume of coins acquired at lower prices over recent months.

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The wider market 🔵 has also seen a return to profitable spending, recovering after a very deep and extended period of heavy losses.

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Assessing the Long-Term Holder cohort, we can observe a persistent regime of sustained losses since the LUNA collapse. Despite this cohort continuing to take losses over the last 9 months, there are initial signs of a recovery, with a potential uptrend in LTH-SOPR starting to form.

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Buying momentum in derivatives seems to be losing buying strength, with divergence from price action being observed.

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The skew, which measures the difference between the IV (implied volatility) of OTM puts and the IV of OTM calls is moving away from the buying climax zone, the market seems to be starting to demand downside protection.

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skew 30/01/23

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skew 06/02/23

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The time structure of the volatility curve has relaxed considerably after last week's difficult week, and we are back to a normal situation.

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30/01/23

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06/02/23

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Bitcoin options market gamma profile on deribit

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The important gamma call wall remains in the 23500 zone, which acts as a clear resistance and the 22500 zone as support.

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usually indicative of a very overextended market. A market in positive gamma means that the Market Maker's hedging activity when approaching the 23500 and 24500 strike is selling. We are at really high GEX levels.

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Classic Markets

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SP500 future 30/01/23

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SP500 future 06/02/23

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The market reacted in the expected demand zone and the Fed did the rest. However, a lot of caution, it seems really difficult for the market to break through the 4150-4200 cluster in the short term. The market has tried twice in the past week to break through this cluster without success.

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The first danger zone for the bulls is the 4100-4080 level. If the market breaks the gamma flip level (4080), market sentiment could turn quickly, the bears could take control in the short term, reversing much of last week's move.

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The divergence of the SPY with respect to the liquidity in the system (wresbal => FED and global) is beginning to be abysmal, this issue will be decisive in the coming weeks.

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