Summary

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The big week of the beginning of the year has arrived, ECB, BOE and FED together will announce a large battery of relevant macroeconomic data and earnings releases in the USA. It will surely be one of the most important weeks of the year and will undoubtedly mark the future of the markets in the coming weeks. As we already know, the market, on all fronts, arrives at this important date in a state of excessive euphoria. Powell, as has been the case on previous occasions, will be the one to decide whether this euphoria is justified or whether it is just the umpteenth attempt by the market to desperately get ahead of events.

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As we said last week, the current market mentality and its euphoria can be summarized in these 3 points:

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Better than expected economic data, we can avoid a recession.

Economic data worse than expected, the Fed will lower rates and the pivot will arrive.

Economic data expected, soft landing is possible.

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The market is massively discounting a 25 basis point rate hike this week and that the Fed will cut rates this year, however less than a month ago the Fed was very clear, there will be no rate cuts in 2023 as long as employment remains strong and there are no clear signs of economic deterioration. Will the Fed use this week's meeting to regain its credibility? Has the market correctly anticipated a perfect disinflation and softlanding? No doubt we will find out in this important week.

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Macro and news

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Relevant data for this week:

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Central banks week (FED, BOE and ECB). Intense earnings releases in the US

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Monday: CPI Spain, PPI Italy

Tuesday: Unemployment, inflation, retail sales Germany, GDP Eurozone, Consumer confidence USA, Employment Cost - Wages QoQ USA

Wednesday: Core Inflation Eurozone, ISM manufacturing PMI USA, FED

Thursday: BOE, ECB

Friday: Non Farm Payrolls and Unemployment USA, ISM non-manufacturing PMI USA

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In this newsletter we will take an in-depth look at the state of the markets ahead of this important meeting with the central banks. January 2023 will go down in history as one of the best starts of the year for the vast majority of risk assets. In the case of the Nasdaq, it is the best start in the last 20 years, the big question: is it sustainable and is it the start of a new bull market or is it simply irrational panic buying acting emotionally after a terribly tough 2022?

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So far this year, the rally has been led by the more speculative segments of the market, with unprofitable techs (purple), high sellers (white) and retail traders' favorites (orange) outperforming the S&P 500 (blue). All indications are that this exuberance at the start of 2023 has kicked off with a low quality rally

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It is curious to note how the weakest 2022 names are the ones that have experienced the biggest gains in this start of the year and the leading 2022 names are now the weakest, here are some examples:

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$LCID +110% $W +102% $OPEN +90% $AFRM +82% $CVNA +75% $TSLA +70%

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ENPH -23%. Health and defensive names such as $UNH $LLY $LMT $NOC are all down.

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As we have already indicated in the two previous newsletters, the retail investor is massively "all in" in this rally. Significant inflows have also been observed in equity funds.

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Credit Agricole's risk index shows that investors are the most optimistic they have been in almost 18 months.

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CTAs (commodity trading advisor) have made a remarkable comeback in the market. CTAs are individuals or firms that provide personalized advice in connection with the purchase and sale of futures contracts, options on futures and retail off-exchange currency contracts or swaps. A CTA fund is a hedge fund that uses a managed futures strategy. It invests in futures contracts and uses a variety of trading strategies that revolve primarily around systematic trading and trend following, leaving out macroeconomic information.

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However, it is important to be aware that retail investors and CTAs are generally not on the good side of the market. The following chart shows how this "dump money" climax together with "smart money" on the sidelines often provide clear signals of an unhealthy market that expects imminent corrections.

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Surprising to look at a chart of the SPX vs Insider sells. The sell-off during this rally is unparalleled. According to this ratio, below 12, bullish, above 20, bearish. Currently the ratio is at 38.

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Insiders include: directors, the CEO, CFO, other "C" level employees and anyone who has inside information about the stock because of their relationship with the company and its top management. Anyone who owns more than 10% of a company's total outstanding shares is also an insider. These insiders are in possession of information that has not been made public but can significantly change the share price.

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The cost of a two month 5% SPX put (put out of the money) is trading at surreal levels, it seems that the market has no fear and that hedging is a thing of the past. The right tail risk is higher than ever, the market does not seem to be hedged.

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The IV365 (365-day implied vol) of SPY options is trading at levels not seen since the 2021 bull market.

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Certainly after all these data and metrics, it is inevitable to think that the market seems to be very overextended and complacent towards the Fed, ignoring in a certain way the macroeconomic and political risk in an environment of uncertainty not seen for decades. The beginning of a bull market led by retail flow and low quality assets or a rally at the beginning of the year to nowhere? One way or the other, the market must let go of this early-year anxiety and fear of missing out. 

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Let's all ask ourselves what makes a company like Tesla go up 80% in just one month when macro, political and monetary conditions have not seen a noticeable improvement since last month. Let's even go one step further, Microsoft, with an intraday move of 10% (after the release of results) for a company with a market capitalization of $1.7 trillion. In 2012, Microsoft's market capitalization was about $200 billion. So last week's move in one session was almost the entire market capitalization of MSFT just a decade ago. Simply stunning.

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On the macroeconomic front, US employment continues to remain strong, although as this chart indicates, history seems to be repeating itself, with unemployment at lows and a sharp inversion of the curve

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Last week's US retail sales data was one of the worst two-month declines since the GFC and the Covid confinements.

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U.S. GDP is 67% consumer driven. This slowdown in core retail spending is worrisome should it continue.

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Last week we knew the US GDP data for the fourth quarter of 2022, +2.9%, however the increase in inventories has a lot to say in this data. Many indicators of manufacturing and industrial activity continue to show increasing weakness.

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As we already know, we are immersed in the  earnings season of the last quarter of 2022. Without being catastrophic, they are not spectacular and, as usual, below analysts' expectations. This week we will be able to draw good conclusions, as most of the companies have presented their results.

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Morgan Stanley's Michael Wilson warns of a major impact on eps that could affect company valuations.

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"Our work shows further erosion in earnings, with the gap between our model and forward estimates wider than ever. The last two times our model was well below consensus, the S&P 500 fell by 34% and 49%.

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We have seen over the past two weeks how inflation in the US seems to be holding up, with some components experiencing declines, however this trend is not seen in services inflation. This component is 60% of US GDP and weights 75% in the CPI calculation.

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Inflation has several open fronts: the re-opening in China, the lack of distillate inventories on a global scale, especially in the United States, and the fiscal policy of most Western countries. The market seems to be discounting a perfect disinflation process led by central banks, however, there are certain components that are uncontrollable for central banks' monetary policies. Today, inflation data were published in Spain, with upward surprises

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Surprisingly, financial conditions are looser than when Fed fund rates were still effectively zero last March, and looser than the average of the last decade. Caution, Mr. Powell is coming and he will not like it.

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We are witnessing the biggest "Fight the FED" movement in history. Despite the Fed's multiple statements affirming higher rates for longer, the markets are betting on the opposite. Current expectations are that the Fed will pivot and the inflation peak will be reached. What will happen if CPI rises again as has been the case in Spain?

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European core inflation will probably remain above 5%, ECB terminal rate expected by the market 3.5% !!! and European risk assets: pricing in a soft landing, ideal and disinflationary. Beware of excessive complacency and market excesses led by low quality assets.

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Last but not least, let's talk about liquidity in the system. It is of special attention to monitor the correlation of risk assets and this important liquidity variable within a process known as Quantitative Tightening (QT) => reduction of the central banks' balance sheet.

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Liquidity(wresbal) vs Bitcoin

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Liquidity (wresbal) vs SPY

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From Turing Capital we believe that much of this market rally has been fueled by a false sense of liquidity inflow into the system, which comes mainly from special adjustments made by the US Treasury Secretary before the arrival of the debt ceiling in the US. It is to be expected that this debt ceiling will again be raised, increasing as usual its limit but without forgetting that the Quantitative Tightening of central banks continues and therefore a constant reduction of the liquidity present in the system.

US Govt pays bills without issuance (no liquidity drain) ,Q1-2023 the TGA will need to be rebuilt & Govt Spending funded via issuance => liquidity hole incoming => equity and risk unfriendly.

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As can be seen in this chart, the liquidity vs SPY correlation is a reality and a variable to be taken into account. With this recent reduction in liquidity, the models estimate 3700 as fair value for the SP500. Everything seems to indicate that risk assets are highly overvalued with respect to the liquidity present in the system.

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Cryptos: spot, derivatives and on Chain Metrics

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Latent risks on important entities of the ecosystem are still on the table, although this week there were no major updates on what was widely exposed in last week's newsletter.

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At Turing Capital, we will closely follow the evolution of all these events due to their potential high impact. An increasing regulatory pressure should not be interpreted as negative, we believe that a regulatory clarification is necessary to allow massive institutional entry and to definitively purge all the "bad actors" left in the ecosystem.

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On the technical side, the upward momentum continues to give climatic signals, we are looking for corrections that validate this movement and represent a real change of 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 23/01/23

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Bitcoin 30/01/23

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As we mentioned last week, this rally does not seem to be led by spot buying from the beginning, only in the final part of the rally we do see activity from spot.

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Derivatives buying momentum seems to be losing steam

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In the last few days we have observed increasing reserves on the exchanges, which could be a potential selling pressure.

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Much of this rally has been fueled by short liquidations and unusually high activity on Binance and specifically on all BUSD instruments.

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There has been a significant drop in buying pressure from the "whales" and a clear resistance in the order book in the $24,000 area.

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23/01/23

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30/01/23

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In terms of market sentiment, as expected:

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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 still in the buying climax zone, surpassing previous floor levels, which have led to a change in trend.

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skew 23/01/23

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skew 30/01/23

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The time structure of the volatility curve shows even more stress than last week, these charts serve to internalize that the crypto market does not stand apart from the rest of the risk assets and high impact events such as a FED meeting

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23/01/23

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30/01/23

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Important gamma call wall in the $23250 area, which acts as a clear resistance and reduction of the notional gamma indicating possible closing of positions

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Like the rest of the risk assets, the crypto ecosystem reaches the FED meeting in full climax. We believe it is necessary for the market to unload the "fomo" and excess to validate if this vigorous bull run is the beginning of a new bull market. Key week for the entire spectrum of financial assets and for the crypto ecosystem.

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Classic markets

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 SP500 future 24/01/23

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SP500 future 30/01/23

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The market has consolidated above the 3960 Vpoc, albeit after two attempts. Looking ahead to Wednesday, Fed Day, it certainly seems difficult to advance beyond 4100, as the market's gamma profile shows. The positive gamma regime returns, with the market maker buying the floors and selling the tops.. The 4050-4100 area certainly looks tough to break through.

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The Gamma notional reaches levels seen in previous market caps experienced during the past 2022

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Pay close attention to the rejection of the 4075-4100 zone and the break of the zero gamma level. It could quickly change market conditions.

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