Summary

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What a time to be alive:

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• Tech stocks up like we avoided a recession.
• Oil prices are down like we are in a recession.
• Regional banks went down like the banking system collapsed.
• Big banks up like the banking system is fine.
• Bonds up like the system is collapsing.
• The U.S. government saved Silicon Valley Bank with a backstop on all deposits above the FDIC insurance limit.
• The Swiss Central Bank saved Credit Suisse with a $54 billion loan.
• Large U.S. banks are saving First Republic Bank with $20 billion in deposits.
• The Fed is: hiking, shrinking its balance sheet via QT and injecting up to $2 Trillion in liquidity via BTFP which is "stealth QE".
• The USDC lost its parity over the past weekend but quickly recovered its parity on Monday.
• BTC up 34% in the last 7 days.

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Markets around the world were rattled last week as concerns mounted following the second and third largest bank failures in U.S. history. Fears are growing among investors that turmoil in the banking sector could drag the economy into a recession. On Thursday, markets rose in relief after two banks in investors' sights bolstered their cash reserves. But on Friday, some of the hope faded and they fell again. In Switzerland, Credit Suisse shares fell 8%. On Wall Street, First Republic Bank shares plunged nearly 33%, bringing its weekly plunge to 71.8%. Both banks face different problems, but the overriding fear is that the banking system could crack under the weight of the fastest series of interest rate hikes in decades.

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After years of historically favorable conditions, banks are suffering a jolt after the Federal Reserve and other central banks raised interest rates at a breakneck pace. The goal is to control high global inflation. Indeed, higher rates may help control inflation by slowing the economy, but they increase the risk of recession down the road. They also affect the prices of stocks, bonds and other investments. This last factor was one of the problems affecting Silicon Valley Bank, which regulators seized a week ago.

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Last weekend, we experienced something no one was expecting: USDC lost its peg, reaching a low of $0.8776 on Saturday. The issuer of USDC declared that the $3.3bn backing its $40bn stablecoin were stuck at Silicon Valley Bank, causing justified panic. Circle was quick to announce over the weekend that they would continue redemptions at 1:1 on Monday, and would cover the lost reserves through their own stack of cash should SVB’s deposit be lost. Monday could not come soon enough, and to no one’s surprise, the FDIC completed the resolution of SIVB, fully protecting all depositors. USDC returned to peg as a result.

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And then came BTC's time to shine, when the banking contagion started in the U.S. It can be openly debated whether BTC's outperformance is the direct result or not. People have started to lose confidence in banks, and BTC is seen as digital gold, and a hedge against our sloppy monetary policy. Bitcoin Maxis have been waiting for this moment for some time. 

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This week promises to be another week of high intensity. We have the Fed rate decision on Wednesday and a banking sector soap opera that is far from over, although the market, unsurprisingly, has treated it as a "transitory" banking crisis. Authorities' intervention and money are back, celestial music for the markets.

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Macro y news

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Banking Crisis:

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As was revealed late on Sunday just around the time futures opened for trading, the Fed's new Bank Term Funding Program (BTFP) - a facility designed to avoid banks that are facing deposit outflows from being forced to sell their bond holdings at a loss, and which as JPMorgan concluded is a stealth form of QE which can be as big as $2 trillion (and even bigger if required) - will serve to backstop small bank impaired assets for the foreseeable future.

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However, the banking tensions in the U.S. did not fully abate, a new name appeared, First Republic Bank. The solution by the authorities and the banking lobby was the creation of a "deposit consortium" plan presented as part of a coordinated bailout, which envisions big banks like JPM, Citi and Bank of America injecting tens of billions of (newly received) deposits into the troubled bank and which are meant to replenishing its own lost deposits (which ended up fleeing to the same big banks which are now recycling them in the form of a bailout) has created a blueprint of how to backstop the liability side of small banks. 

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That last word is critical, because between the asset and liability backstop, the liquidity phase of the banking crisis is now over. But what about the solvency phase? 

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The potential problem in regional banks lies not in the net unrealized losses in their held-to-maturity portfolios (or in the bank run triggered by the sudden collapse of SIVB) but in the real solvency risk they face from their exposure to commercial real estate in general, and office buildings in particular. 

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Investors are starting to look at who among the US banks has the most exposure to crashing commercial real estate (and offices in particular). For now, investors are taking a shotgun approach, dumping the regional and small banks en masse, with the KRE ETF plunging to the lowest level in two years, the broader BKW bank index suffering its worst day since June 2020.

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The problem, and this is where the discussion of the coming 'credit event' kicks in, is that while large banks still are very well capitalized, small banks (the core constituents of the KRE index) are in big trouble because as the following chart from TS Lombard shows, their reserves (as a % of total assets) have collapsed as a source of funding for loans and are back to levels when the Fed needed to do QE to reload their reserves

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Banks, and especially small banks, are now sitting with reserves pretty much at their lowest comfort level, There is not much of a cash-to-asset cushion left for small banks as a whole, so a funding crisis can easily get rolling if large depositors decide too many loans in commercial real estate and other areas are about to go bad. The Fed will make funds available to keep these banks afloat, but that alone will get some push-back from Congress because of the increased concentration of bank deposits in an increasingly smaller number of banks.

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In conclusion, even without the office real estate crisis, small banks were already headed for an unsettling mix of reduced funding and more underperforming loans. Throw in a cascade of bad debt in exposure to office real estate and you could see a repeat of the 2009 banking crisis for the small banks... if only in the beginning, because once the small banks go down, the big banks won't be far behind. We will follow this issue very closely, the market wants to dream of an intraday banking crisis or a transitory banking crisis, but the truth is that there is again a lot under the carpet and these issues are not one-day stories.

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The S&P Composite 1500 Office REITs Index drops as much as 4.9%

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Office giants such as Vornado Realty, Hudson Pacific and SL Green are falling as much as 7% or more; other decliners include Piedmont Office Realty Trust (-4.5%), Cousins Properties Inc. (-5.9%) and Kilroy Realty Corp. (-6%).

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It was clear First Republic was struggling with short-term fears. Between March 10 and Wednesday, the bank borrowed $109 billion from the Federal Reserve’s so-called “discount window,” a mechanism that allows banks to get 90-day loans using high-quality bonds as collateral. The window is often used in times of crisis. First Republic wasn’t alone. As of Friday, the Fed had loaned $160 billion through the window, more than during the 2008 financial crisis

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All this has caused the FED's balance sheet to jump from $8.39 as of march 8 to $8.69 trillion at the end of this week, highest since november, completely eliminating the effect of ongoing quantitative tightening.

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However, from Turing Capital we believe that the market has misinterpreted this move as more Quantitative easing. QE takes bonds away from the system for an indefinite amount of time: it removes collateral and duration risk from the private sector, the Bank Term Funding Program (BTFP) lends money against the collateral (bonds) for a fixed period of time, QE sucks away collateral & duration and BTFP strengthens collateral.

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Tensions in the banking sector have spread to Europe, this week it was Credit Suisse's turn. Last Tuesday's trading day turned out to be nothing more than a respite between Monday's plunge triggered by Silicon Valley Bank and Wednesday's plunge triggered by Credit Suisse. A week that is showing the deep interconnectedness of the banking systems.

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Credit Suisse suffered a 24% fall on the Zurich stock exchange last Wednesday, after its main shareholder since 2022, the Saudi National Bank, assured that it would no longer invest in the Swiss entity to clean up its battered accounts.

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To calm the market, the Swiss National Bank announced hours after the stock market crash a loan of 50 billion francs (50.5 billion euros, 54,000 dollars) to Credit Suisse, which allowed the entity to recover 19% on the Zurich Stock Exchange on Thursday, but on Friday the doubts of the shareholders returned and the shares fell again by 8%.

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SVB's fall has created the breeding ground for precipitating further pressure on Credit Suisse. But its problems do not come from these days, they have not even been generated this year. Practically since 2019, the Swiss bank has lived under a continuous cascade of decisions and mistakes that have weighed down its reputation. These have worsened especially in the last two years, showing certain failures in the bank's control systems and the departure of thousands of customers, which have exposed them to losses that they had not had since the last crisis of 2008.

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Two years ago, a fund manager, Archegos Capital, collapsed in the US and dragged Credit Suisse down with it, which had to acknowledge losses of 4 billion euros and fired two of the bank's risk managers. What could be a failure that affected more entities, became more evident in the case of the Swiss bank because just a few weeks earlier another fund had collapsed, in this case the Australian Greensill, which also caused losses for its clients.

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Credit Suisse's CDS (credit default swap) was exploding at surreal levels, indicating more than a 60% chance of bankruptcy.

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This Sunday a deal has been closed, where UBS buys Credit Suisse, its main Swiss rival. The operation has been negotiated against the clock during the weekend with the two entities, the Swiss government, the National Bank and the regulatory and competition entities in order to avoid a new collapse in the first stock market session on Monday. Finally, the figure for the merger is 3,000 million Swiss francs (some 3,037 million euros), according to data from the acquired bank itself. 

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In addition, the Government guarantees 100 billion Swiss francs for the bank's liquidity and the Swiss Confederation will grant a guarantee equivalent to more than 9 billion euros to reduce the risks incurred by UBS bank in absorbing Credit Suisse. As explained by Finance Minister Karin Keller-Sutter, this guarantee works "as if it were insurance" and will cover eventual losses "of a very specific portfolio" only if these losses exceed a threshold that the minister did not specify.

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The bank is rescued but the earthquake appears in the secondary fixed-income markets associated with Credit Suisse.

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At the same time, there has been a globally coordinated action among the major Central Banks on Sunday:

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• US FED says FED and Central Banks of England, Canada, Japan, ECB and Switzerland announce coordinated action to enhance the provision of liquidity via the standing U.S.. dollar liquidity swap lines.
• ECB and other major Central Banks to offer 7-day US dollar operations on a daily basis. new frequency effective as of 20 march 2023 to remain in place at least through the end of april to support smooth functioning of US dollar funding markets.

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Banking Crisis over crypto

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The USDC stablecoin regained its peg to the U.S. dollar after falling below the $1 value it was supposed to hold as federal banking and finance regulators said last Sunday that all depositors in Silicon Valley Bank will be made whole and have access to their funds on Monday.

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Circle later acknowledged that about $3.3 billion (or about 8% of the overall funds backing USDC) were held in Silicon Valley Bank. The Federal Deposit Insurance Corporation said Friday that insured SVB depositors (including CoinDesk) would regain access to their funds by Monday, but said uninsured depositors would only get an advance sometime this upcoming week. As the FDIC sells off SVB’s assets, these uninsured depositors would receive a dividend. More than 90% of the funds held in SVB were uninsured.

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New York’s Department of Financial Services took possession of Signature on Sunday after it experienced a run on deposits following the collapse of Silicon Valley Bank (SVB). Barney Frank,who served on Signature’s board, said that regulators seized Signature Bank last weekend because they wanted to send a message to other banks not to do business with the crypto industry.  

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Crypto customers make up about 20% of Signature’s deposits, which is more than at other banks but less than at the failed Silvergate Bank, but Signature otherwise had a diverse deposit base that included many top New York law firms and real-estate developers. On Friday before its weekend closure, Signature lost $17.8 billion in deposits. But the bank had $4.54 billion in cash and $26.4 billion in “marketable liquid securities.” It also reported $25.3 billion in borrowing capacity. All this should have been enough to stay in business. The state’s Department of Financial Services said it took possession of the bank because it “failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership,” and “its ability to do business in a safe and sound manner on Monday.”

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On Jan. 3, the Federal Reserve Board of Governors, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a statement that they “have significant safety and soundness concerns” about bank crypto exposure and would “closely monitor crypto-asset-related exposures.”

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A few weeks later, the National Economic Council issued a policy statement discouraging banks from transacting with crypto clients. On Feb. 23, the Fed, FDIC and OCC issued another statement warning banks about potential liquidity risks from stablecoins, which are backed by hard currency reserves and are supposed to hold a fixed peg to the U.S. dollar.

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Following the government’s Signature seizure, crypto companies say they are struggling to get other banks to take their deposits. While the FDIC is ostensibly trying to sell Signature to another bank, Reuters reports that two sources said any buyer must agree to give up all the crypto business at the bank. 

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We need to be aware that with the collapse of the three banks will leave crypto companies basically without banking options.Silvergate, Silicon Valley and Signature all shuttered. Depositors will be made whole, but there’s basically nobody left to bank crypto companies in the US.

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The Silvergate Exchange Network (SEN) and Signature Bank’s “Signet” were real-time payment platforms that allowed commercial crypto clients to make real-time payments in dollars at any time. Their loss could mean that  crypto liquidity could be somewhat impaired. Some voices speak that there are many banks that can take advantage of this opportunity without taking the same risks as these three. The question is whether banking regulators will try to stand in the way.

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Macro news:

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Last week we got the US and Eurozone February inflation data, undoubtedly the most sensitive data for the market. Inflation is not abating, the Fed and BCE are certainly in an unparalleled dilemma.

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CPI 0.4% M/M, Exp. 0.4%, Last 0.5%

CPI Core 0.5% M/M, Exp. 0.4%, Last 0.4%

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CPI 6.0% Y/Y, Exp. 6.0%, Last 6.4%

CPI Core 5.5% Y/Y, Exp. 5.5%, Last 5.6%

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The ECB was not shaken by the news of the Swiss Central Bank's support for Credit Suisse and proceeded to maintain its monetary policy by raising official interest rates.

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Eurozone ECB interest rate decision (mar) actual: 3.50% vs 3.00% previous; est 3.50%

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Eurozone ECB marginal lending facility actual: 3.75% vs 3.25% previous; est 3.75%

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Eurozone deposit facility rate (mar) actual: 3.00% vs 2.50% previous; est 3.00%

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Markets under stress

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Lenin used to say that there are decades in which nothing happens and weeks in which decades pass. The turmoil in the markets over the past two weeks has been unparalleled.

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Only four times in the last 40 years have we seen movements in the bond market like we did last week. One of the largest drops in 2 year yields on record, where else have we seen similar large drops?

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1.  Lehman collapse GFC 2008 

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2. September 11 terror attack 

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3. 1987 Flash Crash

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The market listened to the words intervention and liquidity and rushed into risk assets. Retail investors are buying the dip in financial stocks in unprecedented amounts, $1.43 Billion on Wednesday which is double from previous week.

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Hedge Funds added exposure back after selling into the last pullback. They confirmed their reputation as “trend followers” in this market and continue to act emotionally. One main takeaway from last week’s sentiment readings is the lack of conviction across the board. NO ONE believes in any move. Traders are choosing to stay nimble and take advantage of opportunities intraday rather than making longer-dated bets. It feels like hot potato out here; no one wants to be the last one holding the bag

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The question for the Fed this week isn't whether to hike 25 bps or 50 bps this week. It's when do they start cutting rates, at least according to fed funds futures, which have priced out rate cuts and priced in rate cuts as soon as June.

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Analysts are split when it comes to predicting next week’s Fed decision. Barclays, GS & NatWest strategists see the Fed pausing rate hikes, with Nomura seeing a rate cut & halt to QT next week. BlackRock still sees the Fed hiking rates, as does Citi, Morgan Stanley & JPM. Looking at the Fed's forward interest rate curve, it is undeniable to say that the pivot has arrived, but not in the way the market discounted. If two weeks ago we were living in an environment of uncertainty, we are now at the next level.

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Cryptos: spot, derivatives and “on chain” metrics

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Since March 10th with the VWAPS test, the market has experienced rises not seen for quite some time, accumulating a 40% rise in little more than a week. It is at this time where it is essential to take into account the higher context and the approach of scenarios away from the short-term charts and the current fomo that even speaks of an imminent all time high.

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Bitcoin 13/03/23

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Following last week's 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.

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Bitcoin 20/03/23

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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. Let's look at where we are in a higher time frame to calm down and apply logic and objectivity.

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The market is trying to imbalance the large upper value area. Undoubtedly we are at a key moment, break and test for bearish continuations or break and test and failure of bearish imbalance and rotation to accumulation. To start thinking about a real change of trend is very hasty and even more so without having clearly conquered this area of confluence of VWAPS.

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It is undoubtedly a key moment for Bitcoin, but not so much the price movement since the beginning of the year as the possibility that the upper structure fails in bearish development. The following two scenarios remain on the table, for Turing capital, the conquest of the VWAPS are key.

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In the short term we are starting to see market weather signals in the options market, both from the SKEW  (skew measures the difference between the IV <implied volatility> of OTM puts and the IV of OTM calls) and the GEX (Gamma Exposure is a dollar-denominated measure of the options market makers' hedging obligations. When the GEX is high, the options market is implying that volatility will be low, market makers hedge against the price by severely limiting further movement).

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The SKEW is in a total buying climax market zone, these levels have been short-term peak areas.

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The GEX is very high, coinciding in previous market top zones.

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At the same time we should also be aware that we are in the third standard deviation of the VWAP after a completely vertical move that has barely moved the VWAP upwards. As the saying goes, hurry was never a good traveling partner. The market should be well auctioned and should consolidate levels in an orderly and consistent manner.

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Bitcoin 13/03/23 (low timeframe)

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At lower timeframes we asked the market for a break and test above the VPOC of $23000 and it gave it to us successfully. It is now time for buyers to imbalance this entire value area. We are looking for retracements above the previous highs and above the top of the channeled dynamic proposed in the chart. As we always say, caution, the imbalance of a value area is always the most delicate moment.

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Bitcoin 20/03/23 (low timeframe)

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If the market does not accept the bullish imbalance of all this slanting slope value area, the turn can be abrupt, as always the VPOC of $23000 will be the key, as long as the market stays above this level, control is buyer.

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The time structure of volatility again reflects short-term stress, with the FED coming next Wednesday.

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06/03//23

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20/03/23

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Delving into the on chain and market activity metrics, we do not like the fact that the movement is being led by the futures market, we strongly believe that a healthy and organic movement has to be accompanied by great spot activity.

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All this strong upward movement on the price of Bitcoin is supported by very large volumes on derivatives exchanges.

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At the same time it is worth noting the impressive bitcoin inflow to the spot exchanges, we find almost 60,000 btc that have entered in the last week, this is not exactly what we want to see in a bull market, where it is desirable that bitcoins are kept in cold wallets. To see that number of inflows you have to go back to the moments before the FTX crash.

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Meanwhile, the total amount of stablecoins in circulation (including USDT, USDC, BUSD, DAI) keeps falling while the price is rising, a truly anomalous situation. Is there a shift from stablecoins to Bitcoin and Ethereum, boosting their prices? or is this vigorous upward movement led by leverage in the futures market? The answer is difficult to resolve at the moment.

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Short liquidations in the futures market are notable, but not extreme, indicating that the market is already long. Open interest has risen sharply along with the rally, indicating strong leverage in the futures market, so caution is required.

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Classic markets

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The market has been erratic and volatile this week, the result of an intense week of tensions and rumors about the financial sector. However, the quarterly expiration of options (OPEX) has had its usual influence, anchoring the price at the highest gamma level, 3900 points.

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Once freed from these flows coming from the options market makers' hedging towards expiration, the weakness window opens, where the market is freer to move freely. Macro and economic events will predominate over flows.

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13/03/23

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20/03/23

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13/03/23 SP500 futures big picture

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20/03/23 SP500 futures big picture

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It will be interesting this week to see if the market will be able to regain control of the intermediate structure or if, on the contrary, it is nothing more than a complex break and test and extended for several sessions, targeting the VPOC of the October 2022 lows. It is frankly difficult to see, given the price dynamics and recent events, whether this is a new bull market, as has been so widely acclaimed since the beginning of the year.

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Volatility over the next few sessions is guaranteed following OPEX, the Fed meeting this Wednesday and with MOVE (measures Treasury rate volatility through option pricing) and VIX (real-time market index representing market volatility expectations for the next 30 days for the SP500) in full blast.

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Liquidity is very low. A lower liquidity environment tends to be one where volatility is elevated.

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This lower timeframe structure will be the key for next week. If sellers are able to break out of their control zone, the market will experience sharp declines without any support from option market flows.

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