Summary

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The Federal Reserve raised interest rates by a quarter point on Wednesday as it attempts to fight stubbornly high inflation while addressing risks to financial stability. Investors and economists had widely anticipated the quarter-point increase despite the meltdown in the banking sector. 

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The central bank’s mission in battling inflation became much more difficult over the past few weeks as the collapse of several banks meant the Fed had to balance a potential financial crisis alongside high inflation and a tight labor market. In a statement released at the conclusion of the meeting, Fed officials acknowledged that recent financial market turmoil is weighing on inflation and the economy, though they expressed confidence in the overall system.

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In recent weeks, euro-zone investors have experienced a sense of disbelief. Could banking turmoil really stay confined to America and Switzerland? On March 24th, as European bank stocks slumped, the disbelief faded. By the end of the day Christine Lagarde, president of the European Central Bank, had commented that Europe’s banks were safe and liquid enough to withstand market scrutiny.

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How bad do things look for Deutsche Bank? Start with the immediate comparison between it and Credit Suisse. The Swiss bank was unprofitable and faced enormous legal strife, by contrast Deutsche Bank is profitable, but as the cost of funding increases, banks’ assets, such as long-term bonds, lose value. Luckily for Deutsche Bank, European regulators have demanded lenders hedge this risk. The Credit Suisse scenario, of a self-propelling bank run, seems unlikely.

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Cryptocurrency prices faltered early Friday after a Binance bug forced the top exchange to temporarily halt spot trading. Binance also suspended deposits and withdrawals as part of its standard operating procedures. All trading resumed at 10 a.m. ET after the issue was resolved.

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The US Securities and Exchange Commission doesn’t seem to stop tightening its grip on the cryptocurrency industry. This time, the US regulator went after Coinbase, sending a wells notice that alleged it of listing unregistered securities COIN stock tumbled 14% Thursday.

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The Securities and Exchange Commission also announced charges against crypto asset entrepreneur Justin Sun and three of his wholly-owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent), for the unregistered offer and sale of crypto asset securities Tronix (TRX) and BitTorrent (BTT). The SEC also charged Sun and his companies with fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership, and for orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation.

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Terra’s Do Kwon Reportedly Arrested in Montenegro. After months of being on the run, reports emerged on Thursday that Terra’s infamous Co-Founder was finally apprehended in Montenegro. Shortly after, US prosecutors accused him of operating a cryptocurrency fraud.

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All indications are that this week is expected to be calmer on the macroeconomic front and in the markets after last week's turmoil. However, tensions on the geopolitical level have once again taken a major leap. Moscow and Minsk have agreed to deploy tactical nuclear weapons on the territory of Belarus. According to Putin, the reason for such a move was the UK's statement on the supply of depleted uranium ammunition to Ukraine. According to the Russian leader "There is nothing unusual here either: first of all, the US has been doing this for decades. They have been deploying their tactical nuclear weapons on the territories of their allies, NATO countries, in Europe, in six states for a long time."

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Macro and news

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Banking Crisis:

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Federal banking regulators are reportedly weighing a potential expansion of an emergency lending program that would allow banks to access more funding to meet their liquidity needs which could buy struggling First Republic Bank more time to regain stability.

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The Federal Reserve’s emergency lending program, known as the Bank Term Funding Program (BTFP), was created earlier this March following the failure of Silicon Valley Bank and Signature Bank to give banks more access to liquidity and safeguard depositors’ funds. The BTFP makes loans available to eligible financial institutions for one year.

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According to a report by Bloomberg, authorities are mulling an expansion of the program to help beleaguered First Republic Bank, which has already received a liquidity infusion of $70 billion, including $30 billion in deposits from 11 of the nation’s largest banks plus loans from the Federal Reserve's lending facilities.

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Expanding the Fed’s emergency lending program could require authorities to allocate more funding to it. The BTFP was initially backstopped by $25 billion in funding from the Treasury Department’s Exchange Stabilization Fund. As of last week, the program had lent out about $53.7 billion to banks – a dramatic increase over the $11.9 billion loaned out from the day it opened, March 12th, through March 16th.

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Regional and mid-size banks have struggled for stability following the collapse of Silicon Valley Bank and Signature Bank, which were particularly vulnerable to the bank runs that brought about their failure due to their unusually high levels of uninsured deposits.

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In a statement released at the conclusion of the meeting, Fed officials acknowledged that recent financial market turmoil is weighing on inflation and the economy, though they expressed confidence in the overall system. “The US banking system is sound and resilient,” they wrote in their policy statement on Wednesday. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”

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The banking chaos has stoked fears not just that the central bank could overcorrect the economy into recession but that it could trigger more bank failures, and prominent economists have urged the Fed to pause rate hikes. That’s partially because rate hikes have undermined the value of Treasuries and other securities, a critical source of capital for most US banks. When Silicon Valley Bank was forced to sell those bonds quickly at a substantial loss, the bank ran into a liquidity crisis and collapsed.

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Commercial property loans are joining deposit flight and bond portfolios as the biggest perceived risk for US banks as rattled investors fret about lenders’ strength following the collapses of Silicon Valley Bank and Signature Bank. Strains in the $5.6tn market for commercial real estate loans have deepened in recent months as the Federal Reserve’s year-long series of interest rate rises leads to sharply higher borrowing costs and weakening property valuations.

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Thousands of small and medium-sized banks that make up the bulk of US lenders account for about 70% of so-called CRE loans, according to JPMorgan analysts. Most of the products are not repackaged for the asset-backed securitisation markets so remain on banks’ books. CRE loans make up 43% of small banks’ total lending, against just 13 per cent for the biggest banks.

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“The collapse of SVB is putting a magnifying glass on regional banks, and their commercial real estate loan books remain an area of major concern,” said JPMorgan securitisation analyst Chong Sin. “Credit availability to CRE borrowers was already challenged coming into this year,” he added, warning in a note to investors that a retreat from lending among smaller banks risked creating “a credit crunch in secondary and tertiary CRE markets”.

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Small US commercial banks hold 70% of the total CRE loan exposure. Record $862B was loaned to commercial real estate last year, 

a 15% increase from a year prior.

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Commercial real estate is in trouble, so the next question becomes who holds most of it on their books? 

The overwhelming answer is mid-sized banks.

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Commercial mortgage backed securities are plunging

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Crunch time for US office properties

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Asked for his views on CRE risks, Fed chair Jay Powell on Wednesday told a press conference that the central bank “was aware” of concentration in the sector but added he didn’t think the issue was comparable to the other strains banks had experienced. Offices are seen as the area of biggest risk after tenants cut back on space to reflect the popularity of working from home following pandemic lockdowns. Commercial real estate is a market that relies quite heavily on bank lending, especially actually among the small and mid sized banks. The ability to substitute and look for other sources of capital is quite constrained.

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Another worry is about fallout from Silicon Valley Bank affecting Deutsche Bank’s American portfolio. Deutsche Bank owns nearly $17bn of such assets, ranking it among the most exposed European banks. But the lender’s commercial-property portfolio, which is well diversified, carries limited debt and is equivalent to just 35% of its high-quality capital. Deutsche Bank may have a large book of derivatives, which are dangerous instruments in volatile markets, but these are traded openly and often enough to make it unlikely they are severely mispriced.

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Costs of insuring against Deutsche Bank default (CDS prices) jump in violent moves while share price plunge 

as stress in banking system keeps rising following Fed rate hike.

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The banking crisis and the crisis of confidence in the sector are far from over, and we will continue to monitor developments closely.

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Crypto News

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A number of fintech payment companies and offshore banks are trying to fill the void left by the collapse of Silvergate Bank, Silicon Valley Bank and Signature Bank in the U.S., but it will likely take time before new banking networks are established. In the meantime, crypto market participants and investors appear to have become more reliant on stablecoins to move money around. Stablecoin trading volumes spiked higher after March 8, when crypto-friendly bank Silvergate said it would voluntarily liquidate and wind down operations. It notes that tether (USDT) has captured a larger share.

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It is vital for the crypto ecosystem to replace the banking networks that have been lost so that fiat currency can be transferred efficiently and securely between market participants. The tougher U.S. regulatory stance might drive crypto market participants to banking networks in Europe and Asia.

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Crypto executives have expressed irritation over the latest White House economic report, which notably features an entire chapter dedicated to casting doubts on the merit of digital assets. The Economic Report of the President, released on March 20, marks the first time the White House has included a section on digital assets since it first began issuing the annual economic policy report in 1950. The report includes 35 pages dedicated to debunking the “Perceived Appeal of Crypto Assets,” along with a short section on the FedNow payment system and central bank digital currencies.

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The report’s main argument is that crypto assets fail to deliver on their “touted” benefits, such as improving payment systems, financial inclusion and creating mechanisms to transfer value and intellectual property, stating:

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“Instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets’ prices and many of them have no fundamental value.”

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It also argues that cryptocurrencies fail to perform the functions of sovereign money, such as the U.S. dollar, as crypto prices fluctuate too wildly to be a stable store of value, nor can they function as a unit of account or medium of exchange. Blockchain Association CEO Kristin Smith called the latest presidential report “disappointing,” saying it shows that some in the government appear “increasingly allergic” to the burgeoning crypto industry.

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The Biden administration and federal regulators appear to be using whatever means necessary to cut the cryptocurrency industry off from banking services. Critical observers have dubbed this alleged effort “Choke Point 2.0” after a similar push by the Obama administration to cut undesirable but legal industries off from the financial system.

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Cryptocurrency prices faltered early Friday after a Binance bug forced the top exchange to temporarily halt spot trading. Binance also suspended deposits and withdrawals as part of its standard operating procedures. All trading resumed at 10 a.m. ET after the issue was resolved. Binance's increasing market share in our opinion is a growing risk for the market itself.

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The US Securities and Exchange Commission doesn’t seem to stop tightening its grip on the cryptocurrency industry. This time, the US regulator went after Coinbase, sending a wells notice that alleged it of listing unregistered securities COIN stock tumbled 14% Thursday.

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The Securities and Exchange Commission also announced charges against crypto asset entrepreneur Justin Sun and three of his wholly-owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent), for the unregistered offer and sale of crypto asset securities Tronix (TRX) and BitTorrent (BTT). The SEC also charged Sun and his companies with fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership, and for orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation.

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Terra’s Do Kwon Reportedly Arrested in Montenegro. After months of being on the run, reports emerged on Thursday that Terra’s infamous Co-Founder was finally apprehended in Montenegro. Shortly after, US prosecutors accused him of operating a cryptocurrency fraud.

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Macro news:

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The World Economics SMI report showed a further acceleration in China’s business activity this month.

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China cuts US Treasury holdings to the lowest level since the global financial crisis. And the sales are accelerating. At the same time China is increasing its gold reserves.

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Inflationary pressures in the UK are a cause for real concern:

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UK CPI (Y/Y) Feb: 10.4% (exp 9.9%; prev 10.1%) 

CPI Core (Y/Y) Feb: 6.2% (exp 5.7%; prev 5.8%) 

CPI (M/M) Feb: 1.1% (exp 0.6%; prev -0.6%)

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Fed officials just don't see rate cuts this year. Markets strongly disagree!

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With the liquidity measures and financial sector assistance the Fed updated their balance sheet: now 2/3 of QT has been reversed.

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The "Fed Put" is back with assets on their balance sheet increasing $392 billion over the last 2 weeks, 

the largest 2-week spike higher since April 2020.

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What the banks are doing is taking their collateral and exchanging it for cash at the discount window to fulfill deposits. This does not create new money in the system. It is just a temporary fix for liquidity. Not QE. 

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The Fed is taking in the bonds as collateral and that is what is inflating the Fed’s balance sheet. However, these are just being held as collateral against the loan given to the Banks and therefore, they will be returned as the Banks pay off the loan. This is not the active purchase of treasuries that will inject money into the system that will be further loaned out to customers. This is not Quantitative Easing by any means. 

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The Fed is still doing QT and they still have bonds and MBS’ rolling off. Banks are being charged 4.7% to borrow which is much higher than their cost of deposits and is destroying their NIM (margins). It is a temporary bridge that most will have no choice but to pay back after they dilution capital raises or sell assets.

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Global real rates remain deep in negative territory despite rate hikes by central banks.

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Cryptos: Spot, derivatives and “on chain” metrics

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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 10 days 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 20/03/23

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Bitcoin 27/03/23

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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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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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Bitcoin 27/03/23 (low timeframe)

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Market and on chains metrics:

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Trade volume hits 4-month high as BTC rally continues

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Despite surging volumes, liquidity remains thin: 2% market depth for BTC-USD and BTC-USDT pairs hit 10-month lows in the aftermath of Silvergate’s collapse. Depth dropped even lower than levels seen in the immediate aftermath of FTX, likely due to the closure of major on-ramps for crypto markets, which included Silvergate’s SEN payment network. 

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BTC’s rally could be exacerbated by thin liquidity, which makes it easier for market orders to both push up and push down the price of an asset.

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Bitcoin is largely outperforming the broader crypto market, best encapsulated by the BTC to ETH price ratio, which hit its highest level since July 2022. Since March 12, BTC is up 31% compared with ETH’s 18% gains. The price ratio can be used as an indicator of BTC’s dominance relative to altcoin markets and has historically served as a gauge for investor sentiment.

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Today, 78% of all trades on centralized exchanges are denominated in stablecoins while only 19% of trades are denominated in fiat currencies. With increasingly limited fiat on-ramps, we can expect stablecoin market share to increase on centralized exchanges, especially on off-shore platforms like Binance which are already getting cut-off from fiat payment rails.

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80% of all stablecoin-denominated trades are using USDT.

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Bitcoin’s correlation with equities continues to fall. Bitcoin’s 30-day rolling correlation with tech equities hovered around 30% last week, retreating slightly from its lowest level since the collapse of FTX reached earlier this month. Over the past year, BTC has been moving in sync with the Nasdaq with an average correlation between the two assets of 60%. However, the trend appears to be shifting with BTC outperforming equities in both absolute and risk-adjusted terms.

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Classic markets

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The market has been erratic and volatile over the last two weeks, as a result of the tensions and rumors about the financial sector and the Fed meeting last Wednesday. Certainly, we are very cautious about projecting future scenarios in both the short and long term.

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20/03/23 SP500 futures big picture

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27/03/23 SP500 futures big picture

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The market after the bullish imbalance failure has shown severe weakness on the buy side. Demand has not been able to consolidate the VWAP anchored from highs, leaving minor structures that have systematically failed to develop upwards. However the market is clearly fighting back, sellers are not able to consistently break through the VWAP anchored from last year's October lows. At this point, we consider it appropriate to simplify the analysis to a clear conquest of either the upper or lower VWAP.

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The gamma profile of the market shows a very fearful market with high notional Gamma in Puts ranging from 3800 to 3950 strikes. As we already know, this bearish over positioning can be fuel for another short squeeze.

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If macro and market events remain quiet this week, these puts will be burned and the short squeeze will run its course.

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