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Stocks pushed higher last week with the SP500 and Nasdaq indexes recording their highest levels in more than a year, after Federal Reserve Chair Jerome Powell supported the market consensus view that key interest rates have peaked. Powell said "tight monetary policy" was slowing economic activity, which traders chose to interpret as a signal that the Fed likely is done with rate hikes, even if the central bank hasn't actually said so.
Prices of U.S. government bonds surged, sending yields lower, as investors appeared to focus on the prospect of potential interest-rate cuts in coming months rather than any further rate hikes. The yield of the 10-year U.S. Treasury bond fell on Friday to around 4.22% (the lowest in more than three months and down sharply from a recent peak of 4.99% on October 18). November was the strongest month so far this year for the major U.S. stock indexes, and the big gains offset much of the overall decline from the previous three months’ negative results. The three major stock market indexes ended the week higher for the fifth straight week, with the Dow rallying 2.4%, the SP500 rising 0.7% and the Nasdaq Composite climbing 0.4%.
U.S. crude oil continues its impressive downward trend and fell more than 2% Thursday, even after OPEC+ announced some member nations agreed to voluntary cuts approaching 2M bbl/day starting in January. Market participants were disappointed by the smaller-than-expected numbers and lack of details on quota enforcement. At least 1.3M bbl/day of the cuts were also an extension of the voluntary reductions that Saudi Arabia and Russia already had in place, sparking skepticism over whether they will actually be delivered.
The government’s initial estimate of third-quarter GDP growth beat expectations, and an updated figure released on Wednesday showed even stronger growth. The adjustment puts the annual growth rate at 5.2% versus the 4.9% initial estimate made in October. While that marks a sharp acceleration from the 2.1% growth in this year’s second quarter, a cooldown is expected in the current quarter, in part due to elevated interest rates.
The U.S. Federal Reserve’s preferred gauge for tracking inflation showed that consumer prices continued to rise at a slower pace in October. The Personal Consumption Expenditures Price Index rose at a 3.0% annual rate, down from 3.4% in September. Excluding volatile food and energy prices, core inflation climbed 3.5% in October versus 3.7% in September. In turn, the Government reported on Thursday that spending by U.S. consumers rose in October at an annual rate of 0.2%, the slowest pace in five months. The latest monthly result also marks a sharp slowdown from September’s 0.7% figure.
Charlie Munger, Warren Buffett's right-hand man, peacefully died this week at a hospital in California at the age of 99. “Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation,” Buffett said in a statement. Munger was vice chairman of Berkshire and one of its biggest shareholders, with an estimated net worth of about $2.5bn. Together with Buffett, the pair transformed Berkshire from a textile manufacturer into a giant conglomerate in a partnership that lasted nearly six decades.
The economics calendar next week will be highlighted by the U.S. jobs report on Friday. The nonfarm payrolls report could be high stakes for interest rate watchers as it arrives just five days before the Federal Reserve's December 13 meeting. Economists forecast payrolls growth will rise to 200K in November from 150K job additions in October, and the unemployment rate to stay steady at 3.9%. In addition, the JOLTS and ADP reports will be released earlier in the week.
Macro y news
This Week's Major U.S. Economic Reports:
We have two weeks ahead of us loaded with highly sensitive macro data:
▪️ Non-farm payrolls 8/12
▪️ CPI 12/12
▪️ PPI 13/12
▪️ FOMC rate decision 13/12
▪️ Quad witching for options 15/12
▪️ Final Q3 GDP 21/12
▪️ PCE 22/12
U.S. Macro data
Fed hawk Board Member Christopher Waller, surprised investors on Tuesday by telling a Washington conference that “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.” While cautioning that work remained, he also acknowledged that “we have seen the most rapid decline in inflation on record.”
According to Reuters, Waller also told the audience that if inflation continued to moderate over the next three to five months, “we could start lowering the policy rate just because inflation is lower," stressing that "it has nothing to do with trying to save the economy. It is consistent with every policy rule. There is no reason to say we will keep it really high."
A slight change in tone from Fed Chair Jerome Powell may have helped both stocks and bonds end the week on a strong note. In a speech on Friday, Powell acknowledged that interest rates were now “well into restrictive territory.” He also warned that the Fed would raise rates again, however, if dictated by the data. Powell’s comments helped push the yield on the benchmark 10-year Treasury note down to nearly a three-month low of 4.21% in intraday trading on Friday.
Fed Funds Futures pricing in 5 cuts next year.
More Central Banks are now cutting than hiking, the first time this has been the case since 2021.
On Thursday, the Commerce Department reported that the Federal Reserve’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index, rose 0.2% in October, a slowdown from September. This brought its year-over-year increase down to 3.5% (still well above the Fed’s 2% target, but the lowest level since April 2021). Over the past six months, core PCE was running even slower, at an annualized rate of 2.5%.
Personal spending rose 0.2% in September, its smallest increase in six months, while personal incomes rose at the same pace. Housing permits came in above expectations, but actual starts surprised on the downside. Weekly jobless claims ticked down, but continuing claims jumped much more than expected to 1.93 million, their highest level since November 2021.
The government’s initial estimate of third-quarter GDP growth beat expectations, and an updated figure released on Wednesday showed even stronger growth. The adjustment puts the annual growth rate at 5.2% versus the 4.9% initial estimate made in October. While that marks a sharp acceleration from the 2.1% growth in this year’s second quarter, a cooldown is expected in the current quarter, in part due to elevated interest rates.
BONUS: U.S. Labor Market dilema
With the October PCE report behind us, we have two important data points to consider before the last Fed meeting for the year and the final set of Fed projections. One of them is the unemployment report set to be released next Friday, Dec 08 and the other is the CPI report for November set to be released on Tuesday, Dec 12, the day before the FOMC rate decision.
With the recent level of revisions done to the Nonfarm Payroll reports, the data suggests job creation has slowed considerably. Furthermore, we’re seeing a change in pattern in terms of employment. Much of the employment in the last couple of reports is being led by government hiring, which suggests that jobs are not being created at the pace that they were.
Nevertheless, job openings still remain unusually high and until we see that number decline to pre-pandemic levels, we’re likely going to continue to see spending in the economy, which pushes up GDP.
An important issue with the job data though, is that response rates have declined quite a lot. According to Goldman Sachs, the decrease in response rate has probably increased the median monthly standard error for the job openings rate by over 90% compared to the period from 2002 to 2013. Additionally, a reduced sample size may result in more significant revisions to previously released data, as each additional response has a heightened impact on revised calculations.
Finally, we have the issue of excess savings. It’s no secret that savings rates shot up during the pandemic and there was an accumulation of excess savings in the system. This is true not just for the US but for most developed markets around the world. While savings have tapered off since then, the US, Australia, and Japan are the three countries that are below pre-pandemic levels.
As for the US, excess savings are also being spent down and we’re seeing these levels now drop precipitously.
As for November’s data (to be released in Dec):
- Analysts predict an addition of 175k nonfarm payrolls to the US economy in November, higher than October's 150k but below recent averages (204k for 3 months, 206k for 6 months, 243k for 12 months).
- Unemployment rate is expected to stay at 3.9%, against the Federal Reserve's September projection of 3.8% for year-end and a forecasted increase to 4.1% in 2024.
- November's job growth uptick is likely the impact of United Auto Workers strikes in October, not a labor market resurgence.
- Analysts anticipate the October JOLTs data, expected on Tuesday before November's job data, to reflect a decrease in job openings as companies adjust hiring plans due to current economic conditions.
While the labor market is cooling, there remains residual tightness. A tight labor market could mean spending continues for a while longer but, eventually, that will lead to inflation in the absence of productivity growth.
While we’ve signs of improvement in productivity, much of that may be because of the changing dynamics of the job market and people worried about losing their jobs. We also have a surge in temporary employment and people having to take on multiple jobs because their primary job is cutting back on hours.
Are we only avoiding recession because of a historic deficit during a time of strong labor markets?
BONUS: U.S. fiscal imbalance
Annualized interest expense on U.S. Federal debt is nearing $1.1 TRILLION. To put this in perspective, 2023 defense spending was $821 billion. This means the US is on track to spend 34% MORE on interest expense than defense spending.
In 2023, the US government produced $4.4 trillion in revenue. This means that 25% of receipts in the entire 2023 are equivalent to our annual interest expense. Rising rates and falling tax revenue are both occurring at the same time.
What’s the game plan here?
BONUS: Bankruptcies and delinquencies on sharp rise
Big uptick in this consumer survey that shows more Americans are reporting challenges in obtaining credit.
The office sector's credit crunch is intensifying. By one measure, it's now worse than during the 2008-09 global financial crisis.
BONUS: Reverse Repo Drain Isn’t the Problem
There’s been a ton of attention lately on reverse repos, something virtually no one knew about three years ago. Just like how the wars in Israel and the Ukraine instantly made countless people into Middle East and European policy “experts,” now there are bad takes everywhere on reverse repos.
Reverso Repo is a facility at the Federal Reserve and it’s shorthand for Reverse Repurchase Agreement, or RRP. It’s the opposite of a repurchase agreement, or repo, another Fed facility where you can go for a very short-term loan, say 24 hours (although they can be longer). The Fed gives you money and you post collateral, often a US Treasury. When it’s time to repay the principal, you pay a little extra that we call interest.
Repos are a way to inject liquidity almost instantly and prevent interest rates from going too high relative to the Fed’s interest rate target, like in late 2019. The facility was trending down sharply as the Fed sold securities, but it spiked even higher in early 2020. The collapse of several banks in March of this year caused another spike.
Reverse that whole process and you have a reverse repo. You give the Fed money and the central bank posts collateral, often a US Treasury. When that short-term loan is up, you get your principal back with interest.
Just as repos inject liquidity, reverse repos soak it up. When you loan money to the Fed, they don’t do anything with it (it literally just sits on a spreadsheet overnight, removed from the dollars circulating through the economy). For all intents and purposes, those dollars cease to exist temporarily.
Remember this is just a short-term loan, an overnight “fix” until the cash and collateral return to their original owners. Both repos and reverse repos allow the Fed time to adjust the amount of money in circulation through their buying and selling of securities, or Open Market Operations (OMO). The use of both repos and reverse repos tends to be relatively low and if usage spikes, the Fed corrects course and adjusts its OMO to increase or decrease bank reserves. But that changed in March 2021. That’s when the Fed for the first time definitively knew they had an inflation problem. And they ignored it, on purpose.
Here’s the quick and dirty version: the Fed purchased Treasuries, using money it created ex nihilo. That reduced the supply of Treasuries available and drove their yields to near zero. As the Treasury spent all the money it borrowed, that money worked its way into the banking system, where it would multiply.
When the Fed creates a dollar for the Treasury to spend, it’s only about 10% or so of the total amount of money created because fractional reserve banking multiplies the initial dollar into a total of about 10. So, if you can short circuit this part of the process, you neutralize 90% of the inflation.
That’s what happens with reverse repos. The Fed “borrows” money and sits on it, preventing it from being lent out and multiplying. It’s the same as when the Fed pays interest on reserves, paying banks to park their money in its vaults and not lend it out. Just how extensive was this practice? Earlier this year, the Fed was paying over $800 million in daily interest to “sterilize” $6 trillion through its reverse repo facility and interest on reserve policy combined.
So, why have reverse repos come down so much from their peak earlier in the year of $2.8 trillion to $1.2 trillion as of last Thursday? Because supply and demand are coming back into balance.
The Fed selling securities is reducing the supply of loanable funds while the Treasury’s borrowing spree is jacking up the demand side. The excess supply is coming down. That means the Fed’s arbitrary interest rates are becoming more realistic for today’s market conditions. As the Treasury creates more demand, the Fed doesn’t need to artificially create it, so reverse repos are falling. People are just lending to the Treasury instead of lending to the Fed.
What happens if the Treasury keeps borrowing while the Fed keeps selling securities? Demand would eventually exceed supply as reverse repos go to zero, and we’d be out of equilibrium. Then the whole financial world implodes.
As the Treasury continues sucking all the air out of the room with its multi-trillion-dollar borrowing spree, it has to crowd out more private investment by offering higher and higher yields. That’ll force interest rates higher – too high for the Fed, which has its own interest rate target range it’s trying to maintain. To prevent Treasury yields from getting too high, the Fed will finance the deficit, using third parties as middlemen who earn interest based on the arbitrage between Treasury yields and the rate on repos.
The Standing Repo Facility (SRF) was established in July 2021 to keep a watchful eye on the market and to make sure rates don’t go too high above the Fed’s target, like they did in late 2019. When overnight rates exploded above the Fed’s target, they quickly sold securities to increase the supply of loanable funds and bring rates back down to within their target range.
By keeping rates artificially low and using repos to conduct stealth quantitative easing, the Fed is going to put us right back on the inflation roller coaster. We also forget that before the March 2021 surge, reverse repo usage between $200-300 billion was the norm, not $2 trillion. And before the introduction of ZIRP (zero interest rate policy), it was $20-40 billion. The idea that financial markets will collapse if reverse repos return to normal levels is silly.
What’s much more dangerous (and will happen at the same time) is the Treasury sucking all the air out of the room. By drawing so much investment out of the private sector, capital will only get scarcer, and the least profitable companies will be the first that are unable to maintain financing, and therefore operations. That’s when countless “zombie” companies will go under, and layoffs will become much more common
Eurozone macro data
European government bond yields broadly declined as lower-than-expected inflation data raised expectations that the European Central Bank (ECB) could start cutting interest rates next year. In Germany, the yield on the benchmark 10-year government bond fell toward its lowest level in more than four months.
Before inflation data were released, several policymakers reiterated their hawkish view that rates would have to stay higher to contain inflation. ECB President Christine Lagarde told a committee of the European Parliament that strong wage growth and an uncertain outlook meant that “this was not the time to start declaring victory” in the fight to curb inflation. Germany’s Bundesbank President Joachim Nagel and Spain’s Pablo Hernandez de Cos reiterated that it was too early to start talking about rate cuts.
Deutsche Bank expects the Fed to cut rates by 50 bps in June and a cumulative total of 175 bps of rate cuts over the full year of 2024.
Eurozone annual consumer price growth in November slowed more than expected in November to 2.4%, down from 2.9% in October and below expectations for 2.7% in a FactSet poll of economists. Underlying price pressures also eased. Core inflation, which excludes food and energy costs, dropped to 3.6% from 4.2%. Separately, the jobless rate held steady at a record low of 6.5%.
Germany’s Federal Labour Office reported that the jobless rate rose to 5.9% in November, the highest level since 2021, from 5.8% in October. The statistics office said that, in seasonally adjusted terms, the number of people employed was flat compared with September, while rising 0.6% year over year. The number of job vacancies fell.
Meanwhile, retail sales grew more than expected in October, increasing 1.1% sequentially, as falling inflation appeared to boost consumer confidence.
Germany growth forecasts for 2024 have been cut following the budget chaos after the Constitutional Court declared the Government's spending plans unconstitutional. The consensus now expects GDP growth for Germany of just 0.4% for the coming year.
Japan macro data
Over the week, the yield on the 10-year Japanese government bond fell to 0.71%, from 0.77%, tracking recent weakness in U.S. bond yields on dovish remarks from Federal Reserve policymakers amid signs of slowing economic activity. The yen strengthened to the high-147 range against the U.S. dollar from the prior week’s mid-149 range. This was in an environment of general weakness in the greenback, as anticipation grew that the Fed could start cutting rates next year.
Japan’s Prime Minister Fumio Kishida reiterated the government’s commitment to taking all necessary measures to cushion the negative impact of recent price hikes. In early November, his administration announced a new economic stimulus package worth more than USD 110 billion, aimed at boosting growth and helping households cope with the rising cost of living. The measures include cuts to income and residential taxes as well as cash handouts to low earners. During the week, Japan’s parliament enacted an extra budget for the current business year ended March 2024 to help fund the fiscal stimulus.
Bank of Japan (BoJ) board members tempered investor expectations that the central bank was getting close to pivoting away from its dovish policy stance. Toyoaki Nakamura could not say with conviction that a sustained and stable achievement of the BoJ’s 2% inflation target was in sight and stressed the need to maintain ultra-loose monetary policy for the time being. Seiji Adachi echoed these views, stating that it was appropriate to patiently continue with monetary easing.
China macro data
Chinese equities retreated as official indicators underscored concerns about the country’s fragile recovery. The Shanghai Composite Index gave up 0.31% while the blue chip CSI 300 lost 1.56%. In Hong Kong, the benchmark Hang Seng Index fell 4.15%.
Economic data for October provided a mixed snapshot of China’s economy. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction. The nonmanufacturing PMI slipped to a lower-than-expected 50.2 from 50.6 in October. Readings above 50 indicate growth from the previous month. On the other hand, the private Caixin/S&P Global survey of manufacturing activity rose to an above-forecast 50.7 in November from October’s 49.5, as new order growth rose to the highest level since June.
The value of new home sales by the country’s top 100 developers fell 29.6% in November from a year earlier, accelerating from the 27.5% drop in October, according to the China Real Estate Information Corp.
Chinese authorities issued a 25-point plan to step up financial support for the private sector in Beijing’s latest effort to boost business confidence. The measures aim to unblock financial channels such as loans, bonds, and equity financing. Separately, the People’s Bank of China released its third-quarter monetary policy implementation report, in which it highlighted the changing structure of lending. The central bank encouraged observers to look beyond the volume of new loans as it shifts its focus to improving the efficiency and structure of loans. A slowdown in industrial profits growth pointed to persistent weakness in parts of China’s economy.
Crypto News
=> The Gary Gensler-led U.S. Securities and Exchange Commission (SEC) has opened a public comment period for Franklin Templeton and Hashdex's Bitcoin ETFs, hinting at a potential accelerated approval process by January 10, 2024. This unexpected development follows the SEC's initiation of a 21-day comment period for Fidelity's Ethereum ETF proposal, reinforcing speculation of a broader regulatory shift towards approving both Bitcoin and Ethereum ETFs simultaneously.
=> Grayscale is making strategic changes to the Grayscale Bitcoin Trust (GBTC) to facilitate the transition to a spot Bitcoin ETF. The firm is implementing daily fee collection and consolidating assets into an extensive account. These steps are part of Grayscale’s efforts to adapt to the evolving crypto market and capitalize on the potential approval of a Bitcoin spot ETF.
=> The world's leading cryptocurrency exchange, Binance, continues to struggle in the midst of legal difficulties. Its former CEO, Changpeng Zhao (CZ), has pleaded guilty to violating the Bank Secrecy Act. CZ, who is stepping down and facing a $150 million penalty, may not leave the United States until 2024.
On November 28, 2023, Binance US, the American branch of the global cryptocurrency exchange, also announced that Changpeng Zhao is stepping down as chairman of the board of directors. Meanwhile, the exchange assures customers that operations will proceed as usual despite CZ's departure and legal issues.
Simultaneously, soccer star Cristiano Ronaldo faces a lawsuit for promoting Binance's NFTs, accused of involving unregistered securities.
=> According to a ruling by a federal judge, Changpeng Zhao, the founder and former CEO of the world’s largest cryptocurrency exchange, Binance, must remain in the US until his sentencing in February.
=> Binance announced it would stop supporting its BUSD stablecoin, a response to regulatory pressures from the SEC and NYDFS. This move highlights the challenges facing crypto firms under the current regulatory landscape.
=> A recent report claims that TRON has become the preferred platform for crypto transfers associated with groups labeled as terrorist organizations by Israel, the US, and others, like Hamas and Hezbollah.
=> Circle, a significant player in the cryptocurrency space, has vehemently rejected accusations of engaging in illicit financing. In a resolute move to clarify its stance, the firm addressed a detailed letter to U.S. Senators Sherrod Brown and Elizabeth Warren. They explicitly refuting claims of providing financial services to prominent crypto personality Justin Sun, the TRON Foundation, or Huobi Global (now HTX).
Such allegations have stirred scrutiny around crypto finance, particularly regarding the funding of terror groups. Earlier, The Wall Street Journal initially reported a figure exceeding $130 million in cryptocurrency donations to these groups, later amending the amount to $12 million, suggesting possible transfers to these organizations.
Moreover, regulations are still a major challenge for crypto players. Recently, Justin Sun was sued by the SEC in March. Circle has made significant court efforts and may overcome the regulatory problem if everything goes well, whereas Binance submitted to SEC/DOJ fraud claims after months of denial.
=> Circle, the entity issuing the USDC stablecoin, has announced a partnership with Japanese securities and banking giant SBI Holdings in a bid to boost USDC circulation in Japan.
=> Paxos has been granted an in-principle approval (IPA) by the Abu Dhabi Financial Services Regulatory Authority (FSRA) to introduce stablecoins to the United Arab Emirates.
=> Celsius, the bankrupt cryptocurrency lending platform, has announced that eligible participants can now withdraw 72.5% of their cryptocurrency holdings, minus transaction fees. This development comes as a crucial step forward for the company and its clients, who have been facing financial instability and legal issues.
The withdrawals are available to participants falling under specific custody claims, with a withdrawal deadline set for February 28, 2024. The platform has been navigating bankruptcy proceedings and legal challenges while also planning to transition its core business to Bitcoin mining.
=> The hacker responsible for the $46 million KyberSwap exploit has outlined their conditions for returning the stolen funds. The demands, as seen in an on-chain message on Etherscan, include complete executive control over the Kyber company, ownership of its governance mechanism, and all company assets.
In exchange, the hacker promises to buy out executives, double employee salaries, and provide severance packages. Token holders and investors would also benefit from the transition. Liquidity providers would receive rebates for losses incurred. The hacker sets a deadline of December 10 for the Kyber team to meet their demands, threatening to void the treaty otherwise.
=> Bankrupt crypto exchange FTX has received court approval to sell approximately $873 million worth of trust assets. The proceeds will be used to repay creditors affected by the exchange's collapse. The assets, sourced from FTX's stakes in trusts issued by Grayscale Investments and Bitwise, include the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE).
FTX's administrators have been working to recover assets since the collapse, with around $7 billion recovered so far. Meanwhile, FTX's founder, Sam Bankman-Fried, awaits sentencing after being convicted on fraud-related charges.
=> Crypto lender Genesis and its parent company, Digital Currency Group (DCG), have reached a repayment agreement that could bring an end to a $620 million lawsuit. According to the deal, DCG will repay Genesis's outstanding $324.5 million in loans by April 2024, with Genesis able to pursue any unpaid amounts. The agreement aims to avoid the costs and resources associated with litigation.
This development is part of Genesis's plan to repay creditors, pending a vote from creditors and a decision from Judge Sean Lean. Genesis has also filed a lawsuit against crypto exchange Gemini for nearly $670 million in transfers.
=> MicroStrategy, under CEO Michael Saylor’s direction, has made another substantial investment in Bitcoin, purchasing 16,130 BTC for approximately $593.3 million. This latest acquisition brings the company’s total Bitcoin holdings to 174,500 BTC, acquired for $3.85 billion and valued at about $6 billion at current prices.
=> The UK introduced new tax guidelines for cryptocurrency users, asking them to voluntarily report unpaid taxes on crypto assets. This move aims to enhance transparency and compliance in the crypto taxation realm.
=> The U.S. Federal Reserve is examining XRP’s potential role in central bank digital currencies (CBDCs), indicating the growing interest in blockchain technology and its applications in the financial sector.
Latest ETF 19b-4 deadlines:
Cryptos: spot, derivatives and “on chain” metrics
A lot can change in the crypto markets within a seven-day period. Just a week ago, the primary digital asset had slipped below $37,000 after a quiet weekend. It started regaining traction in the following days and jumped above $38,000 on a few occasions before it conclusively overcame that level by the middle of the week. More gains came at the start of the weekend when bitcoin soared to above $39,000 for the first time since May 2022.
Sunday was quieter, but the landscape changed for the better on Monday morning. Bitcoin initiated a massive leg-up that resulted in breaking above $40,000. However, the asset didn’t stop there and kept climbing. As a result, it soared to $41,750 to chart its highest price tag in 19 months, leaving over $150 million in liquidations. This means that its market capitalization has increased to well over $810 billion, and its dominance over the alts is up by 0.6% in a day to 52.6%.
The altcoin landscape is quite similar, with green dominating almost all charts. Ethereum has jumped by more than 4% overnight and sits at a 19-month peak of its own at $2,260. Binance Coin has reclaimed the $230 level after a 3% daily increase. Ripple, Cardano, Tron, Avalanche, Polygon, and Polkadot are with similar gains, while the two largest meme coins (Doge and Sshib) have soared by 6% and 11%, respectively.
The cumulative market cap of all crypto assets sits at $1.550 trillion.
Gainers / Losers last 7 days, block size volume.
Bitcoin
The market after the great spike of late October has entered a dynamic of higher highs and higher lows, although tremendously overlapped and volatile, to finally reach the most relevant previous high volume node. We believe that at this point, the market is likely to take a break and consolidate gains during December while awaiting the next ETF decisions in January.
While the market has dilated the VPOC ($38600) of the previous value area, this has occurred over the weekend and in a completely climatic and derivatives-led mode. Derivatives metrics show a market in climax with open interest soaring and the highest Deribit funding rate in a long time. Funding rate APR spiked to 133% during the initial squeeze above $40000, current Deribit funding rate apr is 64%.
At the same time, such mainstream headlines are not usually a good sign in the short term, quite the contrary.
Bitcoin 27/11/23 4h chart
Bitcoin 04/12/23 4h chart
On a low time frame chart we see a steeply sloping value area with a clear sell initiative zone that has led to multiple rejections. However, these rejections have been strongly responded by the demand, keeping the price above the VWAP shown in the chart and following a dynamic of higher lows. During the past week the market has managed to break and consolidate above the VPOC of $37400 to finally start from Friday the attack to this sell initiative zone. The demand has clearly taken control but unfortunately during the weekend, and this is not a good thing, as many of the market participants are not present, the market has started a parabolic movement that has characteristics far from a healthy and organic behavior.
As we indicated last week, the key for bulls within this overlapping value area was to effectively consolidate above the VPOC. The rest of what happened over the weekend, puts us on alert for the possibility that we are facing an end of the road in the short term. We expect retracements that will bring back everything that happened during the weekend, paying importance firstly to the upper part of the value area marked in red and secondly to the possible break of the VPOC of $37400. If this level is crossed, dynamics that we will explain in higher timeframe charts will come into play.
Bitcoin 27/11/23 5 min chart
Bitcoin 04/12/23 5 min chart
We do not believe that the most likely scenario is to break through the $38600 VPOC, consolidate and continue practically relentlessly to the value area high (VAH). A move to reject the VPOC and retrace to the value area low (VAL) and then gain momentum seems to us to be the most logical and healthy. Keep in mind what it took for the market to enter the previous value area, we had up to 3 rejections in the VAL.
What is undeniable is that any consolidation within the previous value area after testing its Vpoc is a big battle for the bulls. For us the key to ambitious long term scenarios is that the price consolidates within the previous value area indicating acceptance within the previous distributive process.
Bitcoin 04/12/23 Big picture
Ethereum
The ETH ETF narrative added legs to the ongoing rally, which has been helped by improved global risk sentiment and falling U.S. Treasury yields. The market share of altcoin + Ethereum volume relative to Bitcoin has risen to 60%, its highest level in more than a year. Historically, altcoin volume increases relative to Bitcoin during a bull rally.
The market has been experiencing rejection in the $1700 to $2100 zone. It has clearly been a sell initiative zone since August 2022. At the same time it is coincident with the VWAP anchored at all time highs.
Now it seems that the market has managed to conquer this VWAP and neutralize the bears in this zone. Everything seems to indicate that we have a clear path to the next relevant upper volume node at $2600, but first we want to see a clear consolidation above $2100 as shown in the chart below.
Ethereum 2711/23 4h chart
Ethereum 04/12/23 4h chart
Classic markets
Markets are finishing the year strong, with the S&P 500 surging 20% YTD along with gaining over 5% for the month of November alone. The S&P 500 finished last week up 0.87%, the Dow Jones Industrial Average surged 2.46%, and the NASDAQ rose 0.46%.
$6.5 billion buy imbalance sent the market screaming higher into Friday's close. Friday was month end, which can create large buy or sell imbalances. Generally speaking, the quarter ends generate enormous imbalances, but today's was almost equal to larger than those, driving the market higher in the final 30 minutes of trading. It wasn't a wave of bullish enthusiasm; it was either tied to a sizeable end-of-month option contract roll or end-of-month rebalancing.
Sentiment and exposure metrics: extreme readings, all in!!
The rally started at the end of October has been a 3-part move primarily due to a market in a net short gamma position, systematic flows, and volatility selling. These are primarily a function of flows and positioning and have nothing to do with improvement in the fundamental outlook for the economy or earnings growth. However, the rest of the market participants have fallen into the trap of chasing the price without buying anything other than the fear of missing out (FOMO).
This past week we have started to see clear exhaustion of the Magma 7 and possible rotation into fixed income. Rates are de-stressing and the sectors most sensitive to them have experienced a great week and more specifically on Friday. However, we do not believe that the easing of rates experienced during the past week is solely due to easing inflationary pressures but to a clear discounting of contraction in economic activity. This could be a misleading interpretation of the market thinking that it is time for the Russel and Small Caps. The price forcibly justifies the narratives of a softlanding which we believe is impossible to achieve.
According to the popular HF VIP (most long less most shorted names) a popular proxy for intraday hedge fund P&L swings, the smart money community suffered 5% losses on Friday.
What this suggests is that beneath the market's calmly melting up surface, there have been tremendous tensions, not to mention massive rotations, and indeed, as Goldman's Michael Nocerino explains in his Friday "post-bell" note, "the overarching theme this week has been the rotation out of MegCap Tech and into Rate Sensitive pockets of the market.".
The profit taking across the Mega Cap Tech over the last three days looks to be shifting into more rate sensitive and lagging pockets of the market. To point, the Russell 2000 has outperformed Magma 7 by 4.6% over the last 5 days, one of the largest spreads YTD.
Bearish sentiment has absolutely bombed out according to the latest AAII survey which saw the second biggest 4-week drop in the AAII Bear index in the past 20 years!
Markets finally started to see signs of “Long Only” selling out of "Mag 7" longs and into "the rest" (pockets of quality software/YTD laggards). The chart below shows the reversal in Big Tech vs Non Profitable Tech, another ~5-7% ‘reversion’ in the spread would put it back into more normal territory over the last few years.
The month of November saw the largest easing in US financial conditions of any single month in the past four decades!
The easing of U.S. financial conditions and the eternal reign of the volatility suppression regime, in its final phase of life, results in a final ecstasy on junk assets. A market that ends up having ARKK, Meme ETF and Bitcoin as ultra-excited fellow travelers is not healthy at all and in itself a sign that we have reached the maximum degree of FOMO. The chart below shows the performance of these assets since the end of October. The short vol regime infects and distorts everything.
Volatility in the SP500 is approaching pre-pandemic lows recently, driven by a variety of factors. An increase in 0DTE trading has helped to compress volatility as we’re seeing more opinions expressed within shorter time frames and smaller price ranges. We also have a lot of vol selling funds getting more aggressive.
Even the volatility of volatility has been rather subdued, with the 3-month change in SPX implied volatility nearing lows for 2023.
The divergence between the MOVE index and the VIX also suggests that equity volatility may be too cheap. MOVE is the big brother index because the bond market is actually more important than the equity market. We believe the gap will be closed with the VIX going for the MOVE.
With volatility intentionally subdued if not annihilated, an abundance of optimism in equities is reasonably to be expected, and rightly so. This is a time of year that is very conducive to positive seasonality in the SP500.
We’ve seen the change in sentiment from being washed out to now being rather effervescent with optimism. Flows into equities from a variety of sources have surged. Wall Street bets on Soft Landing again in the best month since 2008.
The same traders who created the so-called meme-stock mania, with big bets on speculative companies, are back. And they are piling into the market's favorite stocks while also buying riskier bets like profitless tech and all things crypto.
However, the latest data investor sentiment has surged back towards the heights of extreme bullishness… while economic sentiment (combined signal from consumer, small business, manufacturing, services, housing surveys) remains deeply depressed, recessionary. So who’s right? we have no doubt.
According to Goldman Sachs there is effectively ‘zero panic’ priced into the equity market.
Everyone is in the pool. CTA asymmetric skew is firmly to the down side after buying +$225Billion in the last 1-month, their buying of US equities is largely complete. CTAs, not content to miss out on the action after having rather significant short exposure, just clocked in 10-day flows of about $70B in US equities. The largest such inflows since 2014. In addition, US pension funds will likely be shedding equity length over the course of December.
Goldman Sachs CTA Update:
Over the next 1 week
Flat tape: Buy $14 billion (SPX $590 million)
Up tape: Buy $19 billion (Sell SPX $300 million)
Down tape: Sell $11 billion (Sell SPX $770 million)
Over the next 1 month
Flat tape: Buy $36 billion (Buy SPX $1 billion)
Up tape: Buy $56 billion (Sell SPX $3.51 billion)
Down tape: Sell $200 billion (Sell SPX $63 billion)
Key pivot levels for SPX
Short term: 4,440
Medium term: 4,392
Long term: 4,352
Options, Gamma, IV, SKEW
SPX pushing higher and skew getting absolutely destroyed. Skew itself isn't telling you much about market direction, but if people were "very long", they would be paying up for low delta puts, creating a bid in skew. We are not seeing that. Skew at these levels is offering cheap downside hedges, but seems like few are in needed of those....
Put hate going even more extreme. Put / call ratio getting hammered.
The cost of protection is near lows looking out five years due to low level of hedging and Volatility selling strategies. Extremes don’t last forever in markets.
The VVIX squeeze continues, the gap vs VIX is huge. Last time the VVIX was here, VIX was at 19 ish…
Gamma
Realized and implied vol continues to collapse under the weight of the long-gamma regime. What happens in a long-gamma environment; dealers are constantly forced to hedge their portfolios against the market trend. This has the effect that liquidity is injected into the market/volatility is decreased.
Gamma new all-time high: $10BN per 1% mov. Insane!
This whole "Long Gamma" Options Dealers thing, also means that Dealers are drowning in "long Vega" in this "realized volatility plummeting to zero" environment (SPX 10-day realized volatility at 4.6, a 2+ year low). Therefore, they are part of the larger "Short Vol" hedge flow as they attempt to offset the loss of PNL by having to sell more near maturity volatility as it declines.
Selling at the money daily puts remains the gift that keeps on giving, sucking in more and more "opportunistic investors". Short vol trade is a ticking time bomb!!
Nothing has changed from the perspective of the Gamma profile of the market with respect to last week. The 4600 call wall remains the insurmountable wall, highlighting the gamma " vacuum" up to 4515 points. A market in positive Gamma should find rejection at the upper call wall and a buying response at the lower call wall. Market makers buy the dips and sell the tops. However, It wouldn't take much of a move in the SP500 to shift the index back into negative gamma (Flip point remains at 4520) and trigger the systematic flows to flip back from buyer to sellers, implied volatility to rise, and credit spreads to widen, to unwind much of, if not all of the rally off the October 2023 lows.
The prevailing FOMO and internal market mechanics has succeeded in making the options market believe that there is no risk, note the total absence of gamma exposure on the OTM put side. There is no higher risk situation in which the risk is not perceived. The market is clearly swimming naked, ignoring tail risk as it has never done before.
Market Comment
The market rates plunge at the front of the yield curve, despite Powell pushing back against rate cuts. The bond market saw the ISM manufacturing data, with employment down, prices rising at a neutral pace to last month, and a sector that remains in contract. If the data from this week confirms the data points of the ISM manufacturing sector, then it is likely to lead to further yield curve steepening, as the front of the curve now begins to fall to the back of the curve.
What is also clear is the yield curve doesn't stay inverted forever, and typically, by around 500 days, the steepening process gets going. That steepening process has already begun, and we are at a point where it should turn positive again.
In 1990, when the yield curve rose after inversion, the SP500 fell by more than 20%. In 2000, when the yield curve steepened, the SP500 fell by more than 40%; in 2008, when the yield curve steepened, the SP500 fell by more than 50%.
That makes this week all the more important because the jobs data, specifically the unemployment rate, really dictates when the Fed pivot will begin and, more importantly, when the yield curve steepening will begin to drive higher. If the data this week shows that a slowing economy is picking up steam, with the unemployment rate creeping above 4% and average hourly wages staying elevated. At the same time, if the number of job openings remains high, it could lead to a yield curve steepening much faster than usual and may take on the form of a 2-year fall and 10-year rise. If that happens, it will be a very strong signal that bond markets are worried about stagflation and a steeper yield curve is coming, which is when the real fun will begin.
Bear market rallies are notoriously violent and abrupt. And this last one was among the most violent and abrupt of them all. There is no greater risk situation in which the risk is not perceived. Although the reader may think that the November rally is due to a real show of buying strength, unfortunately this is not the case. It is not how far the market is able to go but how it has done it.
In terms of auction and market structure, November is the best example of an aberration. We are firm in our opinion that all this upside movement initiated at the end of October does not respond to a healthy and well auctioned market. The following chart shows how the volume profile for the month of November presents a disastrous auction, full of gaps and inefficiencies. We believe that sooner or later all of this will be fully repaired.
Again, the key for the week will be the November´s VPOC at 4562 points on the SP500 future coinciding with the SPX lower gamma call wall at 4515. If sellers manage to break through this zone, the market will enter a negative gamma regime and the minor upper structure marked in red will be solved as distributive.
On the contrary, if buyers manage to hold and consolidate above November´s VPOC a test to the July highs could be possible but in a very slow and sluggish way, as the market has a huge positive gamma exposure with a monster gamma call at 4600 that has remained locked in place for two weeks now.
ES_F 4h chart 27/11/23
ES_F 4h chart 05/12/23
