Trade the Extremes
USD Gives Up Some of its Gains
We highlighted in yesterday’s note that risk seemed a bit stretched and pondered whether we may be in for a rally. The question we are still trying to answer is if we have seen the low yet or not. Whilst we are still unsure, although moving towards a stance of risk has put in a low, what is clear is that short term positioning is very much one way.
Overnight, we have seen risk bounce and the most overly subscribed to positions have started reversing: short GBP and short equities. When it comes to GBP, we are approaching some key levels of resistance around 1.2500. There are a lot of short positions out there so we won’t look to fade any rally in GBP until we see toward 1.2500-1.2600 as I think there is some more pain still to be felt. When it comes to equities we are a bit more constructive. The VIX is firmly back below 30 and when looking at the Tech sector we start wondering just how much of a probable recession has been priced in – it feels like it’s around 70%. For us, that is a lot and we can see equities doing well, at least for a while. Whether it will be a bear market rally or the low being put in place for now is the question and to answer that we need some more data. On the day however, we are tentatively bullish.
Crypto markets seem to have weathered the latest turbulent event. I guess it shouldn’t be all too surprising that another algorithmic stablecoin, DEI, has lost its peg. Granted, its market cap ($63.5m) is nowhere near that of UST’s. Following UST, we may well continue to see algorithmic stablecoins come under pressure but if this is where the panic is contained to we continue to remain constructive on crypto. Crypto markets haven’t really gotten the memo about this recent risk rally but this is not shocking considering the events of last week. What this market needs more than anything is a period of calm and cross fingers we get it. All things being equal, as we are getting more bullish equities we would expect crypto to eventually catch up. That’s working under the assumption we are correct on equities. Immediate resistance levels are $32000 and $2200 in both BTC and ETH which a break of could see more money move off the sidelines and into crypto.
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