Old Lady Signals a Pause to Come
Crypto and Risk Assets Come Under Pressure
USD Remains King; GBP Destroyed
To understand the magnitude of the sell off yesterday here are some facts:
● The Nasdaq suffers its largest one day percentage drop since June 11, 2020
● The DOW suffered its largest one day percentage drop since October 28th, 2020
● Russell 2000 suffered its largest one day percentage drop since June 11, 2020
That quite nicely sums up yesterday. The incredibly short relief rally post the FOMC on Wednesday did not fool the market whatsoever. Tightening financial conditions, high inflation, economic data disappointing is all pointing to risk sentiment staying on the backfoot. We have been saying for a while now that we just can’t see how risk can rally in this environment and nothing has changed for us.
Yesterday it was the turn of the Old Lady to announce their interest rate decision. The fourth hike of 25bps in as many meetings has now taken rates to 1%. We even saw 3 of the 9 members of the MPC vote for a 50bps hike! That is something the MPC has never done. However, the minutes showed two policymakers expressed a view that no further rate hikes were needed. Inflation is forecasted to be above 10% in Q4 with the economy set to contract by 0.25% next year. To summarise – GBP is doomed. You add to the mix the fact local elections in the UK are showing Labour taking key seats and it’s tough to find a reason to own GBP at the moment. We remain short GBP from Wednesday evening but will take profit today before the close.
We have been sounding like such a broken record when it comes to crypto. There is a significant lack of crypto related news, macro economic factors thus will drive markets, path of least resistance feels lower blah blah blah. Well, that all came together quite nicely yesterday. If you needed evidence that crypto is driven by risk markets – well we got it. As equities plunged, so did crypto in what was a very violent and nasty move. Usually you may expect ALTS to have taken the brunt of the pain but to be honest, everything suffered. BTC and ETH were down 10% at a point as were alts like SOL, DOT and ADA. We are approaching some key levels in BTC now and if $34k-$35k doesn’t hold this could get a lot more messy. In other news the LUNA Foundation Guard (LFG) reported it had acquired $1.5bn in BTC to bolster the reserves of Terra. $1bn was done via an OTC swap with $500m worth of BTC bought in addition.
So where to from here? Well markets have come a long way and usually a risk rally is due. But for us any such rally will be a temporary one. Can anyone really point to anything positive at the moment? We struggle and as such we look to sell any rallies in crypto and risk assets to add to current shorts. The trade of the day for us is still short GBP/USD having squared up shorts in crypto, as we respect key support levels in BTC. Remember today is NFP. We are trying to decide what a strong number means for the market. In our humble opinion, a massive number and risk assets knee jerk higher but then may get sold hard as people realise it means the FED can be as hawkish as they like. A soft number may actually provide the market with some much needed respite….
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