The Fed FOMC rate decision will be out in a few hours at 2pm ET/2am SGT.
This will be the most interesting FOMC in recent memory as the Fed is walking on a tight rope. On one hand, crumbling global economic growth and on the other, relentless inflation.
Here’s what we think:
1. A 25 basis point hike and end of Quantitative Easing is pretty much a certainty. We don’t expect any surprises here.
2. To get a clue on the Fed’s stance, we will be paying very close attention to the GDP and inflation estimates, Fed Funds projections as well as Powell’s answers on stagflation, global risk contagion, energy prices, inter-meeting hikes, Quantitative Tightening, crypto and sanctions.
3. There is a chance that signs of dovishness will cause a short squeeze in asset prices (we already started seeing some signs of this in the crypto markets from Asia morning).
However, we think any upside in equities is going to hit significant resistance due to serious global stagflation risks. Particularly the overhang of war in Europe as well as the sell-off in China from ‘common prosperity’ policies and Covid lockdowns.
4. In this scenario, we are not sure if the FOMO-buying in crypto will be enough to break out of its correlation with equities. A convincing break to end the crypto downtrend would probably need to see BTC close above 46,000 and ETH above 3,400.
5. The Fed might sound dovish but to determine if the market is convinced, we will be looking out for a sell-off in USD as well as a recovery in Tech stocks and Chinese equities.
6. Wild price swings in price are likely today given the illiquidity in markets. We will refrain from reacting too quickly until key levels are breached.
In the vol markets:
a. Naturally, 18-March implieds have been trading exceptionally high (Chart 1) even with realized vols trending lower (Chart 2).
b. Massive buying of longer-tenor options (June-December) as BTC back-end vols rallied to 74% and ETH vols to 89%.
c. Relatively larger demand for ETH back-end vols (possibly because of the ETH 2.0 narrative picking up with the launch of the Kiln merge testnet). ETH-BTC 6-month vol spread has widened from 10 to 15% (Chart 3).
d. Huge demand for ETH puts. Over the last few days, a single US hedge fund bought over 40,000x ETH April puts. That probably contributed to the risk reversal (calls vs puts) moving down from -10% to -14%.
e. We expect the vol curve to steepen after FOMC as vol selling from the DOVs continue to press the front-end down while back-end vol demand persists amidst the geopolitical and macroeconomic uncertainties.
f. We have been trading a decent amount of ERKO options (European Reverse Knock-Out). This makes sense given the higher options prices. ERKOs allow the buyer to speculate on direction or hedge a position at a fraction of the cost of buying an outright vanilla option.
Our short vega (longer-term options) position continues to disappoint. We have reduced but will continue to keep a core short position there.
We have a small nett long gamma position (short-tenor options), very long in Alts against short in BTC and ETH.
We increased our long wing (far-strike options) positions especially in ETH. This means on a big spot move, we will turn increasingly long gamma very quickly.
Darius will be speaking at the AVAX conference in Barcelona next week! Please reach out if you would like to connect with the team.
Darius will also be speaking at Bitcoin Miami early April. The team will be headed to Manchester and London after. Finally, Darius will also be speaking at Crypto Bahamas towards the end of the month.
QCP will be throwing side events at the conferences starting in Barcelona next Thursday, 24 March with co-hosts DYDX! Do reach out for invites.