Market Update: 19 Jan 2022
Strange and confusing markets all round this week.
Macro markets have entered a ‘bad news equals good news phase’ where asset prices react positively to poor US economic data and surging Covid cases. A weaker economy gives hope for a less aggressive Fed hiking cycle.
Crypto markets have been eerily quiet with BTC and ETH trading in a tight range but consistently teasing for a break below 40,000 and 3,000 pivot levels.
Defi sentiment is dour with yields across the board at lows and with ‘Defi 2.0’ threatening to unravel (OHM down over 50% and Frax shares down almost 30%).
Vols have been frustrating as well. There is clearly some downside nervousness with risk reversals back to very negative levels (puts more expensive than calls). Both BTC and ETH front-end risk reversals traded to -9% (Chart 1). But at the same time, severe vol compression persists with BTC front end implieds even trading below 50%!
Here’s our take:
1. Macro confusion continues as we are in the Fed blackout period until the 26 Jan meeting.
2. We are getting more bullish here. The market has fully priced in a 25 bp hike in March and is even starting to price in some chance for a 50 bp hike and a total of 4.5 hikes for 2022. We think this is extreme and the market will catch a bid as it prices down the probability of such aggressive hikes.
3. So we have a long bias against the 40,000 support in BTC and 3,000 in ETH.
4. Realised vols are at lows with 10-day at 32% and 1-month at 47% (Chart 2). Long gamma (short-dated options) and long vega (longer-dated options) has been an excruciating trade.
5. We’ve neutralised our gamma position and have flipped to short vega. We think this sideways market could persist for awhile but when it does break out, it will be a violent one. So we are happy to earn the decay from short vega here but we have been adding to our long wings position (far-strike options) to profit on a blow-out.
Sidenote: We’ve been observing NASDAQ closely for clues on how crypto will trade in the short-term. BTC has been trading almost in lock-step with NDX (Chart 3).
