Market Update: 21 Sep 2021
“We think that the market will start paying attention (to macro factors) again towards Q4…” — 08 Sep 21 broadcast
The macro spillover came early with crypto markets tumbling this week along with global risk assets in response to the Evergrande headlines.
Markets turned bearish from Monday morning, with China and Hong Kong on holiday for the Mid-Autumn Festival. This continued the next day with BTC reaching a low of 40,200 this morning in Asia.
Chinese markets reopen tomorrow. We will be watching the 40k support level in BTC very closely as we also head into the US FOMC decision on Thursday.
1) About Evergrande:
Our base case is that there will be government intervention in some form and that this will not be China’s ‘Lehman moment’. However, the lack of guidance so far from Chinese regulators is scaring the market.
The fear here is that President Xi could allow Evergrande to fail as an example to the other real estate players ahead of the 100th anniversary of Chinese Communist Party (CCP) in 2022. He has already taken draconian steps with Big Tech and Education.
At this point, the market has already priced in Evergrande’s equity as worthless and also a default on foreign debt. The key now is to prevent systemic shock. We expect the Chinese government would be able to do so. And this would reduce the current volatility as the market switches from pricing systemic risk to just slower growth in China.
2) Effect on Crypto markets
For a market that was starving for directional catalysts and extra edgy from FOMC uncertainty, this ‘risk-off’ was the perfect excuse for a hard dip.
With that said, BTC found support at the 40k level and has not yet closed below the 38.2% Fibonacci retracement level at 42,500 (Chart 1). We are watching for a break below 40k and close below 42,500 for the downtrend to extend.
The options market reflects a tremendous amount of nervousness with Risk Reversals sinking to -20% due to high demand for puts over calls.
We now expect resistance around 47k (50% Fibonacci retracement level and channel resistance — Chart 2).
Fortuitously, this move has been great for the book. We had been short gamma in both BTC and ETH but were given a truckload of ETH puts from the Defi options market. We were happy to hold onto it into the weekend as front-end vols were trading at year-to-date lows (Chart 3).
So we entered Monday long gamma in ETH (particularly long puts) and short spot in BTC and ETH. And as always, long gamma and vega in BCH, DOGE, ALGO, SOL and LUNA (feel free to let us know if there are additional Altcoins you’d like us to trade). The market has provided some excellent delta trading ranges so far.
We are now reducing long gamma in ETH and are also looking to go short vega across the board at these elevated levels. We are keeping core long gamma in ETH and flipping from neutral to long gamma in BTC ahead of the reopening of the Chinese market tomorrow and the FOMC on Thursday.
