Last week's data releases spurred quite a bit of macro re-thinking, with US data exceptionalism finally come back down to early in Q1 (GDP revised down, consumption lower), while global inflation momentum have started to surprise back to the upside with Eurozone HICP re-accelerating back to 2.9% YoY (vs 2.7% before).

The slowdown in US data is now too pervasive to be ignored, with Atlanta Fed's GDP now falling to sub 2%, and real disposable income growth slowing to sub 1%. Furthermore, rising credit card delinquencies, rent costs, and weakening labour markets are all signaling a weaker US economy into the election, with the Fed hand-tied with still high inflation and only a handful of meetings left before November.

Macro assets have been rallying aggressively over the past few sessions, thanks to Friday's sequential deceleration in PCE, a 10% sell off in oil futures, and prevailing hopes for a goldlock slowdown. This week will see the release of much heavier Tier 1 data, starting with Jolts (today), ADP & ISM Services (Wed), and NFP (Friday).

NFP will be the busiest event this week, though next Wednesday will see a massive double header with FOMC and CPI for the most anticipated day heading into the summer. Strap on tight!

On the election side, former President has (unexpectedly?) benefited immensely from his recent guilty court verdict, with his probability of winning the November election jumping to over 50% (vs Biden at 35%). It would appear that a considerable portion of the voting populace sees the current trials as a 'witch-hunt' on the former president, back-firing against hopes that Trump would suffer from the guilt convictions. Should the former President return to office again, the major impact would be on fixed income as it is widely expected that he would exert new political influence on the Federal Reserve with easy money policies, free spending fiscal policies with further tax cuts. It's going to be an interesting Q4 for markets, to say the least.

In crypto, sentiment has been buoyed since Friday following the rebound in US equity prices and overall risk sentiment, with BTC challening 70k again and ETH around 3.8k. Trading conviction remains low with funding interests staying subdued, realized volatility compressing, and prices holding well between the recent ranges. We would expect this to continue until at least NFP on Friday, and the next bigger move to wait until post CPI/FED next Wednesday. Path of least resistance feels to be on the upside for now. Good luck.

Last Friday, the core PCE price index, closely watched by the Federal Reserve, recorded a monthly rate of 0.2%, slightly below the expected 0.3%, marking a new low since December 2023. Following the data release, U.S. Treasury yields fell for four consecutive days, reversing nearly half of the previous week’s gains, with the ten-year yield dropping below 4.5% to 4.475%, and the two-year yield at 4.871%. The risk markets were buoyed, with the Dow Jones and S&P 500 rising 1.51% and 0.8% respectively, while the Nasdaq was nearly flat.

In the realm of digital currencies, according to Glassnode data presented by Leon Waldmann on Twitter, following the approval of an ETH ETF, the proportion of BTC & ETH held in centralized exchanges has dropped to a historic low. Approximately $3 billion worth of Ethereum has left centralized exchanges, increasing the potential for a short squeeze. BTC today broke above the $68,500 resistance level and began challenging the next resistance level at $71,500. As of now, BTC has hovered near $68,500 for nearly 12 days; if a breakthrough is unachievable, it might revisit $66,000 for support.

In terms of options, BTC front-end implied volatility saw a slight rebound before the start of the workweek, but overall, it remains at a relative low, below the 25th percentile of the historical three-month range; ETH is slightly below the historical median, with a relatively steep term structure curve. Observations of the past 24 hours’ trading also show strong selling pressure on bullish options for mid to early June, whereas calls for late June and July are very popular, perhaps also related to the anticipation of ETF S-1 approval. The current market “consensus” is still for “approval by July at the earliest,” at which time capital inflows and a potential price surge are expected. However, on the other hand, given that Grayscale’s Ethereum Trust (ETHE) currently manages assets worth $11 billion, there is also concern that the market might experience similar selling pressure as seen with GBTC following the ETF’s approval and issuance.

Macro markets are taking a breather everywhere after a very strong month, with the SPX rallying nearly 3% in May against softer economic data and rising treasury yields. Over the past few days, US Q1 GDP saw notable downward revisions (1.6% → 1.3%) with a big drop in consumption (2.5% → 2%) and downward adjustment in Core PCE (3.7% → 3.6%). Meanwhile, China economic data has also reverted back to its old ways with Manufacturing seeing a sizeable drop to under 50 in May, significantly worse than market expectations (50.5) with widespread softness in production, demand, new orders, exports, and imports. The Hang Seng has quietly dropped -5% from its recent highs to settle back at around flat on the month.

With a lack of clear macro conviction, month-end rebalancing flows have been driving the majority of price action, with commodities and equities seeing big drops yesterday, with US equities ending Thursday weaker by around -1%, and sizeable sell-offs seen in tech stocks such as Dell (-15%), Salesforce (-20%), and even Nvidia (-4%). As further proof of rebalancing flows being in the works, tech stocks have fallen by nearly -9% against a 3% gain in the SPX, with technicals suggesting further weakness in equities in the near-term ahead.

On the fixed income side, the treasury curve has steepened (disinverted) significantly over the past 2 weeks (from -48 to -38), as markets have suddenly switched their attention to a possible 2nd Presidential term under Trump. While both US candidates are likely to pursue easy money policies and fiscally expansive programs, the treasury supply and inflation pictures are naturally more concerning for bond traders under Trump.
Furthermore, while there has been lots of focus and noise over Trump’s indictment and possible jail time after being found guilty of falsifying business records, a recent ABC/Ipsos poll shows that only 4% of Trump supporters would withdraw support even if the former President was convicted, with 80% pledging their continued support. This follows a recent poll that 94% of voters who backed Trump in 2020 intend to vote for him again in November, indicating a significantly loyal base and a contentious election cycle regardless of the result. The Manhattan court’s sentencing is scheduled for July 11, with Trump likely to appeal whatever the verdict is. There is no timetable for any other trial before the November 5th election date.

Not a lot to cover in crypto with prices range bound with ETH outperforming BTC by about 0.8% on the week. ETH inflows are steady but unexciting, while ETH S-1 approval dates are unknown with ‘consensus’ assuming a July approval timeframe at the earliest. Meanwhile, natives have started to pivot back into the large memecoins such as Shiba / Dogecoin and Pepe, with the group showing 10–20% gains in recent periods against otherwise quiet market conditions.

Yesterday (28 May), Minneapolis Fed President Kashkari made a hawkish statement: Although the likelihood of a rate hike is very low, he does not think it can be ruled out, and he expects no more than two rate cuts this year. Additionally, affected by weak U.S. Treasury auctions, Treasury yields rose during the session, with the two-year and ten-year yields at 4.956% and 4.564%, respectively. The three major U.S. stock indexes showed mixed results, with the Dow Jones down 0.55%, the S&P 500 flat, and the Nasdaq closing up 0.59%.

Source: Investing
In the digital currency sector, attention is first focused on ETFs. Yesterday, GBTC experienced a net outflow of $105.2 million, but at the same time, IBIT held up the market with an inflow of $102.5 million. Consequently, the holdings of Bitcoin ETFs have reached a historic turning point. According to data recorded by HOLD 15 Capital, yesterday, BlackRock’s IBTC surpassed Grayscale’s GBTC to become the largest Bitcoin spot ETF by net asset value.

Source：Twitter；Farside Investors
On the other hand, following yesterday’s news, former Mt. Gox CEO Mark Karpeles stated that Mt. Gox is operating normally and will not immediately sell Bitcoin. Galaxy’s Head of Research, Alex Thorn, also believes that most of the Bitcoin will be held rather than sold immediately. This temporarily alleviated market panic over the sudden news, causing the price of Bitcoin to gradually return to around 59,000. From the options market, we can also see that the overall IV level of BTC has largely retraced yesterday’s gains, decreasing by 1–2% Vol, with RR also rebounding. However, before today’s settlement, the price suddenly dipped to around 67,700, indicating that the market remains cautious about potential selling pressure.

Source: TradingView

Source: Deribit （As of 29 MAY 8:00 UTC）

Source: SignalPlus

Source: SignalPlus

Data Source: Deribit, Overall Distribution of ETH Transactions

Data Source: Deribit, Overall Distribution of BTC Transactions

Source: Deribit Block Trade

Source: Deribit Block Trade

The U.S. stock and bond markets were closed yesterday due to Memorial Day. However, later this week, important data (GDP and the Fed’s preferred PCE inflation data) will be released, making it a “short but busy week.”

Source: SignalPlus, Economic Calendar
In the realm of digital currencies, Bitcoin, after trading sideways for nearly a week, broke through the $70,000 mark again during the U.S. trading session yesterday. The market’s bullish enthusiasm appears to have finally been swayed by the continuous inflows into ETFs. Considering the U.S. stock market was closed due to the holiday, analysis platform Santiment characterized this surge as an encouraging sign, as it demonstrates that BTC can perform well even when its correlation with the price movements of traditional finance (TradFi) is not as tight.

Source: TradingView；Farside Investors
But the situation did not unfold smoothly. Just after BTC broke the $70,000 mark, news emerged that Mt. Gox’s cold wallet transferred 12.24 kBTC, worth approximately $840 million, to an unmarked address. In 2014, creditors of Mt. Gox were severely impacted when the exchange went bankrupt, and the exchange has been working for the past decade to recover funds for repayment. Today’s transfer on the BTC chain was viewed by some traders as a potential catalyst for selling pressure and bearish sentiment. Consequently, the price of BTC quickly plummeted from its intraday peak to below $68,000.

Source：Twitter
In the realm of options, market focus has once again shifted to BTC. The roller-coaster trading in the past 24 hours and concerns about potential selling pressure have raised implied volatility. The implied volatility curve has generally flattened and risen, and the volatility skew has quickly tilted towards put options following the price drop. In terms of trading activity, the largest BTC trade was a June set of Short Risky (450 BTC per leg), selling a 75000-Call while buying a 65000-Put for protection, with a net premium of approximately 2 BTC.

Source: Deribit （As of 28 MAY 8:00 UTC）

Source: SignalPlus

Source: SignalPlus

Data Source: Deribit, Overall Distribution of ETH Transactions

Data Source: Deribit, Overall Distribution of BTC Transactions

Source: Deribit Block Trade

Source: Deribit Block Trade

Last week saw the continuation of what many are calling a ‘one-pillar’ market, with Nvidia almost single-handedly holding the markets up, while sticky PMI, inflation expectations, and a decidedly more hawkish Fed rhetoric raising fresh questions to the goldilocks narrative. According to Wall Street, last week was a week that saw the fewest advancing stock sectors since last October, signaling increasing narrow leadership, with Nvidia being by far the biggest contributor to this week’s gains by market cap.

Treasury curve bull flattened into the long-weekend, with 2yr yields inching towards 5% again. Rates will be focused on core PCE this Friday with expectations calling for a 2.8% YoY rise in core. Meanwhile, equities are rising on lower and lower volumes with decreasing conviction, as an comfortable cocktail of every rising valuation against a seeming economic slowdown, with a ‘pedestrian’ Fed backdrop are making it difficult to carry a strong view.

What appears to be turning more ingrained is the divergence between economic data vs inflation surprise in the past 1.5 months. US economic data surprises have been on an undeniably softer downtrend, while inflation data has been moving in the wrong direction higher. At the same time, Bloomberg’s new fancy ‘NLP’ model on Fed sentiment shows that the Fed speakers’ language is turning explicitly more hawkish, while asset markets continue to turn a blindy eye with FX/equity/rates vol and credit spreads all making interim lows. Something has to give here, and our view is that macro markets are being a bit myopic here as it’s been nigh-impossible to carry any equity shorts over the past 6 months.

Crypto markets remain buoyed by the rapid developments in ETH’s ETF approvals, with issuers wasting no time in filing their revised S-1s, while Ethereum is on track to test 4000 with the ETH/BTC ratio bouncing back to its 6 month average. BTC ETF inflows have also benefitted, recording strong cumulative inflows over the past 3 weeks. Finally, with the US election season drawing ever closer, both sides appear to have apparently decided that crypto is now going to be a platform to earn libertarian and swing votes from the younger audience, with former President Trump’s extremely aggressive with a series of pro-crypto proclaimations (accepting donations in crypto)

Last night’s (23 MAY) market did not disappoint expectations. It was lively from 9 PM until the early hours of the morning. Before the much-anticipated ETH spot ETF announcement, the price of Ethereum surged all the way up to challenge the high of 4000 points but quickly gave back all of the previous day’s gains, dropping to around $3720. Although the price quickly recovered most of the lost ground, the latest data released by the US at 21:45 (UTC+8) delivered another blow to the risk market. The data showed that the US May S&P Global Composite PMI Index recorded 54.4, far exceeding the expected 51.1 and marking a new high in the past two years. The manufacturing and services PMI also exceeded expectations. After the data release, US bond yields surged in the short term, with the ten-year yield reaching 4.4980% at one point, and the two-year yield rising above 4.9% again. Traders also postponed the Fed’s first rate cut to December, with the futures market reducing the full-year rate cut bet to 34 basis points. All three major indices closed lower, with Nvidia bucking the trend and rising 9.3% to a new historical high, standing out from the rest.

Source: SignalPlus, Economic Calendar

Source: Investing, US May S&P Global Composite PMI Index far exceeded expectations, reaching a two-year high; ten-year Treasury yield
Subsequently, at 4 AM, the main event of the night occurred when the US SEC officially announced the approval of the ETH Spot ETF. However, the price of ETH plunged to around $3500 after the news release, reflecting the traditional market adage “Buy the rumor, sell the news.” Over the past week, ETH had already risen by 29%. Cryptocurrency commentator Zach Rynes remarked on last night’s move, saying, “everyone who wanted to buy the approval already did.” Delving into the reasons why the price did not rise following the positive news, a crucial point is that this so-called “approval” was merely the approval of 19b-4 applications submitted by eight institutions (BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy, Franklin Templeton). Actual trading cannot commence until Form S-1 is also approved, which could take weeks or even months. Furthermore, the approval came from the SEC’s Trading & Markets division rather than SEC Chairman Gary Gensler and the other four commissioners. Bloomberg ETF analyst James Seyffart commented that making decisions through delegated authority is normal, and it would be unreasonable for the SEC to require an “official vote” on every decision and document. Regardless of how one interprets this detail, the crypto community has responded positively to this approval, calling it a “historic move.”

Source: TradingView
In terms of options, after the ETF announcement, the overall implied volatility levels for BTC and ETH quickly declined, with the curve steepening. The average IV level for ETH returned to around 63%. On the trading front, ETH’s large Top Trade showed a clear direction. We observed 20,000 short puts for ETH expiring in late May and June, as well as a combined total of approximately 12,000 long call spreads for ETH expiring in late June and July. As mentioned earlier, the approval of the 19b-4 applications is just the first victory. The approval of the S-1 application for the ETH spot ETF will still take several weeks or even months. Only when traditional finance (TradFi) funds truly flow into the cryptocurrency market will there be a more substantial impetus for the price to rise.

Source: Deribit （As of 24 MAY 8:00 UTC）

Source: SignalPlus

Data Source: Deribit, Overall Distribution of ETH Trading

Data Source: Deribit, Overall Distribution of BTC Trading

Source: Deribit Block Trade

Source: Deribit Block Trade

Yesterday (May 21st), according to Jin10, Federal Reserve Governor Waller mentioned that the soft inflation data in the next three to five months would allow the Federal Reserve to consider a rate cut by the end of the year, and there is no need for a rate hike at the moment. The Vice Chairman of the Federal Reserve, Barr, also reiterated the need to maintain high interest rates for a longer period. For the first time in five days, the yield on the ten-year U.S. Treasury note fell, at one point dropping to 4.40%, but it has since regained most of the lost ground, currently reported at 4.437%. The three major U.S. stock indices all closed higher, with the S&P and Nasdaq rising 0.26% and 0.2%, respectively, reaching new historical highs again.

Source: SignalPlus, Economic Calendar

Source: Investing
In the realm of cryptocurrencies, as the decision date for the Ethereum spot ETF approaches, the overall Implied Volatility level of ETH has risen again, and the price has successfully broken through the $3,700 mark. Bitcoin prices appear somewhat weak, with the price adjusting back to around $70,000.

Source: Deribit （As of 22 MAY 8:00 UTC）

Source: SignalPlus
In terms of trading, BTC primarily adopted bullish strategies, with the May 31st 77,000 vs 81,000 Call Spread single leg transaction volume nearing 1,400 BTC, becoming the focus of yesterday. For ETH, the significant price increase triggered a large number of stop-loss and take-profit orders. Notably, about 19,500 ETH were bought back as a stop-loss for the May 31st 3,000-C, and approximately 18,000 ETH were sold as a take-profit for the June 28th 3,600-C, marking the most significant reduction in positions yesterday. The bulk trading platform was very active, primarily featuring June Call Spreads, Long 3,400 Puts at the end of May, selling of bullish options and buying of bearish options on Wing, which explained the notable decrease in yesterday’s ETH Vol Skew amid the upward trend.

Source: SignalPlus

Data Source: Deribit, Overall distribution of ETH trading

Data Source: Deribit, Overall distribution of BTC trading

Source: Deribit Block Trade

Source: Deribit Block Trade

Both the crypto market and TradFi lobbying groups were caught off-guard over the past 48 hours, as the SEC had a sudden about-face on Ethereum ETF approval. An abrupt request from the SEC to the various ETF issuers to update their latest ‘19b-4’ filings, and well as notification to NYSE, and CBOE that the funds will trade on the exchanges suggest that the ETH approval odds are quite certain.
In response, 5 of the proposed ETF issuers (Ark 21, Fidelity, Franklin Templeton, Invesco/Galaxy, VanEck) have amended their 19b-4s in the past 24 hours, with VanEck’s ETH actually listed on the DTCC depository under $ETHV. That was fast!

So was anything changed in the amended filings? ETF analysts reported that, unsurprisingly, the SEC required all the issuers to remove mentions all mentions of ETH staking as that was the agency’s major contention in insinuating that Ethereum is a security. So we will likely end up with an ETH ETF where the underlying asset cannot be ‘staked for income’. What if that was done through a centralized exchange wrapper, or if it was merely done with a 3rd party platform that wants to pay interest on deposits? How will the final language be written in the S-1? As we’ve said over and over again, it’s always good to be bullish on lawyers!

Naturally, ETH screamed, rallying 25% from ~3100 up to 3750 in less than 2 days, after the #2 token had been largely cast aside given its anemic performance over the past 2 years. Issues of falling fees, competition from L1-EVMs, and an over-focus on complex liquid staking and re-staking laying had taken away much of the original ‘sound money’ narrative of the pre-POS Ethereum. Similar to the BTC ETF approvals, the entry of ‘TradFi bros’ was again the catalyst that Ethereum needed to pull itself out of the nadir, as it had been underperforming BTC massively throughout the past year.

Obviously, unlike in January, the market now has a ‘playbook’ of how these ETF launches go, or at least a prior example to go off on:
Since the January BTC ETF approvals, Bitcoin prices have been increasingly driven by the pace of TradFi ETF inflowsCorrelation of BTC with macro factors and even the Nasdaq have stayed much higher than prior cyclesBTC saw a rapid “sell the news” event in January which took BTC down from around 57k down to ~50k, before cumulative inflows ultimately took us to new highs at above $72k in a hurry. Will participants still sell the news this time around?Has natives had enough time to accumulate ETH given how unpopular it has been? Approval odds have also been long ‘left for dead’ unlike the BTC ETF-leadup.What will be the net price impact from the pent-up grayscale selling versus ETF inflows?ETH float is much smaller than BTC, should we expect much sharper % moves from the net inflow/outflow movements in Ethereum going forward?How aggressive with Larry Fink and Wall Street be promoting ETH this time around?Will US markets continue to grow in influence (record high YTD) as trading volumes continue to shift towards the US timezone?Timing wise, there’s still a long way to go from here to the final S-1 approval date. Will the macro picture (econ & rates) have changed a lot by the time the ETF launches?

Speaking of changing macro factors, while everyone is waiting for Nvidia earnings later today, a full line up of Fed speakers have quietly but decidedly flipped their interest narrative again, this time back to the hawkish side. In the current and past week alone:
Fed Governor Waller: “In the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy.”Vice Chair Jefferson: “It is too early to tell whether the recent slowdown in the disinflationary process will be long lasting.”2nd Vice Chair Michael Barr: “Inflation readings in the first quarter of this year were disappointing. These results did not provide me with the increased confidence that I was hoping to find to support easing monetary policy.”Atlanta Fed Bostic: “I’m not in a hurry to cut rates… My outlook is that inflation will continue to fall for this year and into 2025,” he said, adding that prices will, however, drop at a slower pace than many had expected.Cleveland Fed Mester: “I was on the record before saying I was at the median [forecast] which was three [cuts]. The developments I’ve seen in the economy right now, I would not think that that’s still appropriate… I need to see a few more months of inflation data that looks like it is coming down.”SF Fed Daly: not clear whether inflation is definitively receding and there is no “urgency” to cut rates.

Speaking of not paying any attention, we are now 313 days into a period where the SPX has not had a daily sell off of worse than 2%, with the most recent episode being 2016–2018 where we saw a streak of 351 days. The longest period was during 2003–2007 where we saw ~3 years with no 2% sell-off (I’m old enough to remember those days). No wonder everyone is selling vol.

Early this morning, Bloomberg ETF analyst Eric Balchunas unexpectedly raised the odds of approval for the ETH spot ETF from 25% to 75% on Twitter. He mentioned that he heard some rumors, and as the issue becomes increasingly influenced by political factors, the SEC’s stance might make a 180-degree turn. Therefore, everyone is now desperately preparing for this. At the same time, Coindesk published an article stating that three informed sources indicated that the SEC has asked ETF exchanges to expedite updates to their 19 b-4 applications. This suggests that the SEC might approve the application before a critical deadline this week. However, the 19 b-4 is just a preliminary battle for the passage of the ether spot ETF. Issuers also need to get approval for the S-1 application to proceed with ETF product trading.

Source: Twitter
The news quickly spread across the market, and the price of ETH surged by 20%, catching up with the recent gains in BTC that it had fallen behind. It successively broke through several resistance levels and challenged the $3,700 mark. BTC also took advantage of the situation and broke the high since April, returning above $71,000. This surge, triggered by unexpected news, led to a massive liquidation of short positions. According to data from coinglass, the amount of ETH short positions liquidated yesterday alone was as high as $80.7 million USD.

Source: TradingView, ETH surged, catching up with the recent gains of BTC.

Source: Coinglass, Massive liquidation of short positions in the past 24 hours.
In terms of options, the jump in actual volatility of ETH has driven a significant flattening and rise in option IV, compared to BTC’s 2–6% Vol increase at the front end. ETH has almost outpaced BTC by 6 times in the short end, reaching a 30% -40% Vol spread, leading to increased market attention on this week’s ETH Spot ETF decision, pushing the ATM IV of ETH on the 24th to near historical highs of almost 100%. From a trading perspective, the buying and selling of ETH call options are relatively balanced, with concentrations towards the end of May and June. This includes May OTM Calls and purchases in June represented by 4000-C, while also seeing a larger proportion of sales at higher strike prices, possibly consuming the market’s overbought sentiment under high IV conditions earlier.

Source: Deribit （As of 21 MAY 8:00 UTC）

Source: SignalPlus

Data Source: Deribit, Overall distribution of ETH trading

Data Source：Deribit，ETH trading distribution for May 31, 2024 / June 28, 2024.

Data Source: Deribit, Overall distribution of BTC trading

Source: Deribit Block Trade

Source: Deribit Block Trade

Regarding digital currencies, the U.S. SEC is expected to announce its final decision on VanEck’s ETH Spot ETF on May 23, local time, which has sparked significant interest in the market. The pricing of volatility in the options market reflects this anticipation, as the ATM Vol for ETH 24MAY has been rising over the past few days, reaching a local peak. Overall, ETH’s volatility levels are 5–10% higher than BTC’s. The term structure is also flatter due to the higher front-end Vol Premium. This will undoubtedly be a pivotal moment for the crypto community. Although the market remains relatively optimistic about the approval of the ETH ETF, ETH’s recent weak performance suggests that the market has already priced in a potential rejection. Analysts believe that approval may be achieved next year, offering more investment opportunities and driving the growth of the entire crypto industry.

Source: SignalPlus, BTC & ETH ATM Vol

Source: Deribit （As of 20MAY 8:00 UTC）
In trading, the local IV peak for ETH 24MAY has attracted a significant Sell Straddle trade of 3250 ETH per leg, betting on the IV-RV premium. For BTC, there has been a large influx of put option purchases across various maturities in May and June over the past day, leading to a drop in Vol Skew for that period.

Source: SignalPlus, BTC & ETH 25dRR

Data Source: Deribit，The overall distribution of ETH trades

Data Source: Deribit，The overall distribution of BTCtrades

Source: Deribit Block Trade

Source: Deribit Block Trade

We ended the past week with a slowing growth and lower inflation hopes giving rise to yet another soft landing narrative. This is not the first time we've seen this movie, and the natural thing to do would be to FOMO into stocks, buy credit, receive rates, sell vol, and earn carry income. That has pretty much been the exact script since the last FOMC, with no signs of letting up without any significant variables on the horizon.

Equities made new ATHs this week, with the SPX rising 1.5% on the week and breaking above 5300. Automakers (+4.4%), tech (+2.9%), and real estate (+2.5%) on the week on friendly financial conditions. 10y yields fell -8bp on the week, and -27bp on the month, while oil (+2%), gold (+2%), and copper (+8%) all staged impressive rallies on the month. As the following WSJ article would attest to - what's there not to love in the investment world?

Furthermore, Wall Street dealers believe that the current recent equity recovery has morphed from pure short-covering to fresh long exposures, with Citi estimating that over $50bln of SPX futures have been added over the past month. ICI reports that over $20bln in US domestic equity ETFs have been issued MTD as retail have been profitably chasing this rally higher.

Equity option flows are pointing in a similar direction, with digital options (binary outcomes) pricing in 25% of a further 10% rally in the SPX to the year-end. Furthermore, call/put ratios on 0DTE options have been rising again throughout this rally with ~56% of volumes attributable to calls.

Underneath all the euphoria, it's interesting to see that the 30yr long bond is the odd-one out, and is on track for the 3rd worst annual return over the past century based on BoA calculations. Lax government spending, out of control budget, overly-easy financial conditions, and an inflation-tolerant Fed (what inflation target?) are punishing long-rate instruments, as the fiscal largesse will have to be paid at some point via higher real rates and/or a weaker FX. But just not today...

Looking ahead, economic data will be on 'holiday mode' with no catalysts of note until Nvidia earnings on Thursday, and then nothing again until NFP and FOMC+CPI in the first 2 weeks of June. Nvidia options imply a +/- 0.4% move on SPX based on earnings day based on the chip-giant's heavy weight on the index, with positioning in the stock appearing less heavily concentrated than earlier in the year.

Not much to mention in crypto, with BTC prices trading with the highest short-term correlation to the Nasdaq since 3Q24. Price action looks constructive at 66k, with natives looking for a test of the ATHs again over the next weeks. Nothing changes sentiment like price, and certainly nothing changes crypto prices like equities at this juncture. While 'everyone' was a rates trader in 1H23, is every macro asset class now a Nasdaq day-trading tool in disguise? Hope the quiet markets will give everyone some well-needed rest in the near-term!

Equity prices made another early run towards a new record high before easing off, while treasuries underwent a bear-flattening with front-end yields adjusting slightly higher on a significantly higher import price print (0.7% MoM vs 0.1% expected).
We have little in the day of data until Wednesday of next week with Nvidia earnings, where options are implying a +/- 8% move for the stock, just beneath its 2yr average of +/- 8.4% and +10.9% in February. The 8% implied move translates to a ~0.4% impact on the SPX given the chip giant’s outsized weight in the SPX not to mention sentiment spillover to other related stocks in the index.

Along with the import price miss, an expected rebound in oil prices into the summer driving months is likely going to keep CPI pressures elevated into August, though inflation traders remain as confident as ever that CPI will settle <2.5% by the end of the year.

The unshakeable confidence in inflation and lack of economic risks are allowing markets to focus singularly on where interest rates are going, leading to treasury yields and stock prices to be moving in perfect inverse correlation since mid December. Said another way, both equity and bond prices are moving together in a perfect Goldilocks scenario, ignoring signs (once again) for any tail risks that could come from a deeper economic slowdown, stubborn inflation, or valuation correction.

Not much to note on the crypto side with BTC holding against the recent highs on muted activity. However, Coinbase stock fell -9% on the session, a notable break from Bitcoin prices as investors are beginning to worry about rising competition in the regulated field from the likes of CME entering into spot trading. The entry of TradFi certainly brings much needed inflows but will certainly give rise to new competition as well. How will the crypto landscape look a year or two from now? We certainly live in interesting times.

Yesterday (May 15, 2024) saw the release of significant economic data. Amid a series of three consecutive days of inflation data exceeding expectations, the US CPI index roughly met expectations; however, retail data unexpectedly remained flat, continuing the recent trend of weak consumer data. Although the current level and momentum of inflation remain well above the Federal Reserve’s target, these two pieces of data somewhat alleviated market concerns about prices re-accelerating, restoring confidence in a rate cut by the Federal Reserve in September. As a result, US Treasury yields fell in the short term, and the three major US stock indices all closed up by around 1%, reaching historical highs.

Source: SignalPlus, Economic Calendar

Source: Investing
In the realm of digital currencies, BTC prices surged past the 66,000 mark, buoyed by weaker U.S. economic data, sparking a frenzy in the community. BTC Spot ETF inflows have also been healthy recently. Although IBIT no longer shows growth, yesterday’s total inflow still reached $303 million, mainly contributed by FBTC and BITB. On the other hand, as shown in the comparison chart below, ETH’s performance has been relatively poor in this rally, gaining only half of BTC’s increase in the past 24 hours, returning to oscillate around the $3,000 mark.

Source: TradingView

Source: Farside Investors
In terms of options, the implied volatility levels of BTC and ETH show distinctly different changes. The primary change for BTC is the rise in mid-to-long term IV, with most of the large transactions over the past day also concentrated in this range. The largest transaction was a long straddle betting on June-end volatility, involving 277.5 BTC per leg. There was also a diagonal spread involving selling May calls and buying June calls.
For ETH, front-end IV dropped significantly, attracting a large trade involving a buy of 17 MAY vs. sell of 24 MAY with a size of 19,450 ETH per leg. Additionally, there were a considerable number of bullish options positions built for late May. Despite ETH’s recent underperformance, traders are still betting on its potential upward movement.

Source: Deribit （As of 16 MAY 8:00 UTC）

Source: SignalPlus

Data Source: Deribit, Overall Distribution of ETH Trading

Data Source: Deribit, Overall Distribution of BTCTrading

Source: Deribit Block Trade

Source: Deribit Block Trade

After 3 months of consecutive upward surprises, a roughly in-line CPI was all that was needed to spur risk markets to another blow-off record rally. The EoD scorecard looks something like the following:
Yet another new record high for the SPXLargest daily drop in US 1y1y forward rates since early January2025 Fed Fund futures yields falling by 25bp (a full rate cut) since the April highsUSD DXY saw the largest single day drop YTDCross-asset volatility (FX, Equities, Rates) falling back to their interim and/or record lows

So is the Fed about to cut rates ASAP? June Fed Fund futures are pointing to merely a 5% chance for a rate cut and July at just 30%; even September odds are not much better than a toss-up at ~64%. So what was all the excitement about?

As we have been alluding to since the past FOMC, the Fed has shifted to a full asymmetric bias where sustained inflation pressures would be tolerated, as long as they are not reaccelerating, but any emerging weaknesses in labour markets would be taken as a policy easing impetus. As such, while headline and core inflation remain well above Fed mandates at 3.6% and 3.4%, respectively, the market’s fear was for a pricing reacceleration, which failed to materialize in the past month. That plays into the overriding theme that the Fed is back on ‘easing watch’, as the bingo card of ‘slowing job markets’ and ‘high but still-tolerable inflation’ are being checked off.

The actual CPI data showed core rising 0.29% MoM in April, basically just a hair beneath consensus after 3 months of consecutive upside misses. The softness was attributable to a drop in goods prices and manageable increases in shelter prices and OER. Core services excluding housing rose 0.42% MoM, roughly in line with estimates.
Post CPI/PPI, Wall Street expects core PCE to come in at around 0.24% MoM in April, thereby heading towards a 2% annualized level and towards the Fed’s comfort zone. Traders remain confident that inflation prices will continue to settle back lower in the 2H of the year.

Lost in the CPI relief was a much weaker April retail sales report, which saw widespread weakness across various discretionary spending categories. Headline spending came in at flat versus consensus expectation of a 0.4% — 0.5% MoM rise, with the control group spending falling by 0.3% MoM with negative prior revisions. Drops in general merchandise and even non-store sales saw some of the largest declines since 1Q23.
The retail sales miss continues a string of recently softer consumer data over rising credit card and auto loans delinquency, exhaustion of accumulated excess savings, and deteriorating perceptions of labour market strength. While we are still entirely too early to call for a harder economic slowdown, it does feel like we are close to an inflection point for economic growth as high rates might finally be biting into the US economy?
As usual, markets are comfortable ignoring any slowdown risks and focusing on the first Fed easing function for now. As a reminder, public markets are supremely adept at pricing-in all available information and being forward looking — just not that forward looking, mind you. Enjoy the brief party while it lasts and try not to get in the way.

In crypto, BTC prices continued to be led by the flow and ebb of overall equity sentiment, with prices breaking its MTD highs and recovering back to the April peaks at around $67k. ETF inflows were also healthy, with a new +300M reported yesterday post CPI, with even GBTC showing a net inflow. However, underneath the surface, performance dispersion remains high across tokens, with ETH and a number of Top-20 assets struggling to make up any lost ground over the past week. Performance remains increasingly concentrated in a small pocket of winners (BTC, SOL, TON, DOGE), without any significant beta spillover.
We expect this to continue and remain focused on BTC as the main benefactor of continued TradFi inflows (13F filings showed increasing BTC ETF exposures from some large HF titans), and expect less wide-spread FOMO into natives-only or degen coins over this current cycle. Good luck friends!

A quiet Monday to start the week with a slew of market moving data to arrive over the next few days. PPI will kick things off on Tuesday followed by a prime double-header of CPI and retail sales on Wednesday, with no shortage of sell-side analysts predicting the 3rd-decimal place outcome of where the index value is going to come in at. In the meantime, following the rise in U-Mich inflation expectations last Friday, the NY Fed’s survey of consumer expectations also saw a rebound in 1-yr ahead expectations to 3.3% (vs 3.0% prior), the first significant rebound in over a year.

Without going into the nuanced details of CPI, what is clear this cycle is that housing and services inflation remain fully entrenched versus history. Anecdotal stories of housing supply shortages, rising raw materials input construction cost, and stubborn rent pricing (any one of you had your rents ‘deflated’ lately?) appear to be a permanent fixture of our times, just as QE / easy money was over the prior decades. Such is likely to put a floor on the nominal rate of inflation to come out of the report, but expect markets to ‘over-analyze’ any nuanced details or misses to the downside given the Fed’s asymmetric mandate of ‘justifying’ a dovish narrative.

According to Citi calculations, the SPX has moved an average of +/-1.3% over the past 24 CPI days, with about 40% of the trading days realizing below the 1-day straddle breakeven, and 60% above. Current straddle pricing is similar to March at around 1.25% daily breakeven, which remains towards the higher end of the recent range, but is reasonable given the double CPI + retail sales release on the same day. Strap your seatbelts on!

Outside of CPI, underlying vol metrics remain constructive for equities. VIX and it’s 2nd order VVIX cousin remains in a historically low percentile with convexity still favoring the upside. Said in another way, the SPX is continuing to realize stronger returns on up-days vs its down days, and the index has not since a -2% daily drawdown since mid February. The recent monthly and quarterly ranges are also amongst the lowest levels in almost 40 years with low implied correlation. In a nutshell, the goldilocks narrative remains well and alive, with the market pricing in 2nd-order or even 3rd-order policy adjustments from the Fed from the smallest changes in macro developments.

While crypto frenzy has died down recently, a famed TradFi meme-stock OG (Roaring Kitty) made his triumphant return on Twitter (X) yesterday with a simple meme with no accompanying message. Hysterically, his presence was enough to spur Gamestop to spike over 100% in prices yesterday, causing short-sellers (professionals?) to lose over $1bln yesterday, reminiscent of the go-go days during the covid lockdown. Over the past month, the SPX has been up a ‘mere’ 2% while the most-shorted stock basket has rallied nearly 16%, with 0DTE call-put ratio rising above 1 and on strong volumes. Look who’s laughing now?

Last Friday, macroeconomic data in the United States performed poorly. The one-year inflation rate expectation for May rose from 3.2% to 3.5%. The University of Michigan Consumer Confidence Index showed weakness, dropping to 67.4. This offset the positive impact of recent soft employment data on market risk sentiment. The yield on the ten-year US Treasury briefly rose above the 4.5% mark, while the two-year yield, which is more sensitive to interest rate policies, climbed to 4.853%. Risk assets showed relative stability, with the three major US stock indices showing mixed performance. The Dow and S&P both closed slightly up by 0.32% and 0.16% respectively, while the Nasdaq fell by 0.03%. The focus of the market this week will be on the CPI data released on Wednesday, which could become a key driver of mid-term price trends.

Source：Investing
In terms of cryptocurrency, at the beginning of the week, BTC started strongly, with short-term breakthroughs reaching above the 63,000 mark. Implied volatility at the front end showed a significant increase, especially on May 17, influenced by CPI uncertainty, forming a local IV peak. Investors are closely watching for signs of cooling in consumer prices, which could drive market speculation in digital currencies and other risky assets. However, on the other hand, a poor inflation report could also trigger concerns among traders about economic overheating, potentially leading to a decline in cryptocurrency prices.

Source: TradingView
Two things worth noting here. According to reports from Cryptonews, the Japanese investment advisory firm Metaplanet has explicitly stated in its declaration a “Bitcoin-first, Bitcoin-only” strategy. They are offering long-term yen loans and periodic stock issuances as financial solutions, emphasizing that this is to continuously accumulate more Bitcoin rather than holding onto the increasingly weak yen.
The other matter concerns the US presidential election. Recent moves by the Biden administration to strengthen regulation on digital currencies have stirred discontent among investors. Billionaire Mark Cuban, a supporter of current US President Biden, has made a sudden turnaround. He believes that under Biden’s leadership, the Chairman of the Securities and Exchange Commission, Gary Gensler, has failed to protect investors, making it “nearly impossible for legitimate cryptocurrency companies to operate.” Cuban has warned that if the opposition to Bitcoin and cryptocurrencies continues, Republican presidential candidate Donald Trump is likely to win the 2024 presidential election. In fact, Trump’s attitude toward Bitcoin has recently made a 180-degree turn. In 2019, he publicly stated his dislike for Bitcoin, but during a recent event at Mar-a-Lago, he openly told attendees, “If you support cryptocurrency, you better vote for Trump,” causing quite a stir in the community. This statement has been described by the American media outlet Politico as “a new weapon against Biden,” and the development of digital currency policies will play an increasingly important role in the upcoming election.

Source: Deribit （As of 13 MAY 8:00 UTC）

Source: SignalPlus

Data Source: Deribit, The overall distribution of BTC & ETH tradings

Source: Deribit Block Trade

Source: Deribit Block Trade

Risk assets enjoyed firm close to the week with financial conditions continuing to ease post the softer job market releases as of late. Equity markets shrugged off a poor U-Mich and inflation expectations, with the headline print falling to 67.4 from 77.2 the past month, while 1yr inflation inflation expectations print jumped to 3.5% vs 3.2% prior.

Overall, macro economic surprises have fallen to the weakest levels in 1.5 years, with Citi’s hard data surprise seeing the biggest one-day drop in a year last week. While a ‘hard landng’ call is definitely still way early to be made at this point, it is becoming evident that the US consumer is indeed finally entering into a soft patch with declining consumer savings, still lackluster PMIs, higher rates dragging down credit demand, and a labour market that is finally feeling the effects of gravity.

All eyes will be on CPI Wednesday this week as a key driver of price action in the medium term. While the market is certainly hoping for a softer print to steer the disinflation narrative back on course, recent market-driven ‘CPI fixes’ have been steady with traders expecting around a 3.4% YoY print in May, and a further softening to ~3.1% in December. Easier financial conditions are matched off against softening consumer credit demand in the near term, while the path of oil price is likely to drive the inflation trend and expectations into year-end.

Crypto prices have been disappointly weak with BTC seeing a sharp correction from 63.5k down to 60.5k on Friday’s NY session. ETF flows saw a small -85M outflow, while leading global CEX reported a drop in spot trading volumes in April, the first in about 5 months. With spot prices consolidating for much of the past 1–2 months, price action definitely feels heavy with incumbents naturally still skewed long. Furthermore, while implied volatilities have dropped heavily as directional traders are selling upside calls to harvest extra income, while longer term players are back to monetizing IVs to generate yield in the current lull in market sentiment.

You know it’s a quiet week when a small miss in weekly jobless claims (231k vs 212k) was enough to propel all major asset classes to move higher in unison. Against the Fed’s recent pivot to a focus on labour weakness, markets are certainly taking the message to heart and are scouring every little hint of a job market slowdown to revigorate its rate cutting hopes. As we have been mentioning, the current asymmetric risk-reward setup (Fed ignoring high inflation, looking for job slowdown) should be supportive of risk assets in general, which is exactly what we saw with equites, bond prices, and even BTC all rallying in unison following the release of the claims data.

Looking a bit deeper in the recent labour data, while a 175k monthly NFP gain is still relatively healthy, and an unemployment rate of 3.9% is still low, some cracks are starting to show underneath the facade with alternative labour measurements. Powell himself had specifically mentioned falling hiring rates and weaker employment surveys in his Q&A as signs of weakening labour demand. Furthermore, other sub-component measures such as rising permanent job losses, falling quit rates, reduction in hiring plans and widening ‘jobs hard to get’ ratios suggest that the US economy might be heading into a more pronounced labour slowdown in the 2H of the year, just as the pandemic-era excess savings have been depleted as we pointed out earlier this week.

Next week should be more active once again with CPI data coming back in the fold and offering the first significant challenge to the recent goldilocks narrative. Have a good weekend everyone!

A court document shows that, due to the recent rise in the value of cryptocurrencies such as BTC and SOL, nearly all customers of the bankrupt cryptocurrency exchange FTX will be able to recover their funds, and potentially more. Specifically, the company currently has assets ranging from $14.5 billion to $16.3 billion available to repay creditors’ debts of about $11.2 billion. However, some investors remain pessimistic about the potential upward movement of coin prices due to the risk of selling these volatile assets.
On the other hand, according to Bloomberg, the world’s largest crypto asset management company, Grayscale, has announced the withdrawal of its application for Ethereum futures submitted to the U.S. SEC, without revealing the reasons for the withdrawal, leading to widespread speculation.

Source: TradingView
BTC performed poorly this week, reversing most of the gains brought by macroeconomic positives since last Friday. In terms of options, the implied volatility has fluctuated slightly at recent lows, with a flatter front-end curve, and ETH still has a higher Vol Premium compared to BTC. From a trading perspective, the sell call spread strategy of ETH 31 MAY Sell 3700 Buy 3800 became the focus of the past day, and the selling pressure of BTC’s bullish strategy was equally strong, accompanied by significant protective put option purchases across various terms, leading to a substantial drop in Vol Skew.

Source: Deribit （As of 9 MAY 8:00 UTC）

Source: SignalPlus

Source: SignalPlus

Data Source: Deribit, Overall Distribution of ETH Trading, 31 MAY Sell 3700 Buy 3800 Call Spread

Data Source: Deribit, Overall Distribution of BTC Trading

Source: Deribit Block Trade

Source: Deribit Block Trade