Market Commentary – August 26th, 2022

Crypto Market

Last week on August 19, the value of long liquidations was the second highest it has been for the past three months at $538.2 million. This surge of liquidations came after prices of many crypto assets fell last week. BTC fell from $23.2k to $20.8k and ETH fell from $1.85k to $1.6k from the 18th to the 19th, marking the sharpest drops between closing prices of the past month for both assets. Since then BTC has found support at around $21.5k and ETH has now reclaimed $1,700.

From an on-chain perspective, the total transferred volume out of Crypto-assets Trading Platforms (CTPs) has increased since July’s 41% decrease month-over-month, driven by the combination of buy orders surpassing $10 million, meaning big players are currently accumulating large amounts of Bitcoin and withdrawing them from CTPs; potentially trying to limit the selling pressure from August 19.

Four weeks from now, Ethereum will be in a post-merge world. The merge is a plan to transition the Ethereum blockchain from proof-of-work to proof-of-stake, with a goal to slash the blockchain’s energy consumption and lay the ground for it to be more productive in the future. Issuance will be reduced by a projected -90% and net inflation will virtually become neutral, if not negative. This could create a compelling case for ETH as a monetary asset in an increasingly inflationary world. Fiat is currently inflating at 12.8% per year and Gold sits at 1.79%. After the next Bitcoin halving in 2024, BTC’s inflation rate will be 0.88%. After the merge, ETH issuance falls to 0.18% based on current demand levels where it could potentially go negative if demand recovers to same the levels as a few months ago.

Macro

As of late, there’s been more to be optimistic about. The extreme pessimism of the first half of 2022 seems a distant memory. War in Europe, runaway inflation, a coming collapse in corporate profits, and a behind-the-curve Federal Reserve forced to push the economy into recession. However, since mid June, the S&P 500 index has climbed 17%. Market participants are closely looking at data being released to see if there is deteriorating economic activity with rising unemployment in a high inflation environment. If so, the Fed would have to weigh its inflation fight against supporting a faltering economy.

The U.S. economy contracted in July as manufacturing output dropped modestly and the service sector recorded a sharp decline in activity, data from a purchasing managers survey showed Tuesday. The S&P Global Flash Composite Output Index fell to 45.0 in August from 47.7 in July. The rate of decline was the sharpest since the initial stages of the pandemic. The downturn was led by a steep drop in service sector activity, although production at manufacturers also fell marginally. The flash U.S. services PMI fell to 44.1 in August from 47.3 in July, missing the 49.0 consensus forecast from economists polled by The Wall Street Journal. The U.S. manufacturing PMI fell to 51.3 in August from 52.2 in July, its lowest level in two years, signaling subdued operating conditions across the manufacturing sector.

The Fed’s preferred measure of prices and inflation, the personal consumption expenditures (PCE) price index was expected to have risen by less than June’s 0.6% gain, which excludes food and energy costs. The PCE came out today at -0.1% versus the expectation of 0.0% month over month and 6.3% versus the expectation of 6.4% year over year which means it was the first month over month negative print since April 2020. Excluding food and energy, the PCE price index increased 0.1%

At the The Jackson Hole Symposium today, Federal Reserve Chairman Jerome Powell said he is cautious against prematurely loosening rates and will continue to tighten for the near future. For context, the Jackson Hole Symposium features central bankers and academics from around the world. Investors world wide pay very close attention to announcement coming out of Jackson Hole as it can lead to large market moves. Last year at the Jackson Hole event, Powell said he thought inflationary pressures would probably prove transitory. He was soon proved wrong and had to play catch up with soaring prices.

Equities, Fixed Income, FX and Commodities

Equities

Last Wednesday saw the S&P 500 top out at 4325 in the moments following the release of what were generally viewed as dovish FOMC minutes, at least relative to expectations. From there the bears gained the upper hand. Valuation began to come under closer scrutiny because many acknowledged there was little to no room for error for an S&P 500 trading at 18x a likely over-generous 2023 earnings forecasts.

Fixed Income, FX & Commodities

China has cut its prime lending rates, with a 15bp reduction in the five-year rate. This move is more than \ was expected, and is being interpreted as another attempt to boost the flagging property market. Mortgage rates have fallen significantly over the past twelve months. US yields and the EU’s yields moved higher this week. The USD is holding onto recent gain. Greenback strength attributed to speculation that Fed Chair Powell is likely to point to further rate rises and may counter notions of a 2023 pivot. USD also aided by some safe-haven flows. WTI prices rose as some OPEC+ members indicated they agree with the Saudi position that supplies may have to be curtailed to balance the market.

News we’ve been reading

The Fine Print

Disclaimer

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Forward-Looking Information 

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