Market Commentary – December 13th, 2022

Crypto Market

At the time of writing, Bitcoin is trading at $17,715 USD and Ethereum at $1,310 USD. According to blockchain analytics firm Kaiko, historically, the BTC-USD versus BTC-USDT trading volume could be considered an indicator of institutional inflows into crypto, as institutional investors would typically buy BTC using fiat directly instead of using an onramp like the USDT. 

The dominance of USDT based BTC trades have risen to 84%, implying that USD trades only made up 16% of trading volume, a level seen just before the COVID selloff and way before the start of the 2021 bull market. While this lack of institutional participation could be one reason why the price of BTC has been lacklustre recently, this could also imply that a reset of key institutional players in the crypto scene is happening as the players in 2021 get flushed out in the current deleveraging. If this really is the case, this may be good news for investors as they now may get  the chance to come in before the large institutional investors if they do so again later.

After the timeline on the deployment of the withdrawal function on ETH 2.0 upgrade was removed in mid-November that resulted in weeks of paranoia within the ETH community, ETH developers have finally agreed on a date that this function would be enabled – this would be deployed in March 2023 in the Shanghai hard fork that is poised to begin testnet around the end of this week. The positive turn of events has caused the accumulation on ETH to pick up again, with whales holding between 100 to 1 million ETH adding about 561,000 ETH last week. The amount of ETH this category of whales hold is now back to pre-Merge levels, but still substantially lower than its high of the year.

Macro

Last week with not much on the calendar, stocks closed lower as traders realigned their positions ahead of the last Fed meeting of the year this Wednesday. While a 50-bps point hike is pretty much priced in, investors are getting worried over what Fed Chair Powell would guide at the post meeting press conference, especially after the release of the producer price index (PPI) last Friday December 9th.
The producer price index, a measure of the cost of raw materials companies that produce a product have to pay, or sometimes also referred to as wholesale prices, increased 0.3% for the month and 7.4% from a year ago, despite expectations for it to cool down. A 38% surge in wholesale vegetable prices pushed the food index up by 3.3%, offsetting an identical 3.3% decline in energy costs.

While some investors were worried that an increase in the PPI could spill into the CPI, which is the price that consumers pay, the markets was relieved to see November headline and core CPI come in below market expectations. The deceleration seen was broad with a wide variety of categories coming in below expectations, while there were only a few offsetting surprises on the high side. This report potentially reduces (though does not eliminate) the risk that the Federal Reserve might have to push the funds rate above 5% next year. A key topic heading into tomorrow’s Fed meeting which will include and updated dot plot. Rates dropped led by the 2-year yield and futures markets pulled down expectations for the 2023 terminal rate towards 4.8%.

Equities, Fixed Income, FX and Commodities

Equities

After the release of today’s November CPI report, stock prices surged through the US opening bell led by the Nasdaq and tech. Equities started to pare gains though as investors try to speculate on what Jereme Powell will say during tomorrow’s FOMC meeting regarding future rate hikes and the terminal rate. 

Fixed Income, FX & Commodities

Gold and Silver closed almost the same levels as where they opened at the start of the week after rebounding from an early week decline. Gold closed a tad below $1,800, while Silver closed at around $23.45. Both metals are a tad lower in the new week on the back of a slight dollar bounce to start the week. 

Oil prices fell to their biggest losses in months after the EU price cap on Russian oil took effect. In a retaliatory move, Russian president Putin threatened to cut output, however, it did nothing for the price of oil, which continued to slump. Eventually, Brent closed the week down 13.5% to $76.80 while the WTI dropped 13.4% to close at $71.80. Oil is starting the new week rebounding a little, by around 1%.

New’s we’ve been reading

  • The Canadian Securities Administrators (CSA) published an ‘update to crypto trading platforms operating in Canada’ on Monday. The statement highlights that exchanges in Canada ‘agree to comply with expanded terms and conditions that will include, among other things, requirements to hold Canadian clients’ assets with an appropriate custodian and segregate these assets from the platform’s proprietary business…’ The CSA also wrote that it will contact registered venues to discuss the applications of these terms. The statement also said that the CSA ‘is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives.’ – link – @OSC
  • A JPMorgan study found that 13% of its American clients transferred funds to a crypto account at least once at some point in time. The figure represents a 3% increase compared to pre-pandemic levels, with a median of USD 620. The demographics are also largely dominated by millennials. – link – @WSJ
  • FTX’s bankruptcy lawyers claim the Bahamas government requested Sam Bankman-Fried to mint and transfer its officials ‘hundreds of millions of dollars’ worth of crypto while the former CEO was still in control of the exchange. According to court filings the government also tried to assist Bankman-Fried with regaining access to the exchange’s systems after it filed for bankruptcy. – link – @Bloomberg
  • The US Department of Justice is split on a decision to prosecute Binance over the exchange’s compliance procedures, sources told Reuters. The exchange has been the subject of an investigation, which began in 2018, and has focused on determining if Binance violated money laundering laws and sanctions. Sources said some prosecutors believe the investigation has garnered sufficient information to prosecute Binance’s executives, while others discussed further review or possible plea deals. – link – @Reuters
  • South Korea’s Supreme Prosecutors’ Office reported that Do Kwon, the creator of the Terra network, is located in Serbia. In September, a South Korean court issued an arrest warrant for Do Kwon, and Bloomberg reported that Interpol issued a Red Notice for the Terra co-founder. – link – @CoinDesk

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