📈 Weekly Market Update

[27 February 2023]

Broader markets continue on a risk-off trajectory as a new narrative takes hold: inflation is more entrenched than expected, and to bring it under control requires an economic slowdown. If the slowdown occurs naturally, the Fed will not need to raise rates further. If it does not, then the Fed will need to bring further pain. In other words, there will be a comparable amount of pain coming from somewhere before markets can look upwards again. Regardless of the details, expect further downside in the short term.

Concurrently, one of the current driving forces behind NASDAQ’s previous strength, the craze over AI and ChatGPT, is also past. As time passes, the limits of diffusion-based AI models are becoming more apparent to the layman, and the exuberant emotions around the issues start to fade. This means a further damper on the US’ major tech stocks.

Tension between China and the US and uncertainty within China itself also continue to cloud the global outlook. Although the EU has done poorly in the past year, the EU is at least a known quantity, while China’s data is much more uncertain, with potential policy changes presenting a much larger risk. Within the last week, we have seen signs of continued decoupling between China and the US, with China pushing firms to drop big 4 auditors, stirring rumours of more books being cooked. Propaganda and policy have also stepped up elsewhere to denounce and curb “Western influence”. China’s continued coziness with Russia has been a serious source of unhappiness for the West; these are essentially sanctions busting within the limits of international law but also outside of the Western-led consensus. It is quite possible that we are looking at the precipice of moving from a globalized world of international supply chains focused on economic growth, to one with another iron curtain. Once the credit between the two sides has been broken, changes can arrive exceptionally quickly and recovery will be next to impossible.

In light of this, our analyst will limit exposure to the Chinese market in all its various forms. Given that the crypto market has been somewhat decoupled from China at this point, the overall impact may be limited in the short term. However, the broader impact of how China moves onwards will be difficult to overstate.

Events of note: US home prices, retail and inventories on Tuesday. S&P global manufacturing PMI on Wednesday. EU inflation data on Thursday.

Full article at: https://marginx.io/weekly-market-update-27-feb-2023/

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[7 March 2023]

Last week saw markets largely setting up for their subsequent moves, with bond, stock and crypto markets all largely trending sideways after breaking their momentum in the second half of the week. The bond markets’ continued upwards tick is placing pressure on institutions who see another round of possible sell-offs coming along. If rates continue to tick higher, we are likely to see further shocks as positions are forced to unwind, as we have seen last October when the Bank of England had to step in to secure its financial system due to a sudden spike in borrowing costs. For now however, things look largely steady across the board, with VIX readings heralding a calm before the storm as markets wait for the next sign from the central banks, data agencies and policy makers globally. The US Fed and the Bank of Japan with its new chief are the ones to watch in the coming week.

China continues to be in the spotlight, with rumours that the US is preparing sanctions on China with its allies if Chinese support for Russia deepens. While this does not mean that US will exercise such a decision, releasing public knowledge of such discussions is clearly meant to act as a warning. This is likely to increase China’s emphasis on self-sufficiency in the near future, them having observed the impact of coordinated sanctions on Russia’s economy, and wanting to draw a line in the sand. The latest China’s National People’s Congress has seen Xi further tighten his grip on the state apparatus as the technocratic and economy focused Li Keqiang exits the stage. In broad strokes, the relationship between geopolitical risk and centralization of power is clear, as is Xi’s more confrontational style compared to his predecessors. That said, the inward facing nature of this congress suggests Xi is more interested in securing his own power and sorting out the Chinese economy’s internal woes for now. Both have yet to recover from years of adhering to China’s aggressive zero-Covid policy. Consistent with this, the CCP has set for itself a growth target for this year at 5%, a tepid follow-up to last year’s 3%. To be clear, China is still an integral part of the global economy, and a slowly growing China means the world’s largest growth engine in the last few decades can no longer be relied on to bail out the rest of the world. On balance, both the SSE and Hang Seng continue to drift sideways in response as they await more substantial market policies.

In the cryptosphere, Silvergate’s woes have sent ripples through the markets, sending BTC sharply downwards on March 3, 2023. Silvergate’s finances have come under pressure despite BTC’s recent price recovery and having held on since FTX’s collapse, a sign of the stresses induced by borrowing costs marching ever higher. It remains to be seen if this was an aftershock of FTX’s collapse, another company falling to the chill we are currently experiencing, or a sign of things to come.

Events of note: Powell’s testimony to Congress on Tuesday and Wednesday. US Job data on Friday.

Full article at: https://marginx.io/weekly-market-update-7-march-2023/

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[13 March 2023]

Last week has proven to be dramatic, with both foreseen and unforeseen events. Powell’s statements before Congress sent expected rates shooting up. Silicon Valley Bank’s (SVB) subsequent collapse sent rates markets the other way and exacerbated the selloff in crypto and equity markets. The markets are pricing in no further tightening on the next FOMC meeting in the aftermath of these bank collapses. Along with Silvergate and Signature, there have been three significant bank collapses in a week. We can see a pattern emerging from these collapses:

  1. Institutions are holding onto a large amount of losses from a bad year amidst collapsing equity/crypto prices and rapidly rising rates
  2. A liquidity crunch follows from realizing these losses, or from a loss of public confidence related to these losses leading to a run
  3. Institutions are unable to recapitalize due to the overall liquidity shortage on markets even if they are sound in the longer term

Broadly, this is similar to collapses that have already occurred within the cryptosphere. In the case of SVB, the FDIC was forced to step in to make depositors whole, above the 250,000 USD per account as usual. This, along with HSBC’s acquisition of SVB, has halted contagion fears for now and is evidence that the post 2008 system is more resilient and responsive. However, systemic stresses are not abating unless liquidity becomes more available. With crypto markets being less regulated than traditional markets and less likely to invite government support, the potential downside ahead remains substantial should anything break. SVB’s collapse already resulted in a visible red warning in the form of USDC’s depegging. It is again a reminder that mechanisms that relate different parts of the financial system, decentralized or otherwise, both propagate stresses and can be broken. The road ahead is uncertain and it is worth reevaluating assumptions that can be taken for granted in more ordinary times.

SVB’s collapse also offers a final lesson. HSBC has been able to acquire SVB for a single pound by taking on potential liabilities, and is able to do so because of their ability to absorb the remaining risk. SVB was a victim of both hard times and markets that have decided to shoot first and ask questions later. This acquisition, impossible under normal times, represents a massive opportunity to expand HSBC’s network in tech and their footprint in the US. Should we see another major financial crisis develop, those who protect their capital and have remaining liquidity will be able to snap up assets at incredible discounts. Investors may be well advised to seriously consider this as a model rather than reaching for a falling knife. Caution now is space for greed later.

Full article at: https://marginx.io/weekly-market-update-13-march-2023/

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[21 March 2023]

At this point, it’s becoming increasingly obvious that we have a full blown banking crisis on our hands, and the measures taken to contain it are becoming increasingly exceptional. The latest failures to add to the tally include regional bank First Republic and Swiss giant Credit Suisse (CS). First Republic was the latest amongst the US regional banks to come under pressure since Silvergate and Silicon Valley Bank heralded the start of banking panic in the US. The FED has seen its balance sheet swell from additional lending made to banks through both its newly opened BTFP and the traditional discount window. Meanwhile, Credit Suisse’s troubles are not exactly new at this point, with their CDS premiums being elevated for months now and only able to borrow at ~4% over risk free rates when it tried to raise cash for its internal restructuring back in January.

That these two banks are, in retrospect, clear candidates for the latest fault lines to crack under pressure should not be a good reason for consolation. The collapse of Credit Suisse in particular is a sign that systemically important banks, also known as banks that are “too big to fail”, may not hold under their own strength. The Swiss government was forced to intervene and arrange an acquisition by UBS, with the latter being a largely reluctant party forced to clean up after its rival. UBS’ own equity took a significant hit from the news, while the Swiss government had to put up 9 billion to absorb potential losses. It is notable that the merger also went ahead without shareholder voting and with only the approval of the respective boards.

Another important detail of the Credit Suisse UBS merger is that Credit Suisse’ 17 billion USD worth of Additional Tier 1 (AT1), also known as Conditional Convertible (CoCo) bonds, were completely wiped out. This is in stark contrast to shareholders who will be paid 3.2 billion USD for their equity. That equity is paid out before bonds is distinctly unusual even if AT1 bonds have a clause for wipe outs in the event of government intervention. With the AT1 now seen as potential junior to even equity, expect liquidity in AT1 markets to evaporate, along with AT1’s ability to fulfill its role as a buffer between equity losses and bonds at a time when global markets are already incredibly fragile.

The serial collapse in the banking sector and the unusual actions taken by both the Swiss and FED, even if successful in containing the immediate fallout of these banking collapses, only serve to emphasize how significant the underlying problems are. Expect more institutions to fail and contagion to spread. Financial crises tend to emerge in the aftermath of usually negative market conditions following a loosening of financial regulations. 2008 followed from the 1999 repeal of Glass-Steagall, and current events can be traced in no small part to the repeal of parts of the Dodd-Frank act in 2018, itself designed to prevent a repeat of 2008. The similarity is both uncanny and uncomfortable. Expect more trouble on the horizon.

Equity and Crypto

In stark contrast to the banking sector, both tech stocks and crypto have performed well, with BTC breaking out over 28000. Tech has come to be seen as a safe haven, while crypto is seen as an alternative to traditional finance as at large. While a point has clearly been made about the weaknesses of traditional financial markets, the assumption that tech or crypto do not seem well grounded. While tech is no longer the growth filled hype bubble of 2001, with mature behemoths such as Google and Microsoft, it is worth noting that many of the NASDAQ’s largest components such as NFLX and AMZN do not have particularly strong cash flows. Cash-on-hand for the sector as a whole has come under pressure lately and it remains to be seen what would happen if these tech behemoths are forced to raise additional capital.

Concurrently, crypto has already shown itself to be far less decentralized or divorced from traditional finance than maximalists would propose. To argue that the current rally is a reflection of crypto’s superiority rather than primarily a massive squeeze of short positions is to forget FTX and Silvergate. Imagine for a moment if Binance collapses, unable to process withdrawals due to a loss in confidence in its liquidity, or if its partner banks are unable to process transactions due to their own issues that are unrelated to Binance. Another scenario would be if major holders of crypto are forced to liquidate their BTC holdings in order to cover their losses elsewhere. With the long/short ratio of BTC becoming increasingly long favored, BTC and crypto as a whole remain exposed and in danger for all their apparent strength.

Events of Note

The FOMC announcement on March 22 is the calendar event to watch. Prior to Credit Suisse’ collapse, my view was that we are likely to see a 25 bp increase despite pressure on the banking sector. Inflation remains more than double of the FED’s target, while the FEDs can rely on its lending facilities to maintain banking sector stability. With things as they are now, it is clear that current events have overtaken whatever projections the FEDs have made and will likely continue to do so regardless of their decision in the upcoming meeting. Even if we see no increase, don’t celebrate too early. Historically, market bottoms have followed FED pivots, rather than come before.

Full article at: https://marginx.io/weekly-market-update-21-march-2023/

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[27 March 2023]

Overview

Global markets continue to be roiled by uncertainty. Shocks from both sudden events and the actions of market players and policymakers come together to produce exceptional volatility. We have already seen the biggest slide in US 2-year rates since 1987, and bond market volatility as indicated by MOVE remains at its highest since its introduction in 2019. Inflation readings continue to be elevated as well, and the specter of stagflation suddenly feels a lot more real. Other macro indicators such as China’s disappointing corporate profits also paint a gloomy picture looking ahead. Capital preservation remains the name of the game for the foreseeable future.

Looking at the markets, there is a danger right now of becoming consumed by short-term movements and missing the bigger picture. As a reminder, the collapse of Bear Stearns in March 2008 predated that of Lehman Brothers by 6 months and the market bottom in March 2009 by a full year. Regardless of direction, it will be some time before current events play out.

Banking Crisis

The current banking crisis is undoubtedly still at the top of everyone’s minds. With credit default swap (CDS) spreads blowing up and stock prices plunging, Deutsche Bank looks like it might be next on the chopping block. Despite the material differences between Deutsche Bank and Credit Suisse, Deutsche Bank has not been quite able to leave behind its history of run-ins with regulators. This same scrutiny by regulators has resulted in a strengthening of Deutsche Bank’s balance sheets and a series of restructurings that put it in a much better position to survive current and coming shocks. That said, losses of confidence can often be self-fulfilling, which is why regulators globally have been so eager to shore up confidence in any way they can. There is no small irony that in trying to do so, German Chancellor Olaf Scholz’s statement that there is “no cause for any kind of concern” ended up reminding many of Silicon Valley Bank CEO’s own right before its collapse.

Meanwhile, across the Atlantic, lending on the Fed’s balance sheet continues to expand as banks seek liquidity. Loans at the familiar discount window decreased while usage of the Fed’s new credit facility, the Bank Term Lending Program, ballooned. Outflows from smaller banks to larger ones continue, though there are signs of a slowdown. Overall, we see continued stress for many US and global banks, with global central banks stepping up as lenders of last resort.

First Citizen has agreed to acquire much of Silicon Valley Bank. First Republic Bank continues to be in limbo and Signature remains in receivership.

Equities and Crypto

In contrast to bond makers and the banking sector, US equities have performed well over the past two weeks. However, much of the current rally has to do with the strong performance of megacaps such as Alphabet and Microsoft as rate expectations adjust heavily downwards, potentially masking weaknesses in the broader market. Should these firms falter, we may see equities falling in line with other asset markets.

In terms of mainline crypto, Bitcoin has been moving sideways for the past week. There are signs of the current banking crisis affecting BTC liquidity despite its strong rally in the past month. This will manifest in the form of greater slippage and volatility as order books are thinned out, as well as a general easing of buying pressure. Binance’s spot market outage also briefly sent jitters across the markets, a reminder of potential counterparty risks.

Upcoming Calendar Events

  • EU area preliminary inflation data (30, 31 Mar)
  • US PCE data (31 Mar)
  • Ethereum Shanghai upgrade (Mid April)

Full article at: https://marginx.io/weekly-market-update-27-march-2023/

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[4 April 2023]

Overview

As the days go by, the intense urgency of the banking crisis has faded and conflicting narratives have emerged. Some see the next bull market emerging in equities and crypto, while others are increasingly alarmed by what they see as a dislocation that will be corrected. US and EU inflation numbers show a slight cooling in inflationary pressure, but they remain uncomfortably high at the same time that growth concerns have come to the forefront, with different parties having significantly different expectations. The question of who is right remains very much in the air, and with this much uncertainty, the risk of a policy misstep remains notable, and it is quite possible there is just no correct answer left for many.

Banking Crisis

With no other banks looking to be on the brink of failure and regulators having shown a willingness to step in at the first sign of trouble, contagion fears are much reduced. Fed balance sheets shrunk in the week ending March 28. Deutsche Bank, seen to be the next GSIB at risk after Credit Suisse, looks to be stable for the moment.

The ballooning of Deutsche Bank’s credit default swap spreads has been attributed to a relatively small trade in an illiquid market. In the aftermath of Credit Suisse’s collapse, the fear that this was a sign that market insiders knew something everyone else did not along with Deutsche Bank’s own poor reputation produced a significant selloff on Deutsche Bank and across broader markets. Even taken at face value, the market nervousness reflected is itself a cause of concern, and could lead to more instances of shoot first ask questions later. In the longer term expect credit to remain exceptionally tight.

Money Tightness

With European and American central banks stepping in to support their financial institutions, some have seen their actions as effectively quantitative easing and a sign of monetary loosening to come for the broader economy. This is a gross mischaracterization. The Feb balance sheets have expanded as regional banks are forced to head to the lender of last resort and borrow at overnight rates far above the norm. Similarly, the liquidity support provided by the Swiss to UBS and Credit Suisse is far from free. Most would agree that giving out what is effectively a payday loan would not exactly count as loose monetary policy.

Concurrently, traditional monetary policy indicators such as money supply measures have collapsed in a way unseen since the 1930s’ Great Depression. Meanwhile, the velocity of money remains low by historical standards and is likely to have seen a further contraction since the last reading was taken.

All of this combines to suggest that the current policy support is a way to spread out the pain and prevent acute liquidity troubles from unduly damaging the financial sector. With the health of the financial sector having visibly deteriorated, the real economy is likely to see tighter conditions even if rate cuts arrive soon.

Upcoming Calendar Events

  • EU PPI, consumer expectations (4 April)
  • US labour data (7 April)
  • Ethereum Shanghai Upgrade (12 April)

Full article at: https://marginx.io/weekly-market-update-04-april-2023/

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[18 April 2023]

Overview

Markets continue to be uncertain, with crypto, equity and bonds reflecting different expectations. A mishmash of signals have arrived, and depending on where one looks, they can find something to support either an optimistic or pessimistic narrative. It is important to focus on the bigger picture and not get led astray by day-to-day headlines. Zooming out, equity, crypto and bond markets have been trending largely sideways, showing an uncertain market waiting for direction.

Equity

With earning season starting in earnest, market watchers are most interested in finding out how earnings have been impacted in an environment with a potential recession looming, banking uncertainty, high interest rates and sticky inflation. Bellwether earnings so far include JP Morgan and Wells Fargo, strong beats that have injected significant confidence following the preceding month’s banking collapses and rescues. It remains to be seen if the more concerning regional banks have done as well and how firms outside the banking sector have done. For those trying to divine how seriously to take recession fears from coming earnings, it is worth remembering that earnings are backward-looking.

Crypto

BTC broke 30k last week, but in the grand scheme of things, that is not a big move and prices have since fallen below the mark. The real news was in ETH. With Shanghai-Capella having arrived, ETH has seen significant strength after an initial bout of weakness right before the upgrade itself. The initial sell pressure represented traders attempting to front-run the market before an event with apparent downside potential. In reality, this resulted in crowded short positions in ETH, many of which were liquidated. Sell pressure was overstated as the unlocks are gradual and most have cost basis above current market prices. Meanwhile, Shanghai-Capella’s successful execution shows that things are going according to plan and is long-term bullish. The strength is most apparent in the ETH/BTC pair, but it remains to be seen if ETH holders will be tempted to take profit and cap the current rally.

Upcoming Calendar Events

  • Earnings season
    • Finance: Bank of America (18 April), Morgan Stanley (19 April)
    • Consumer Goods: Johnson and Johnson (18 April)
    • Semiconductors: ASML (19 April), TSMC (20 April)
  • US PMI data (21 April)

Full article at: https://marginx.io/weekly-market-update-18-april-2023/

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[26 April 2023]

Overview

Banking concerns look largely played out in the short term, along with price swings from the Shanghai-Capella update. Equity and crypto markets are thus seeing concurrent pauses in price action as they wait for direction. Big earnings in tech megacaps will likely determine where NASDAQ heads in the next couple of days before attention turns to the FOMC meeting on the 2 and 3 May. In the background, concerns over the US debt ceiling have sent short-term US Treasury rates higher.

Equity

With tech giants Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN) and Meta (META) reporting earnings this week, the NASDAQ and S&P500 have seen their rallies paused. Currently, there is significant potential for downside if earnings fail to impress. The indices are already under pressure as enthusiasm from bank earnings fade and with Tesla (TSLA) facing a major sell-off following its earnings release on the 19 Apr. TSMC (TSMC) has similarly disappointed on revenue and has projected further headwinds ahead. The sensitivity is especially great given that much of the stock market rally since the start of the year are particularly concentrated in these megacaps. Nvidia (NVDA) and AMD (AMD) have similarly rallied off AI hype but earning numbers may prove sobering in the short term given their backwards looking nature even if the hype pans out in the coming months/years.

Debt Ceiling

At this point, partisan brinksmanship over the debt ceiling is nothing new. The story is largely similar to the last time a Democrat president sat in the White House and the Republicans held the Capitol. Since then, political dysfunction in the US has noticeably worsened, with Trump’s election in 2016 emboldening and empowering those most likely to play fast and loose with the US’ credit. Bond markets are starting to show early signs of discomfort, especially with tax revenue being weaker than expected. With Congress not especially known for moving fast, there is a risk, albeit a small one, where those standing on the brink may misjudge and end up falling off.

Upcoming Calendar events

  • Earnings season
    • Tech: Microsoft (25 Apr), Alphabet (25 Apr), Meta (26 Apr), Amazon (27 Apr), Intel (27 Apr)
    • Commodities: Exxon Mobil (28 Apr), Chevron (28 Apr)
  • FOMC Meeting (2–3 May)

Full article at: https://marginx.io/weekly-market-update-26-april-2023/

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[9 May 2023]

Overview

The past week has been filled with events that have moved markets, but not quite enough to establish a clear trend. Meanwhile, uncertainty about the future remains high, even as VIX values hit one year lows on 28 April. Expect market volatility to increase in the coming weeks as markets become untethered from its holding pattern waiting on calendar events and attempt to start establishing a narrative once more. Markets and the Fed look to be in another standoff over rates. Whatever happened to “don’t fight the Fed”?

Equity

Equity markets have swung between the top and bottom of the trading range established since 31 March. Regional banking shares have come under pressure once again, despite repeated reassurances from authorities. Share prices collapsed last Wednesday and Thursday before recovering on Friday. Such movements have been distinctly uncomfortable for some, with calls emerging amongst bankers for investigations into “abusive” short selling. It remains to be seen if such abuses emerge or if short sellers are simply ahead of the curve. After Silicon Valley, Signature and First Republic, there is a certain richness to regional banks blaming short sellers.

Tech giants continue to show strength, with Apple (AAPL) earnings proving encouraging. Friday’s pop can largely be attributed to strength in the most valuable traded company in the world, supported by a partial recovery in regional banking shares.

Policy Concerns

With the May FOMC meeting panning out largely as expected, ending with a 25 bp bump and the Feds signaling a possible pause in rate hikes, the market’s attention has turned to the future. However, a point that may have slipped under the radar is that the Feds do not expect a rate cut before the end of the year, though they have left enough wiggle room in their words to suggest that a cut is possible. This is in stark contrast to bond markets that have priced in a good chance of a rate cut as early as the July meeting (33% as at the time of this writing). Essentially, the Fed is saying one thing and bond market traders are trying to call its bluff, convinced that the current liquidity crisis and potential recession will force the Feds’ hands much earlier than expected. Part of that is an expectation that the Fed’s data is not he most accurate, and that strong looking data is breeding unwarranted optimism. Job openings as a datapoint is basically moot at this point and labor data as a whole has seen repeated adjustments in recent months that suggest the data is far from good. This likely also goes some way in explaining the market’s tepid reactions to the latest NFP data.

Ultimately, only one side will be right and the upcoming showdown will not look pretty regardless of which side is proven right. Meanwhile, equity market prices somehow seems to have internalized the contradictory expectations of upcoming rate cuts and no recession. Expect at least one more test downwards for equity markets as determined bears try to break greedy but flighty bulls.

Meanwhile on the fiscal side, the x-date, where the US Treasury will not be able to meet its financial obligations, is swiftly approaching. Markets look sanguine, seemingly resigned to the brinkmanship on display and not expecting a resolution until right before the deadline. The potential for a default seems almost unreal, but playbooks should be made for a potential credit event, just in case. That a default has never happened does not mean it will not, and suggests global financial systems will be poorly equipped to deal with the fallout.

Crypto

BTC liquidity issues have made themselves apparent in another way, with Binance forced to put up short withdrawal freezes. It remains to be seen what the outflow of BTC from Binance means.

More transparently, the Ethereum Foundation has sold a tranche of ETH. Historically, the foundation has done a pretty good job look for market tops to offload a little bit of the tokens they have on hand.

Upcoming Calendar Events

  • China trade data (9 May)
  • US CPI data (10 May)
  • BoE policy decision, US PPI data, China CPI and PPI data (11 May)
  • US Consumer Sentiment, Preliminary (12 May)
  • Various comments by Feds (8 – 12 May)

Full article at: https://marginx.io/weekly-market-update-9-may-2023/

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[16 May 2023]

Overview

US debt ceiling concerns and weakness from China continue to weigh on markets. With little more than rumours from DC to calm the markets, expect increasing stress to manifest as time passes until something concrete arrives. The problem with the game of chicken is not that either party wants disaster, it is that in trying to threaten the other with disaster, the point-of-no-return may be misjudged. Market participants are certainly taking such risks increasingly seriously. Inflation readings coming in ever so slightly below expectation was the silver lining last week, but the consolation feels scant. Crypto mainlines show weakness as altcoins and memecoins show strength, traditionally a sign that the current rally is coming to an end.

Debt Ceiling

With Yellen’s predicted x-date fast approaching, Biden set to fly to G7 and Washington failing to deliver a resolution, the possibility of a default is looking more real with each passing day. Should Biden be forced to cancel his trip, there would be a blow to the US’ global standings and no one would walk away looking pretty. Let this be clear: the standoff is between the Republican-controlled Capitol and the Democrat-controlled White House. Should Biden leave for G7, progress will be difficult if not impossible.

Even if everything works out in the end, trust in the US government will be eroded. In the past, this visibility manifested in a downgrade from AAA to AA+ by S&P in 2011. In 2023, we are looking at a situation where the US fiscal position is substantially worse, interest payments are substantially higher, and politics are more polarized than ever. The problem will zoom out from the immediate issue of whether the US government’s bills can be paid in the coming month to whether the US government with its captured and divided institutions can fulfill its most basic and mechanistic functions, let alone deliver meaningful policy to guide it into the future. It is quite likely that we will see another downgrade by a major rating agency after everything passes. If CDS spreads are anything to go by, the US government as it stands is already far from AAA rated in the eyes of investors.

Credit Crunch

The US banking sector continues to be under stress. In the short term, we have not seen contagion in the form of one bank failing resulting in the balance sheets of another collapsing. We are instead seeing broader systemic pressures that continue to threaten regional banks in particular. There is irony with JP Morgan taking over First Republic when First Republic’s collapse is in no small part driven by deposit flight from regionals to larger banks. If PacWest is any indication, the FDIC’s willingness to guarantee Silicon Valley Bank’s depositors beyond the original $250,000 limit has not fully arrested withdrawals. The question then becomes, what other tools are available to policy makers to stabilize the system, if the essentially unlimited liquidity promised seems to not have done the trick?

The result thus far has been a steep drop in US bank credit growth, which historically has been a strong predictor for incoming recessionary pressures. The effects are beginning at last to be more sharply felt in the real economy, producing a wave of bankruptcies. This is in line with the inverted yield curve in US treasuries that has been on clear display. In a world of mixed signals, the strong historical fundamentals continue to suggest a recession is coming while arguments for a bull market remain largely a rehashing of “it hasn’t happened yet”.

Crypto

The rotation from mainline cryptos into altcoins and memecoins continues. In the past, this is a sign that crypto’s broad-based rally is weakening as crypto longs are looking for improved returns elsewhere with their winnings, with the expectation that mainlines will not continue to make gains in the short term. Both BTC and ETH have slipped substantially from mid-April peaks, with more weakness likely. Lower liquidity in broader financial markets does not help either.

While these mainline alternatives do have the potential to moon, the risk is substantial and frictional losses from poor liquidity, price discovery and high transaction fees are likely to cost the average investor substantially. An alternative way to look at the situation is to consider if the coin being looked at will likely continue to perform well if BTC and ETH take a steep plunge. In most cases, the answer is no, in which case the case for moving from mainlines is much weaker.

Upcoming Calendar Events

  • Empire State manufacturing survey (15 May)
  • US Retail data (17 May)
  • US initial jobless claims (18 May)
  • US leading economic indicators (18 May)

Full article at: https://marginx.io/weekly-market-update-16-may-2023/

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[23 May 2023]

Overview

The event to watch for this week is ongoing negotiations over the US debt ceiling. Expect news to come right before June 1. Markets are likely to get more agitated in the meantime, with volatility futures predicting as much.

Comments from Powell increased an increased inclination towards a pause in hikes, but this is conditional on further economic weakness.

Further data from China suggest that weakness from the previous week was not a fluke, and foreign investors are increasingly coming to realise that China’s trajectory emerging from COVID is very different from the economic miracle we have seen in the past few decades. While it is not the dominant story currently, recession risks are increasingly real and apparent, and will likely be the next focal point for investors after the US debt ceiling resolves.

US Debt Ceiling

With Yellen’s June 1 deadline fast approaching, it’s crunch time for a deal out of DC. Frankly, a solid deal from the two sides was unlikely to emerge until right before the deadline, and the markets have reacted accordingly. Even as the days tick by, markets have been by and large stolid, with expectation for a last minute deal being priced in from the start. From the perspective of the politicians in question, every day before the last is an opportunity to pressure the other side. Either side could close negotiations at any time by caving to opposing terms, but why do that when each day is an opportunity to pressure the other, with the first to make concessions the loser of the two? Markets have thus been sensitive to signs of clarity of communication between the two sides, that discussions are ongoing. The main risk right now is a mistake close to the edge, where a miscalculation occurs and negotiations take just a tad too long.

With US Treasuries (UST) representing a massive portion of global fixed income and one of the default ways to hold USD in any quantity, a potential default is dangerous. There may currently be a slight market dislocation, and thus opportunity, in US Treasuries and its CDS given that many of the largest UST holders have a mandate to control their exposure to the apparent risk of a US default. There is also the point to be made that even if a payment is missed, UST holders are likely to be made whole eventually. What a technical default would look like to the global markets remains an open question.

Upcoming Calendar Events

  • FOMC meeting minutes (24 May)
  • US GDP, initial jobless claims (25 May)
  • US PCE, Durable goods data, personal income and spending (26 May)
  • US Treasury x-date (1 Jun)
  • EU inflation data (1 Jun)

Full article at: https://marginx.io/weekly-market-update-23-may-2023/

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[30 May 2023]

Overview

A deal for increasing the US debt ceiling looks to be in sight, sending markets broadly upwards. Meanwhile, stronger than expected PCE data has sent US bond rates up once again. Tech giant Nvidia announced impressive earnings off the back of AI earnings. Overall, it has been a strong week for equity markets who have been taking the news well, for both USD and crypto. Watch for the next big narrative to dominate the markets in the coming weeks.

US Debt Ceiling

With McCarthy, the Republican house leader, and President Biden having come to an agreement, the debt ceiling bill will pass in some way, shape or form. There might be some last minute wrangling over the minutiae, but a few spoilers will not be able to stop a majority vote from clearing it. Concurrently, the US Treasury has managed to wrangle a few extra billions to push back the default date to June 5. The current market rallies imply an expectation of no more surprises.

Expect this to be the last act of this saga for now. In the longer term, expect the credit worthiness of the US to be more open to doubt. We may see another rating cut from a major agency coming. It is also quite likely we see repeats into the future wherever there is a Democrat in the White House and a Republican majority in the House.

Equity

Tech giants continue to buoy the current equity market, and the difference between megacap top performers and the rest of the market grows increasingly apparent. NASDAQ is up 25% YTD, while the S&P 500 sits at 10%. Meanwhile the S&P 500 equal weight index is flat for the same period. Not all is rosy.

AI continues to be one of the main drivers for the current explosion in tech valuations. In contrast to software giants like Google and Microsoft however, Nvidia is seeing revenue upfront and is likely to continue to enjoy windfalls from any further positive developments in the field. Its most recent earnings sent it more than 25% overnight. The same can be said, though to a lesser degree, for AMD, the 2nd biggest supplier for AI hardware. Now that the news is absorbed however, future direction is more uncertain.

Upcoming Calendar Events

  • US consumer confidence (30 May)
  • EU inflation data (1 Jun)
  • US labour data (2 Jun)
  • US Treasury X-date (5 Jun)

Full article at: https://marginx.io/weekly-market-update-30-may-2023/

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[6 June 2023]

Overview

A resolution has arrived for the US debt ceiling, and as with all good compromises, neither side is walking away happy. The markets nevertheless rejoiced, with equities posting 52 week highs. The Royal Bank of Australia surprised markets by raising rates once again. Finally, the big developing headline to watch is the SEC’s filing against Binance.

Debt Ceiling Drama Wrap Up

As expected, a deal was passed between the Democrats and Republicans to avert a potential default. Both sides can claim to have achieved their primary objectives. However issues remain, and the following points are worth noting:

  1. Republicans were able to achieve limits in discretionary government spending and prevent tax increases. However, such spending is only a small portion of US government budget, which is dominated by social services and defence spending
  2. The Democrats can claim victory in having successfully defended social spending and avoiding major cuts.
  3. The Democrats were unable to pursue tax increases on the wealthy and ultra-wealthy, or even take smaller steps such as closing Trump-era tax cuts
  4. The IRS will not receive additional funding, further aiding the wealthy in reducing their taxes paid, legally or otherwise
  5. The current spending and tax revenue outline indicate continually ballooning debt with the new ceiling likely to be reached again circa 2025

With the debt ceiling drama over for now, bond and equity markets are once again looking to central banks globally for signs. Market expectations have swung swiftly between flat to hike to flat for the next Fed meeting over the course of days.

Crypto

The big news this week in the cryptosphere is the SEC’s filing against Binance. There have already been hints that this was coming, with Reuters having published successive investigative reports on Binance’s murky finances. The charges are expected to stick given the evidence on hand, such as point 111 in the filings.

To some, this is eerily reminiscent of FTX. To others, the material difference is that Binance has the money to pay its bills and has done a good job of cordoning its US entity away from the rest of its operations. Thus far, it appears the SEC filing will result in a fine, but the timing and amount remain uncertain. Meanwhile, it remains to be seen whether the US Department of Justice will choose to pursue criminal proceedings.

Upcoming Calendar Events

  • US, China services PMI (Jun 5)
  • US, China trade data (Jun 7)
  • China CPI and PPI (Jun 9)

Full article at: https://marginx.io/weekly-market-update-6-june-2023/

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[14 June 2023]

Overview

As expected, recession, inflation and rates are again featured on market headlines. The Canadian central bank has followed Australia’s in raising rates, with the Australian central bank warning of sharply increased recession risks. The week ahead is similarly dominated by inflation and rates-related calendar events, with US CPI and PPI data arriving ahead of the outcome of FOMC’s rate decision. The European Central Bank and Bank of Japan will similarly be following up with rate decisions. With recently revised numbers showing the EU posting two straight quarters of contracting GDP and higher inflation numbers than the US, the ECB’s decision will be closely watched.

Recession?

With the US economy proving more resilient than markets expected, there is once again increasing optimism amongst investors that a recession can be avoided. Meanwhile, indicators such as bankruptcy rates, and Fed emergency lending suggest pressures have not fully abated. The split is interesting, with large institutions and economists more convinced that a recession is going to arrive, and more likely to argue that the current rally is unlikely to sustain itself. For the latter, a point that is important to remember is that the markets are not the economy. Even if the US economy tanks tomorrow, if we see sharp rate cuts and globally increased government support, then expect asset prices to soar.

Upcoming Calendar Events

  • US CPI (13 Jun)
  • US PPI, FOMC rates decision (14 Jun)
  • ECB rates decision (15 Jun)
  • BoJ rates decision (16 Jun)

Full article at: https://marginx.io/weekly-market-update-14-june-2023/

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[21 June 2023]

Overview

A relatively quiet week has come and gone, with US and EU rate decisions largely falling within the range of expectations. Another policy-driven week looks to be on the books ahead, with recession concerns amongst investors looking to be somewhat reduced. Currently, We are in a stage that requires patience. While the most recent economic readings and policy decisions can propagate and get priced in at the speed of the internet, the real economy takes time to respond and have its internal forces play out.

Policy

The FOMC’s decision not to raise rates was within the range of expected outcomes. Despite the pause, Fed officials have also signalled a couple more hikes down the road. Powell’s testimony to Congress would hopefully offer a little more clarity while leading indicators on Thursday and S&P’s PMI flash would help give some hard data in support.

Beijing will be looking to support its over-extended ‘dynamic-zero’ policy and has cut its prime rates by 10 bps. However, market responses have been lacklustre given the depth of China’s apparent economic woes. Massive youth unemployment, deflationary pressures, weak exports and factory output cannot be meaningfully alleviated by minor rate cuts. As it is, it is quite possible China is looking at repeating Japan’s Lost Generation, except without a developed country’s GDP per capita.

In Japan itself, the Bank of Japan continues to hold onto its ultra-loose policy despite inflation staying above 3% for more than a year. JPY continues to show weakness against the USD as a result even as the dollar index (DXY) itself hovers around the lower end of its 52-week range.

Lastly, the Bank of England’s decision will be closely watched as it struggles to balance inflationary and recessionary pressures. Markets expect either a 25 bp or 50 bp raise, following in the ECB’s footsteps. The UK’s government borrowing costs are growing heavier by the day, and we may see the strains in the UK’s financial system, last seen in Liz Truss’ tenure, reveal themselves again.

Upcoming Calendar Events

  • Powell testimony (21 Jun)
  • UK inflation data (22 Jun)
  • UK interest rate decision (22 Jun)
  • US leading indicators (22 Jun)
  • S&P US PMI flash (23 Jun)

Full article at: https://marginx.io/weekly-market-update-21-june-2023/

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[26 June 2023]

Overview

US equity markets are staring down the reality of a global recession while crypto markets jump from a collection of positive catalysts. US PMI readings suggest the global manufacturing slowdown has finally reached American shores. Globally, central banks continue to suggest tighter regimes for the foreseeable future. Analysts are in turn suggesting the pain will be greater than markets have priced in.

In breaking news, Russian PMC Wagner has staged an armed uprising, advancing rapidly towards Moscow, seizing the headquarters of the Southern Military District, responsible for supplying and directing much of the war in Ukraine, and shooting down multiple Russian aircraft along the way. Putin announced that Prigozhin, head of Wagner, is to be persecuted, before backing down a few hours later. It is likely that an agreement has been reached that secures Prigozhin’s power in the 2024 elections where Putin will step down. Subsequent developments and their impact on the markets remain to be seen, but responses thus far outside of Russia have been muted, a consequence of how divorced Russia is from global markets since the beginning of the invasion of Ukraine.

Equities

With so many apparent headwinds, it’s a wonder US equities have done so well in the year so far, AI hype or not. That the most recent PMI readings were a surprise compared to forecasts suggest a degree of disconnect between US investors and those abroad, reminiscent of when COVID first became a global concern. Asian and EU markets swooned while US markets seemed to remain in its own bubble until cases reached American shores, producing the sharpest selloff since 2008. It is possible we are seeing a repeat of the pattern amongst American-centric investors, where they fail to price in relevant external information well. In such a case, we are likely looking at the end of an extended bear–market rally. The alternative is one where the US economy is indeed heavily decoupled from the fortunes of the rest of the world, able to perform well while the rest of the world struggles. In that case, we may be looking at a new, at least in living memory, paradigm of an effectively deglobalized world.

Crypto

Last week can be seen as a landmark week in crypto history. While there has been a long-standing division between trad-fi and crypto, the launch of Wall Street backed EDX, Blackrock’s BTC spot ETF filing and Crypto.com’s license from Spain and Singapore are strong steps towards making crypto mainstream in trad-fi circles as well. This represents a massive new pool of cash that can easily access crypto markets, in ways that are both technically familiar and legally compliant. The flipside of that reality is that crypto, or at least BTC, is likely to become increasingly co-opted into existing financials structures, a far cry from its initial dreams of a decentralized world. In response to these announcements, BTC rose sharply, breaking the 30000 USD mark once again.

Upcoming Calendar Events

  • US new home sales (27 Jun)
  • German CPI (28 Jun)
  • China Manufacturing PMI (29 Jun)
  • US PCE, consumer sentiment data (30 Jun)

Full article at: https://marginx.io/weekly-market-update-26-june-2023/

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[5 July 2023]

Overview

Last week ended with a solid shot to the arm to US markets, with PCE numbers coming in lower than expected and GDP growth stronger. On the other hand, China’s latest PMI release showed a struggling manufacturing sector, as did Germany, the EU’s biggest economy. The US’ own consumer spending also seems to be growing slower than hoped. All in all, the US economy remains the exception in its performance. The week ahead looks to be dominated by more macro data following a slow start as the US celebrates 4th of July.

Crypto

After the SEC rejected Blackrock’s initial filing, Blackrock reapplied naming Coinbase as its surveillance partner. Thus far, existing BTC ETFs have been based around future contracts, with spot convertible ETFs still remaining elusive. As discussed previously, this is another step in BTC becoming a mainstream financial asset. That Coinbase has been named as a partner hints at a future role for the company, as EDX and its backers look to muscle into the crypto exchange business.

Upcoming Calendar Events

  • Royal Bank of Australia rates decision (04 Jul)
  • FOMC Minutes (06 Jul)
  • US labor data (07 Jul)
  • China inflation data (10 Jul)
  • US inflation data (12 Jul)

Full article at: https://marginx.io/weekly-market-update-5-july-2023/

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[12 July 2023]

Overview

Hawkish comments from the Fed backed by strong growth and employment data from the US has sent bond yields higher. In contrast, China’s inflation, or rather disinflation, data weights further on global growth expectations. That markets still adjust downwards suggests investors still do not have a confident grasp of just how much pessimism is warranted for China’s economy and what that means for asset prices globally. Lastly, NASDAQ has announced a surprise reweighing of the NASDAQ 100 to reduce the weight of the “Magnificent Seven”, highlighting exceptional concentration.

Equities

In the year thus far, seven megacap tech firms stood out to become “The Magnificent Seven.” Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Tesla (TSLA), Alphabet (GOOGL), Meta (META) and Amazon (AMZN) now account for more than half of the NASDAQ 100. Meanwhile, the S&P 500 excluding these companies has been flat since the start of the year in an exceptional year for US equities.

In the face of this extraordinary concentration, NASDAQ is making adjustments to their index weighting to more broadly reflect the market. For funds tracking the index, this would mean they would need to sell off their holdings of the Seven and purchase additional shares of other components companies, with the announcement sending most of the Seven slightly down. While there is not likely to be a long term impact on prices, this adjustment does highlight just how reliant the current market rally is on a few companies. A position on equities is much more likely to reflect the fortunes of these particular companies rather than those of the broader US economy.

Crypto

With the SEC filing against Binance, there are warning signs that liquidity is drying up on the Binance US exchange and that there are concerns over its continued operations. For instance, the BTC-USD pair is trading at roughly a 10% discount to current BTC-USDT price. Investors with holdings on the exchange should tread carefully.

Upcoming Calendar Events

  • US inflation data (12 Jul)
  • Bank of Canada rate decision (12 Jul)
  • China trade data (13 Jul)
  • US initial jobless claims (13 Jul)
  • University of Michigan sentiment survey (14 Jul)

Full article at: https://marginx.io/weekly-market-update-12-july-2023/

[19 July 2023]

Overview

An eventful week has come and gone. In terms of data, lower than expected US CPI and PPI readings offered a notable positive surprise. US bonds and equities were sent higher and the dollar lower. For crypto markets, a ruling by a US district judge that XRP was not a security sent ripples through the market while Binance fires 1000 staff following SEC’s filing and a rumoured US Department of Justice investigation. Looking ahead, earnings season is approaching once again and will likely dominate headlines in the coming weeks.

Monetary Policy

With CPI and PPI numbers at 0.2% and 0.1% respectively, there is a strong hint that the Fed has largely succeeded in reaching their target of 2% inflation. The fact that core inflation which has proven sticky in the past months now follow headline numbers is especially encouraging. Thus far, the market has consistently been pricing in rate cuts ahead of Fed projections but it looks like the the two are finally largely in agreement, though expect at least a few meetings where rates are held steady as the FOMC verifies the trend is sustained and not simply a fluke in data, something that has happened before in past two years. Lowered rates will offer a significant boon to risk assets across the board as the risk free rate of returns falls and valuations can grow more aggressive, a fact not lost on equity markets which have reached 15 month highs and may suggest further upside for the crypto market as well.

Crypto

US District Judge Analisa Torres’ ruling in favour of Ripple Labs that XRP was not a security when sold to retail investors but can be considered a security when sold to institutional investors sets a strange but significant legal precedent for the cryptosphere. In response, XRP rose more than 50% while Coinbase’s shares rose 30%.

While the market is taking the news well, the ruling itself does little to provide legal clarity. The argument goes that less informed investors should not have the detailed knowledge to expect XRP to increase in value over time, and thus XRP is not a security to them, while more sophisticated institutional investors would expect Ripple to take relevant action to increase token price, making them see XRP as a security. This means that XRP and similar tokens can be freely marketed to retail and Coinbase can reasonably argue its primary business is not facilitating the trading of unregistered securities. Without going into what the judge thinks about the expectations and sophistication of retail investors, the outcome of this ruling is that “sophisticated” institutional investors are protected by the SEC and the US’ more comprehensive security laws, while “naive” retail investors are not, an outcome that is contradictory to the intent of the law. The ruling also rests this differentiation not on what XRP is inherently but what investors may think it is. As such, expect the ruling to be seriously challenged.

Binance’s firing represents another view on the legal status of crypto. Following the departure of several senior executives in response to a DoJ investigation, Binance has now additionally axed 1000 of its employees. While the SEC’s filing are serious, they are civil charges that ultimately can be resolved with money and a change in operations. A DoJ investigation suggests serious criminal charges may be in the playbooks for the world’s largest crypto exchange.

Upcoming Calendar Events

  • China GDP, industrial production (Jul 17)
  • U.S. industrial production, retail sales; Canada CPI (Jul 18)
  • Morgan Stanley, Bank of America earnings (Jul 18)

Full article at: https://marginx.io/weekly-market-update-19-july-2023/

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[26 July 2023]

Overview

A blockbuster week of calendar events is coming up, with rate decisions from both central banks and earnings from mega-caps. Rate decisions will arrive from the US, Japan and EU, along with PCE price data at the end of the week. Consumer confidence data from the US will also give a hint as to how likely and how deep a coming recession might be for the world’s largest economy; the world’s second-largest has already disappointed last week, forcing Beijing to announce support for the economy, though how much words will translate into meaningful action remains to be seen.

Equities

NASDAQ saw a correction last week as Tesla (TSLA) and Netflix (NFLX) disappointed. It is apparent that long gone are the heady days of growth and marketshare at all cost, where money is no object. Instead, we now see a world where the bottom is much more important as growth slows and funding costs balloon in response to rising interest rates. Tech companies with strong cashflows and strong moats were touted as safehavens, with the AI hype sparked by, amongst others, ChatGPT sending valuations higher. Microsoft (MSFT), Google (GOOG) and Meta’s (META) earnings will be a reflection of how much of this AI hypes has been transformed into cold hard cash thus far, and how much the market is willing to give these companies the benefit of the doubt that they will do so in the future.

In contrast, financial stocks have performed well, with Morgan Stanley (MS) and Bank of America (BAC) both delivered positive surprises, leading a rally in the sector that has recovered strongly from their woes, stemming from the collapse of multiple major regional banks, earlier in the year.

Upcoming Calendar Events

  • Global flash PMI (Jul 24)
  • US consumer confidence (Jul 25)
  • FOMC rates decision (Jul 26)
  • ECB rates decision (Jul 27)
  • BoJ rates division (Jul 28)
  • PCE Index data (Jul 27)

Full article at: https://marginx.io/weekly-market-update-26-july-2023/

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