Market View
Following the market volatility over the weekend and into Monday, many of our immediate predictions regarding a near-term market rebound have now materialized (see “Doom and Gloom?” published August 5). But uncertainty continues to cloud investor sentiment, as macro dominance of crypto price action persists. That said, reports suggest that institutional clients have started to take advantage of the situation.
The drivers of this extreme market activity are still somewhat nebulous, but they come down to few points:
- The Bank of Japan (BoJ) hiked rates by 15bps to 0.25% on July 31 (minutes released on August 4), which was a catalyst for the reversal of JPY carry trades against higher yielding currencies and US stocks.
- Concerns over the US labor market followed a weaker-than-expected nonfarm payrolls print on August 2. Most importantly, the Sahm rule on the unemployment rate (the U-3 surged to 4.25%) was triggered signaling possible recession, though Claudia Sahm herself has said this may be a false positive[1]. Moreover, Hurricane Beryl may have caused distortions in the employment data, which would suggest this could have been a seasonal blip.
- Regardless, that data immediately followed a weak US ISM manufacturing print and may have led economists and market players to believe that the Federal Reserve was behind the curve. Fed funds futures were revised to suggest the Fed could deliver as much as 50bps of cuts at the September meeting. That’s still six weeks away – a lifetime in market terms – given the absence of an August meeting. This further accelerated unwinds in the JPY carry trade and led US 10y yields to fall 20bps to 3.79% on August 5 before retracing higher.
- US earnings reports from the “Magnificent Seven” have also disappointed expectations in recent weeks, driving up concerns about the state of global consumer demand and setting these assets up for a correction.
- Finally, escalating tensions in the Middle East have been making many investors uneasy about the state of geopolitics and its effect on markets, particularly where oil supply may be concerned.
Looking ahead, we would expect some of this selling pressure to ease, though we’ve made it clear that we retain a defensive approach in 3Q24 and a constructive outlook for 4Q24. Given the absence of idiosyncratic catalysts for crypto in the next few weeks, we think macro dominance could continue. For example, next week’s inflation print on August 14 will likely take on additional scrutiny given this week’s events. The median Bloomberg forecast is 2.9% YoY for the headline figure and 3.2% YoY for the core figure (ex-food and energy). But also we expect many market players to look at PPI the day before to provide an early indication for CPI directionality, potentially affecting market performance as well.
Meanwhile, the sharp price move downwards on Sunday evening (August 4 at 9pm ET or Asia market open) cleared a large amount of leverage out of the market with nearly $1.1B in perp liquidations in the span of 24 hours. This was the largest single day of liquidations since March 4, 2024 per Coinglass data. Cleaner positioning could be a positive technical indicator for crypto, in our view. In the options market, the bitcoin 25D 1m skew is also starting to come in from some of the most negative levels we’ve seen YTD, after a massive shift lower from 6% in late July. This may indicate that the market could be done pricing-in pessimism.
On the other hand, liquidity may be more constrained. Leverage in onchain spot markets has been reduced as evidenced by drops in stablecoin borrow amounts. Between August 1 and 6, the total USDC borrowed on Ethereum Aave V3 fell by 20% from $1.43B to $1.14B (with a proportionally even larger 45% drop from $220M to $120M on Arbitrum Aave V3). Part of this reduction in borrowing was driven by liquidations, with $239M of collateral liquidated on Ethereum Aave V3 over the span of 24 hours. This was the largest single day of Aave V3 liquidations since its deployment by six-fold, accounting for more than 50% of cumulative liquidation volume to date.
In fact, we think that liquidation driven market moves had an outsized impact on ETH, in part due to its widespread usage as collateral in DeFi (with programmatic liquidations) relative to BTC or SOL. This may have exacerbated perp driven liquidations in a reflexively downwards cycle where liquidation in one market triggered selloffs in the other. On August 4th, $261M in ETH perp longs were liquidated, nearly the same as the $281M for BTC despite their differences in market capitalization. For comparison, only $41M in long liquidations occurred for SOL.
Perp funding rates for ETH also reached below -10% annualized, but remained mostly above 0% on BTC perps. This further indicates a comparatively larger perp driven move to the downside for ETH, which we think was responsible in part for the relatively larger magnitude of ETH’s move. For example, in the 1 minute tick on August 4 at 21:10 ET BTC dropped -2.98% and SOL dropped -2.82%. Meanwhile, ETH dropped -8.34% over that same time. Note that a lag in the recovery of ETH this week may also reflect headline risks related to possible endogenous supply moves.
Despite ETH’s relative underperformance during the selloff, it’s interesting to note that the US spot ETH ETF complex saw its strongest net inflow days on Monday and Tuesday at +$48.8M and +$98.4M respectively. The deceleration in Grayscale’s ETHE outflows to a daily average of $39M this week also validates our view that the withdrawals have likely been frontloaded compared to what we saw with GBTC. Meanwhile, US spot BTC ETFs saw collective outflows of -$168.4M and -$148.6M at the start of the week, respectively. We think this could reflect some opportunistic buying of ETH near YTD lows.
PSA: Not all onchain transfers are sells
The rise of onchain monitoring tools has revealed early signals into major distributions in the past several months. While these have recently been relevant (e.g. Mt. Gox and German government movements), we think it’s also important to note that not all large onchain movements imply distributions. Onchain movements could arise from wallet consolidation, OTC trades, security upgrades, and more – many of which do not have a direct impact on flows. That said, BTC markets have tended to trade lower in the hours following large or unexpected movements by well tagged entities. (See Chart 2.)
