Next week’s economic conference at Jackson Hole could be an important event for risk markets, particularly as financial conditions have actually loosened since mid-June. We explore what to expect in this week’s market commentary along with a look at recent ETH spot and derivatives performance.
Separately, take a look at our new report titled “Ethereum’s Merge: Investing at an Inflection Point” where we review critical dates for the Merge, look at the bear and the bull cases for ETH and address some of the misconceptions surrounding what this upgrade means to the network and its users. Please see our full report here.
Also, we recently published a tokenomics report on “Tezos (XTZ): Differentiated Governance” which analyzes Tezos and its rise to fame via offering fast and cheap transactions for NFT market participants. Despite a recent resurgence however, the network and its native token XTZ are not without their own set of challenges.
Weekly Market Call
View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.
Coinbase is hosting a Protocol Access Program on Polygon - a platform of multiple Ethereum centric scaling solutions – on August 25 at 11am ET. Our Head of Institutional Research, David Duong, and Protocol Specialist, Ben Rodriguez, will speak to Co-founder of Polygon, Sandeep Nailwal, about the future of layer 2 scaling solutions. Please register for this webinar here.
- Date: Thurs, August 25, 2022
- Time: 11:00am - 11:30am EDT
- Who: Co-founder of Polygon, Sandeep Nailwal
We expect the upcoming economic conference at Jackson Hole next week (i.e. August 25-27) to be closely watched, as market players look for signs that Fed officials could pivot on monetary policy – taking a less aggressive stance under the assumption that inflation peaked in July. After policy makers signaled that they will be data dependent at the last FOMC meeting, the minutes published this week suggested that there was a rising fear of overtightening among some board members. In our view, Fed Chair Jerome Powell will more likely try to take a more measured approach in Wyoming and emphasize that the tightening cycle isn’t over yet. Indeed, the latest readings from the Chicago Fed (see chart 1) suggests that financial conditions have actually loosened since mid-June.
Chart 1. US financial conditions have loosened since mid-June
The market is currently pricing in a terminal rate of 3.50-3.75% (inclusive of another 1.18pp of hikes this year) in the rates curve, while implied breakeven inflation expectations have fallen to 2.70% down from almost 4.50-5.00% at the end of 1Q22. That would put ex-ante real rates at around 0.8-1.0% compared to the Fed’s neutral rate of 0.50%, though ex-post real rates are of course still deeply negative at the moment at around -6%. A lot depends on how prices develop in the next few months with the Cleveland Fed “nowcasting” headline CPI at 8.33% YoY in August, though core inflation is starting to look more intransigent at 6.25%.
Meanwhile, discussions around balance sheet reduction have been subordinated in the broader monetary policy debate in recent months. But something to keep in mind is that an increase in the pace of quantitative tightening will start to kick in after August - jumping from US$47.5B to US$95B worth of bond reduction each month. The Fed’s balance sheet recently peaked above US$9T, but it’s still at all time highs which has in our view limited concerns about the impact on market sentiment. However, Fed staff have commented that the net income from their bond portfolio will turn negative in the months ahead and unfortunately at the same time that the US Treasury General Account balance will start to rise. We think this could become a pressure point for risk assets in the medium term.
ETH Merge ahead
With Ethereum’s Merge likely to take place sometime around September 14-15, the stronger ETH performance we’ve seen lately has taken its share of the total crypto market cap to 20.7% over the last week, near the levels we saw at the beginning of the year (BTC’s market cap dominance has fallen to 40.8% which is also close to where it was in January). Indeed, ETH has outperformed BTC by 46% since the end of June, although it’s unclear whether the ETH/BTC cross level of 0.8 can be flipped from resistance to support. Meanwhile, the open interest on ETH options is at all time highs of over US$8.2B compared to only US$5.5B for BTC options, as of August 18.
Chart 2. ETH/BTC cross back to January 2022 levels
What’s happening on the futures curve is somewhat more peculiar. The September 30 ETH futures price is currently trading ~1% below spot with the curve in steep backwardation through December 30 before trending back up. We think this reflects the recent noise surrounding the possibility of a proof-of-work fork that could result in airdropped ETH PoW tokens. Investors may be taking long ETH spot vs short ETH futures positions on the back of the expectation that if they own more ETH now, then they may receive more corresponding ETH PoW tokens in the event of a fork.
The futures hedge allows them to capture this exposure within a theoretically risk-free structure. Assuming a PoW fork does materialize and offer new ETH PoW tokens, then they would then be able to capture the value that’s there. However, if the Merge goes well and traders want to be long ETH (PoS), they would likely need to buy those backwardated futures (presumably trading at a discount) thus pushing the curve steeper.
Coinbase Exchange and CES Insights
Exchange volumes have ticked up above average over the past week. With the recent postive CPI print traders seem more willing to put on risk. ETH continues to be a focus as we get closer to the merge, making up over 39% of exchange volume. There continues to be a debate in the market over positioning. One camp believes ETH has come too far too fast and the merge will be a sell the news event. The other camp believes that it is still under-owned and has considerable upside once the protocol successfully moves to PoS.
Coinbase Execution Services
Flows on the CES desk are balanced with buyers being more cautious in their execution. The buy side is no longer chasing price action. Instead, buyers are being more passive, utilizing below market limits and waiting for their price. Post the FOMC minutes we did see some accounts derisk their portfolios. They sold mostly BTC and, to a lesser extent, some of the alt-coins. We have not encountered many sellers in ETH. But rather we have seen accounts come in to add on any weakness.
The BTC daily technicals chart is showing signs of weakness and is in danger of retesting the US$20k level. After two closes above the EMA70 on August 13 and August 14, the EMA9 cross rejected the EMA70 and is set to close below the EMA50 (US$23,418) on August 18, invalidating the short term bullish setup. On the daily, both the StochRSI and MACD crossed on August 14 and August 15, respectively, creating a very bearish downtrend. BTC will likely retest support at US$20,830 and US$19,230 over the coming few weeks. The EMA20 is likely to cross the EMA50 on August 19 creating further downside and the weekly chart is set to close below the EMA9.
View From Around the World
South Korea’s Financial Services Commission is investigating 16 cryptocurrency exchanges for violating the Specific Financial Information Act – alleging that they were operating as non-reporting entities and actively conducted sales activities on their websites without reporting to the South Korean government. (CoinGape)