Zaps are Friktion’s weekly market insights newsletter. Friktion is DeFi’s leading protocol for risk-managed yield strategies. The platform has amassed over 17,000 users and traded over $2 billion in volume. The protocol’s mission is to enable access to long-term sustainable DeFi yields.
Start earning at: app.friktion.fi
Twitter: twitter.com/friktion_labs
Discord: discord.gg/friktion
The inflation print on Wednesday came in lower than expected at 8.5% year over year inflation, lower than the 8.7% expected. The fall in oil prices in the past couple of months contributed to the decline.
Equities and Crypto markets rallied on the news as another piece of evidence for the Fed not to raise rates as much as previously expected.
The US Equities markets has slowly but surely reclaimed over half of its decline from the 2022 peak to June lows. Institutional shorts have begun to pile up in size as people anticipate a scramble for the back-door once the music stops.
But what if the music won’t stop just yet?
Net private savings still rests at over 2 Trillion dollars from stimulus. There’s excess cash in the financial system that’s on the search for shade from the brutal rays of fiery sun that is inflation.
Let’s take a moment to reflect on the migration of the herd over the past few months.
The first to peak was the pristine global asset, the US Dollar as the world scrambled to safety following the rate hiking fears in May.
The second was the next safest asset, US debt, as the market began to sense that the Fed would soften on its hawkish posturing.
The safe and quiet August has pushed the market to seek assets further up the risk curve in the search for shelter from the blistering sun.
It’s not clear how much longer this equities rally will last, but there are clear signs of late stage froth building up.
Retail equities options buying volume has crept back up again after months of decline.
Dog coins in DOGE, SHIB, and SAMO have staged impressive recoveries from June lows.
Excess cash in the system + quiet summer month + retail options + dog coins + down-bad bulls revenge trading = short squeeze blow off top before sending it all back down again?
Recent losses are probably still painful into societal mind-space that will prevent things from getting too far out of hand assuming the Fed doesn’t pivot dovish again.
Deep down everybody is still a bear at heart, some are just dancing to the music thinking that they can grab a chair before the music stops.
Crypto Markets
For the most part crypto markets have been quite anxious in the backdrop of the equities rally.
Bitcoin has yet to close above $25k, Eth yet to close above $2k, SOL yet to close above $50.
The market still isn’t quite ready yet to put on more crypto risk, after being hit especially hard in the June dip.
The Bitcoin chart has an open sky to reclaim up to the 27k price level given the right trigger.
Price action has been quite choppy, however, with short dated 7-day realized volatility in the 50s. For context, that is a 1 standard deviation daily move at 50/sqrt(365) = 2.5% a day, a multi-year low.
Short dated volatility remains relatively high compared to realized volatility, trading over 10 vol points over.
This means volatility markets are still expecting Bitcoin volatility to increase from what we’ve been seeing.
Ethereum has been carrying the market recently with the merge narrative, almost reclaiming January lows at $2,200.
ETH vols have certainly been spicier with short dated vol currently at 80ish vol (80/sqrt(365) = 4% daily move). This is down almost 20 points from last week, as show in the chart below.
ETH vols will likely remain elevated until the merge happens next month.
Solana saw a nice bid into the weekend that was quickly routed into Sunday night. It’s been difficult for non-ETH majors to catch a strong bid in the past month.
The market remains to price implied volatility quite high on the downside with relatively muted upside skew.
Interested in contributing Friktion’s Research arm? Drop us a note in Discord or email us at team@friktionlabs.com
Start earning: app.friktion.fi
Twitter: twitter.com/friktion_labs
Discord: discord.gg/friktion
Blog: friktionlabs.medium.com
Documentation: docs.friktion.fi
Contents distributed by Learn.Block6.tech
👉 Discord — Live Talks
👉 Twitter — Latest articles
