Duplicity
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 $2.8 billion in volume. The protocol’s mission is to enable access to long-term sustainable DeFi yields.
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We had a good recovery in risk markets this week with equities indices bouncing back up 5–6% on the week. Bonds sold off, crypto traded flat, dollar down and crude down on the week.
As all major asset classes suffer through drawdowns in 2022, holding cash, and especially US dollars, has been King Kong.
Trillions of dollars in cash is sitting on the sidelines waiting for a sign of a pivot from the US Treasury markets for a signal that it’s safe to play in risk asset land again.
The Fed’s tone has been softening as of late, with regional reserve presidents beginning talk of slowing down hikes. Another 75 bps is all but penciled in for the next Nov 2nd FOMC meeting. The debate is whether the December FOMC meeting will be 50 or 75, with the market pricing in roughly 50/50 odds of either.
The recent low in equities failed to puncture much lower than the 3600 low in June, providing a glimmer of hope that things have bottomed.
Corporate buyback windows open fully very soon with record amounts in repurchase authorizations, potentially marking a tailwind for equities.
We’ll see if this spills over to crypto markets. While crypto markets have been quiet while equities have dipped, they’ve been quiet on the way up as well, with the BTC/S&P ratio taking a hit this past week.
The lack of volatility in the crypto asset space has been quite the conundrum.
While FX, fixed income, and equities volatility has been near all time highs, crypto volatility has been at all time lows.
It’s unclear whether this is bullish or bearish for the asset, but it is a statement that the crypto market cap has receded to be small enough to trade more idiosyncratically asset rather than pure leveraged equities beta.
Selling volatility via call overwrite strategies typically has not performed well in low vol regimes like this one.
One interesting trend in equities options that we might see more in crypto is retail interest in 0DTE options, effectively serving as short term leveraged plays. Over 53% of SPX option volumes are in 0DTE.
Perhaps we’ll see more of that move over to crypto. Some of finance’s greatest achievements has been to channel innate human need for risk taking and speculation into providing capital for productive endeavors for society. Until next time ~
Volt Performance
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