Equifinality

Last week, we postulated that the markets may have swung too far in the direction of pricing in higher interest rate hikes, potentially setting up for a snap back in the opposite direction. The chain of events that culminated in this outcome however, was quite unexpected.

Source: Twitter (PriapusIQ)

• Silicon Valley Bank (SVB), the 16th largest bank in the U.S. with over $200 billion of assets, catering primarily to tech startups, failed spectacularly
• Here’s ChatGPT explaining what happened in layman’s terms:

Source: ChatGPT

• A bank run and a failed capital raising attempt ensued, before SVB was seized by the Federal Deposit Insurance Corporation (FDIC) on Friday (Mar 10)

• Contagion then spread to crypto land on Saturday (Mar 11) as Circle, the issuer of USDC, confirmed that the company had $3.3 billion out of its $40 billion reserve at SVB

Source: Twitter (Circle)

• Concern turned to panic when Coinbase announced a suspension of USDC:USD conversions “while banks are closed” on the weekend

Source: Twitter (Coinbase)

• Without the usual redemption channels, participants rushed to both centralised and decentralised exchanges to exit their USDC positions, at one point trading below 0.87 vs USDT on major exchanges

USDC/USDT Chart (Source: OKX)

• The TDX team, leveraging off detailed analysis from seasoned market participants (aka Twitter), ran some back-of-the-envelope calculations and were quick to surmise that the situation was likely overblown and urged clients against panic-selling
• USDC began to re-peg on Sunday (Mar 12) on chatters of an imminent “rescue” package from the regulators, before confirmation came from the Treasury Department and FDIC that they would “fully protect all depositors”

Source: Twitter (Circle)

• In the same announcement, New York state regulators also said it would shut down crypto-friendly Signature Bank, citing systematic risk, while depositors of Signature Bank will have full access to their deposits (Regulators close crypto-focused Signature Bank)
• The Federal Reserve also announced additional measures to shore up liquidity for banks through the creation of a Bank Term Funding Program (BTFP), which allows banks to pledge debt securities at par (whilst they may be trading well below par)
• The bond market reacted violently to the news as the 2Y treasury yield freefalls by more than 100 basis points in a matter of days

US 2Y Treasury (Source: CNB)

• Both BTC & ETH rocketed >20% from weekend lows on a combination of relief on the resolution of the USDC situation and the prospect of a pause in Fed rate hikes
• The price action may also have been partially attributed to CZ’s announcement that Binance would convert $1 billion of BUSD to BTC, ETH and BNB

Source: Twitter (CZ_Binance)

• Heading into the CPI data release tonight and next week’s FOMC meeting, there has been a drastic adjustment in terms of market expectations which had been pricing in a 80% probability of a 50bp rate hike for March before the SVB crisis
• We now have JP Morgan expecting a 0.25% rate hike, Goldman Sachs and Barclays expecting a pause, while Nomura is calling for a 0.25% rate cut

Source: GS & Nomura Research

A moment of gloating, our trade idea from last week

• The market action has made us look like geniuses for our trade idea from last week, for all the wrong reasons (but we’ll take it)
• We are, however, at a fascinating juncture in the markets
• Is this the cathartic moment in which the world is waking up to the fact that keeping your hard-earned savings at traditional banks can be actually risky, and that Bitcoin is the ultimate store of value? Along with a Fed that may be forced to pivot, are the stars aligned for the start of a glorious bull run?
• Or is this a deja vu of when the Luna Foundation Guard bought $1.5 billion of Bitcoin in April/May 2022 to bolster reserves for its ultimately doomed UST, which marked a significant market top
• I am uncertain at this point in time, but it is possible that the market has yet again overreacted in the re-pricing of the yield curve and interest rate expectations
• We eagerly await the inflation data tonight and a solid print — core inflation expected to come in at 0.4% month-on-month — should still keep an interest rate hike firmly on the table for the upcoming March FOMC meeting
• In the absence of a strong conviction, we would like to remind our readers of key technical chart levels (Chart Porn)

Source: TDX Strategies

• For our compulsive traders, we would be looking at constructing short-dated call spreads / put spreads in the vicinity of key support/resistance levels to potentially capture a market chop in either direction
• Check with the desk on ideas and pricing