Ultimate Elongation
The market has swung violently from pricing in rate cuts in 2023 to the other extreme of pricing in higher terminal rates by year-end. Will the market snap back, or are we reaching breaking point?
- Since our note last week, there has been two major market-moving events: namely Fed Chair Powell’s Senate testimony overnight and the potential bankruptcy of major crypto bank Silvergate Bank
- A full transcript of Powell’s testimony can be found here (Chair Powell’s Semiannual Monetary Policy Report to the Congress), while we have summarised the key points below:
January data along with revisions to the previous quarter “suggests that inflationary pressures are running higher than expected at the time of our previous FOMC meeting”
“There is little sign of disinflation thus far in the category of core services including housing, which accounts for more than half of core consumer expenditures.”
“The ultimate level of interest rates is likely to be higher than previously anticipated… we would be prepared to increase the pace of rate hikes.”
- Equities sold off and interest rate markets reacted quickly to price in a whopping 70% probability of a 50-basis point interest rate hike at the March meeting (up from 25% before the testimony), as well as a higher terminal rate by end of 2023
- Crypto prices held up relatively well, having already sold off the previous week on the back of troubles at Silvergate Bank (Silvergate delays filing of annual report)
- Major crypto platforms including Coinbase and Galaxy Digital subsequently announced that they would no longer work with Silvergate as their banking partner (Coinbase, Galaxy Digital abandon Silvergate), before Silvergate announced the discontinuation of the Silvergate Exchange Network (SEN), the 24/7 settlement service used by numerous major exchanges (Silvergate Closes SEN)
- Bitcoin cracked through the key $23.1k support level flagged in last week’s report (Chart Porn) and is within striking distance of our next target support level of $21.5k
- Meanwhile, ETH is trading right on its key support level of $1,551, beyond which we will be targeting $1,438
- Clients who have been following our previous notes would have seen our various downside protection strategies paying off following the recent market correction
- We continue to sit firmly in the “higher for longerer” camp, BUT our short-term view is much more convoluted, given how much markets, in particular the U.S. rates market, have adjusted since the last FOMC meeting
- The market may be setting up for a relief rally, especially if Friday’s Non Farm Payrolls normalises and comes in at <220k versus the monster reading of 517k the previous month
- The potential for a Silvergate Bank rescue package (however unlikely) could be another catalyst for a sharp, short squeeze (Citadel Rumoured to Rescue Silvergate)
- Thus, we are looking at some short-term tactical bullish options strategies (keyword: short-term, given the persistent macro overhang, we will continue to take a cautious approach)
ETH 17-Mar-2023 $1,600 / $1,700 Call Spread
Premium: $25 per option
Assuming a trade notional of 250 ETH
Max profit of $18,750 if ETH settles ≥ $1,700 at expiry
Max loss of $6,250 if ETH settles <$1,600 at expiry
Payoff Ratio: 3:1
- It may be worthwhile looking at this and other short-term upside strategies, especially if markets de-risk further ahead of the NFP release
