The risk aversion that started the day before continued to intensify, with stocks, bonds and cryptocurrencies falling simultaneously. On the policy front, Fed officials continued to withdraw from Powell's dovish comments at the March FOMC meeting, with Loretta, Mester, and Daly all trying to withdraw expectations of any imminent rate cuts.
The Fed's behavior is not surprising. In addition to the previously mentioned high inflation data, Citi's Global Economic Surprise Index also rose to a one-year high on continued strong economic performance.
Bond investors may be starting to get nervous, with the MOVE bond volatility index rebounding sharply from its lows yesterday, the 10-year yield heading for 4.50%, and the odds of a June rate cut now looking 50-50. Moreover, despite expectations of a rate cut, companies continue to flood the issuance market to lock in borrowing rates, with about $20 billion of new debt expected this week and as much as $100 billion this month, up more than 50% from the same period last year.
On the risk-off side, oil prices have quietly recovered to around $85/bbl, a 20% gain this year, which is probably the main CPI indicator that consumers really care about. Also, despite Powell’s dovish turn and opposite-moving assets like gold and BTC rising this year, the dollar has been uncharacteristically appreciating against most major currencies (European inflation falling short of expectations, BoJ exiting zero interest rate policy, China’s economic woes), which has put significant depreciation pressure on currencies like the RMB, which is already trading above its worst-case 2023 premium on FX forwards as markets remain concerned about the state of the Chinese economy.
On the stock market side, in addition to fading interest rate cut expectations, the index was also weighed down by Tesla (-7%), which reported quite poor first-quarter results that were significantly below expectations and a sharp decline in vehicle deliveries (-14%) , concerns about factory shutdowns, rising inventories and concerns about increased competition from BYD and Chinese automakers have all added to the negative sentiment on the stock. Will the SPX underperform in April as the market “catches up” to changes in rate cut expectations? Or will we enjoy another quarter of prosperity?
Speaking of risk aversion, crypto prices have plummeted, with BTC falling from 69k to a low of 64.5k yesterday, with nearly $400 million in futures positions liquidated in 18 hours. The drop occurred, as usual, during the Asian trading hours, likely in response to the ETF net inflow data (-86 million) released after the US close, coupled with the fact that Asian investors are mainly long positions.
Future positions should be clearer due to this wave of stops, perpetual funding rates have also fallen sharply, and short-term put skew has intensified as spot price momentum has weakened significantly.
In the short term, volatility may continue for a while. Blockchain analysis company Arkham reported that a wallet under government control has been activated and several test transfers to Coinbase have been performed, which is expected to be a precursor to larger-scale transfers. The US government may sell tokens back to fiat currency. In addition, ETF issuer Proshares has launched several leveraged Bitcoin ETFs (BITU and SBIT) for retail investors. Enjoy!
