Markets Knocked And Powell Answered

Daily Updates:

• After nearly four years, Ether has just surged to an all-time high, up more than 15% in the past 24 hours. That brings its year-to-date performance to 45% — nearly double that of BTC’s 25%. 

• Bitcoin, Ether and the entire crypto market have moved higher in a near vertical fashion, bringing the total market cap of the entire digital asset space to a record $4.2T. That mirrors a similar move in US equities, which reversed an entire week of losses. Both the S&P 500 and the Nasdaq 100 gained more than 1.5%, with the S&P 500 clocking its best day since May. Treasury yields across the yield curve dropped, with two-year yields sinking more than 10bps to 3.68%. 

• Crypto-equity stocks bounced today too. Shares of Bitmine Immersion Technologies Inc, the largest holder of ETH jumped 12%, while shares of Michael Saylor’s Strategy rose more than 6%, recovering almost all of its losses earlier in the week. Finally, Solana-focused treasury firm DeFi Development ended the day up 21%.

‍

• The ignition? None other than the Chairman of the Federal Reserve Jerome Powell. 
• In his highly anticipated annual address from Jackson Hole in Wyoming, Chair Powell stated: “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”

• The response from risk-on assets seems to suggest traders had not been expecting Powell to step to the podium in as dovish a fashion as the Chair did. Earlier in the week leading into Powell’s speech, we had commented that investors had largely de-risked their positions – open interest in perpetual futures contracts had declined, without any major liquidations suggesting traders had sidelined themselves, and put–call skew in options markets for both BTC and ETH had tilted towards OTM puts — a sign of hedging against further downside moves.

‍

• Another factor which perhaps caught markets off guard is the slight disconnect between comments made in Powell’s speech and the meeting minutes from the Fed’s July gathering where officials opted to hold interest rates unchanged. 
• According to the meeting minutes: 

“Participants generally pointed to risks to both sides of the Committee’s dual mandate, emphasizing upside risk to inflation and downside risk to employment. A majority of participants judged the upside risk to inflation as the greater of these two risks”

• In Chair Powell’s speech, he said: 

“Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising.”

• Regarding tariffs he added: “A reasonable base case is that the effects will be relatively short lived—a one-time shift in the price level” – overall his comments leaned more towards opening the door for a September rate cut, while the Fed meeting minutes were significantly more hawkish. 

‍

• Positioning in BTC and ETH options markets shortly after Powell’s keynote speech suggested that at least some of the short-dated volatility that had been priced was due to rate cut uncertainty. ATM volatility levels for both BTC and ETH fell by 3 points: for BTC that was from 35% to 32%, and for ETH from 69% to 66%.
• Since then, implied volatility levels have diverged between the two. 
• BTC ATM vol has dropped below 30% (currently 28% for 7-day options), while traders bidding up short-tenor options have inverted the term structure of volatility for ETH. 
• That has largely been due to demand for call optionality – the 25-delta put-call skew ratio for 7-day ETH options rose from -6.2% ahead of Powell’s speech to 4.8% in the hour that followed and is currently at 5.1%. 

• BTC volatility smiles are only slightly skewed bullish – OTM calls trade just 0.4 vol points above the level of OTM puts at short-tenors.
•  However, perpetual swap funding rates and futures-implied spot yields have risen significantly, indicating traders are willing to pay a premium above the spot price and a premium to short traders in order to gain long exposure to BTC.

‍

‍

‍

Charts of the Day: