Connecting the Dots
Episode 90 - Time for the Fed to Return the Punch Bowl
Welcome to the new subscribers that have joined us over the last week. The aim of this newsletter is to help you navigate the world of crypto. There’s an incredible amount of information out there so we try to distil it into the things you MUST know each week, covering both macro and crypto.
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Onto the newsletter. Here’s what you’re getting this week:
Macro Update: We are rapidly moving into an environment which is positive for Bitcoin and the big picture bull scenario continues to unfold perfectly. Find out why below.
Crypto Native News: CFTC charges Uniswap, Bitcoin mining profitability at record lows, Travala.com partners with Skyscanner.
Institutional Corner: Mastercard expands its support for non custodial crypto wallets, the 4th largest bank in Switzerland offers its retail customers crypto trading, Qatar Financial Centre releases a regulatory framework for Digital Assets, Trump re-iterates that he will make the US the capital of crypto.
Charts of the Week: Ether market depth drops, spot and deriv volumes on CEX’s rise in August, large increase in stablecoin transactions, CME ether futures volume declines.
Top Jobs in Crypto: Featuring Ledger, DV Trading, Cryptonary, Coinbase, Copper and Kraken.
Macro Update
This is where we connect the dots between macro and crypto.
Time for the Fed to Return the Punch Bowl
The “goldilocks” narrative that saw a positive end to August quickly unraveled this week as recession fears re-emerged as a dominant focus, following a string of soft global data releases. Markets were also perhaps nervous heading into a month which has historically shown seasonal weakness. To witch, the S&P 500 has lost 4.9%, 9.3%, 4.8% and 3.9% over the last 4 years. It took little then to ignite caution and quite a broad de-risking.
The “recession” spark came on Tuesday when Manufacturing ISM came in soft at 47.2, the 5th consecutive month of contraction. Declines were seen across the board with new orders, production and employment all contracting. Surging inventories also saw the new orders/inventories ratio fall back to levels historically consistent with recession. Adding an additional ugly edge to the print and spooking stocks was the prices paid component which jumped from 52.9 to 54.0. “Stagflation” is the toxic combination that markets dislike most.
We are quick however to point out that markets, in our view over-reacted to the report, given manufacturing is less than 20% of the US economy. Indeed, the more important services sector was consistent with a “soft landing”, with Thursday’s services ISM rising from 51.4 to 51.5 and new orders a stronger 53.0 Vs 51.9 exp. Nonetheless, it’s quite revealing as to where the weight of market sensitivity currently lies.
Wednesday’s JOLTS job openings report also continued to underscore the softening labor market backdrop with job openings falling to 7.67mio Vs 8.1mio expected and is the lowest level since Jan 2021. The ratio of job vacancies to unemployed workers dropped to 1.07, the lowest level since 2018. We say the labor market is the most lagging of indicators and also, the most “up the stairs, down the elevator shaft” data series there is. Evidence is rapidly mounting that we’re set to fall down the elevator shaft. Despite that, Friday’s Non Farm payroll report painted a more mixed picture, with a respectable 140k headline print but off-set by 86k of downward revisions for June/July. The unemployment rate also ticked lower to 4.2%, suggesting a deep recession is not an imminent threat.
Fed behind the curve…
All of this left the odds for the next FOMC in a couple of weeks, to be a coin flip between 50 or 25bps. We suspect JPow will go 25bps but signal sequential rate cuts and a willingness to do more should the data require. However, as we’ve said for some time now, the Fed is behind the curve. The data flow they receive will naturally be backward looking and given the lags with which the transmission of monetary policy acts, usually 12 to 18 months, they should have started cutting some time ago in our opinion.
This is why the Fed consistently stays too low for too long, then too high for too long. Of course, it then leads to a Fed necessarily trying to counter their mistakes by being more aggressive with policy, especially as, given the transmission lags, they will see little immediate impact from the cuts they deliver, yet instead of being patient will default to “do more.”
We still therefore think the market is underpriced for the Fed cuts that will be delivered over the coming year. The move in bond yields has much further to go. This should also drive a continued “bull steepening” of the yield curve (this is yields falling across the curve - bullish bonds - but more so at the front end of the curve causing it to steepen.) The often referenced 2s10s yield curve this week un-inverted, closing on Friday 6bps positive (2yr at 3.65%, 10yr at 3.71%.) Ironically for all of the talk about the deep yield curve inversion being a recession indicator, it’s typically a rapid un-inversion that signals the recession is imminent and a continued steepening here may well act to weigh further on risk.
Elsewhere, the global growth outlook looks bleak. Industrial production in Germany fell a dismal -2.4% driven by on-going weakness in the automotive sector. China’s official manufacturing PMI meanwhile, slipped to a weaker than expected 49.1 in August, down from 49.4 in July as production and new orders continued to decline. The troublesome housing sector which is underpinning domestic consumer weakness also saw the value of new home sales by the top 100 developers drop 26.8% in August. China’s somewhat piecemeal approach to stimulus is proving ineffective. Expectations continue to grow that they will soon be forced to bring out the big bazooka!
Where does this leave us?
Whilst we understand the knee jerk risk-off reaction to growing recession fears, we still hold strongly the belief that post-2008, we’re in a regime whereby markets are simply a function of rates and liquidity.
Debt based fiat economies require the assets which form the collateral of the system to increase in value to enable growth. We’re nearing the point of massive global rate cuts and stimulus and artificial inflation of assets to help stimulate growth. Further, whilst the US is slowing down and we continue to expect a mild recession, the combination of a disinflationary economy and a Fed with lots of firepower maintains an element of “goldilocks” for risk. We do not hold the view that a sharper, deeper, more troublesome downturn that could deepen a short term correction is on the horizon. We therefore remain of the view that this a “buy the dip” market in US equities and continue to expect new record highs into year end.
Bitcoin is currently trading with high correlation to equities and broad risk and so a continued sell off in equities has the potential to pull us lower still. However, positioning remains light and with funding negative, the short term “pain trade” is perhaps higher.
However, we are rapidly moving into an environment which is positive for Bitcoin and the big picture bull scenario continues to unfold perfectly. Fiat, debt driven economies cannot sustain high real rates. The window to normalise rates and reduce central bank balance sheets, withdrawing liquidity, are typically small and that window has now firmly closed. Whilst we encourage short term caution as the market seeks assurances that the Fed will keep the party going, rest assured the punch bowl is about to be returned. Bitcoin and broader crypto investors will be getting drunk again quite soon 🤪
Native News
Key news from the crypto native space this week.
The US Commodity Futures Trading Commission settled charges with Uniswap for $175,000 this week. Uniswap Labs, the team behind decentralised exchange (DEX) Uniswap, received an order from the CFTC accusing them of violating the Commodity Exchange Act (CEA). In a report on Wednesday, the CFTC alleged that Uniswap engaged in offering leveraged or margined retail commodity transactions using digital assets. Uniswap Labs was required to pay a civil monetary penalty fee of $175,000 and desist from violating the CEA. The report added that Uniswap Labs has been fully cooperative as they complied with the regulator's Division of Enforcement throughout the investigation. Interestingly, CFTC Commissioner Summer Mersinger argued against the regulator's actions, claiming that the case "has all the hallmarks of what we have come to know as regulation through enforcement." Mersinger stated that the CFTC's charges against Uniswap Labs have little connection with the alleged offense. She went on to state that regulators need to start taking progressive approaches to violations rather than placing enforcement first. Read the full press release from the CFTC HERE.
According to JP Morgan’s latest crypto report, Bitcoin mining profitability is stuck at record lows. Their analsts say in the report "We estimate bitcoin miners earned an average of $43,600 per EH/s in daily block reward revenue in August, the lowest point on record.” That compares with a peak value of $342,000 in November 2021, when the BTC price was $60,000 and the network hashrate was 161 EH/s. Mining stocks declined as the average price of the world's largest cryptocurrency fell for the third consecutive month and the network hashrate rose. As a reminder, Hashrate refers to the total combined computational power used to mine and process transactions on a proof-of-work blockchain. The total market cap of the 14 U.S.-listed miners tracked by the bank shrank 15% month-on-month to $20 billion, with only three of the miners outperforming bitcoin in the period.
Crypto-friendly travel platform Travala.com has integrated with global travel marketplace Skyscanner. The partnership allows Skyscanner’s 110 million monthly users who complete 80 billion searches every day to access Travala.com’s inventory of more than 2.2 million hotels, book and pay for them with more than 100 cryptocurrencies, in addition to traditional payment methods. Travala.com CEO Juan Otero said “Visibility is a crucial component of mass crypto adoption,” “By displaying Travala.com on one of the world’s most popular travel marketplaces in Skyscanner, we’re demonstrating the utility of crypto and showcasing it as an available option from the moment travellers make their very first search.” Check out their website HERE.
Institutional Corner
Top stories from the big institutions
Mastercard is expanding its support for non-custodial cryptocurrency wallets in a new collaboration that enables users spend crypto stored via self-custody. After piloting a crypto debit card with MetaMask in August, Mastercard’s new partnership is with the European crypto payments infrastructure provider Mercuryo. In the collaboration, Mastercard has enabled a new euro-denominated debit card that allows users to spend cryptocurrencies like Bitcoin stored on self-custodial wallets at more than 100 million merchants in the Mastercard network. Christian Rau, senior vice president of Mastercard’s crypto and fintech enablement “Through our collaboration with Mercuryo, we’re eliminating the traditional barriers between blockchain and conventional payments, providing consumers who want to spend their digital assets with an easy, reliable, and secure way to do so, anywhere Mastercard is accepted.”
The fourth-largest bank in Switzerland, Zürcher Kantonalbank (ZKB), has begun offering retail customers the ability to buy, sell and hold Bitcoin and Ethereum. In a collaboration with Crypto Finance customers of the cantonal bank will have access to BTC and ETH through ZKB’s existing Mobile App, eBanking, and other established channels. Alexandra Scriba, head of institutional clients and Multinationals at Zürcher Kantonalbank said “When it comes to cryptocurrencies, Zürcher Kantonalbank takes on the critical function of securely storing the private keys. Customers and third-party banks therefore do not need their own wallet and therefore do not have to worry about storing their own private keys. Zürcher Kantonalbank takes care of both”
This week the Qatar Financial Centre, a special economic zone in Doha, Qatar, has released a regulatory framework for digital assets as the region continues to see increased activities around cryptocurrency. According to the QFC statement, the “QFC Digital Assets Framework 2024” offers more clarity and sets the legal and regulatory foundation for crypto assets, including tokenisation, property rights in tokens, custody arrangements, transfer and exchange. The QFC said “The framework sets high standards for the process of asset tokenisation and puts in place a trusted technology infrastructure that will ensure trust and confidence among consumers, service providers, and industry stakeholders.” According to the QFC, the framework was established after “extensive consultation” from an advisory group comprised of 37 domestic and international organisations. It is part of Qatar’s “Third Financial Sector Strategy,” which aims to create a financial and capital market that leads the region in innovation.
Donald Trump delivered a long address on his intention for the US economy this week, but only devoted a small moment to mention crypto. Trump repeated his promise to make the U.S. the world capital for crypto saying “Instead of attacking industries of the future, we will embrace them, including making America the world capital for crypto and Bitcoin.” Trump also said “I will launch a historic campaign to liberate our economy from crippling regulation,” “I’m pledging today that in my second term, we will eliminate a minimum of tenfold regulations for every one new regulation.” Trump added that, if elected, he will immediately issue a national emergency declaration to increase domestic energy production, citing the need for increased electricity to continue growing the artificial intelligence sector and keep the U.S. tech industry competitive with China.
Charts of the Week
Because charts are just as important as macro.
Ethers 5% market depth on US exchanges has dropped 20% since the introduction of the spot ether ETF's. Hat tip to CCData for the chart.
Again from CCData…Spot and derivatives volume on CEXs climbed 5.38% to $5.22tn in August, the second consecutive month of increased crypto trading activity.
Large increase in Stablecoin transactions in Q2, 2024. Hat tip to Bitwise for the chart.
Another chart from CCData, CME Trading volume in ether futures declined 28.7% to $14.8 billion in August, the lowest since December 2023. Volume in ether options fell 37% to $567 million.
Top Jobs in Crypto
Well, we all want to work in Crypto don’t we. Here’s a bit of help on your job search!
Institutional Sales Lead - EMEA at Ledger
On-Chain Analyst at Cryptonary
Execution Services Trader at Coinbase
Senior Product Manager for Prime at Copper
Fiat Funding Specialist for Banking at Kraken
DISCLAIMER: The content in this newsletter is not financial advice. This newsletter is strictly educational and is not investment advice or a recommendation to buy or sell any assets or to make any financial decisions. Crypto markets are volatile, please be careful and do your own research.