Summary:

In addition to the whispers coming from the Fed on a 75 bps September hike and not much to prop up the euro despite a well-flagged move taking deposit rates to above 0% for the first time in ten years, we were watching selling activity. Net selling by company management reached the highest level since last November, the top of the market. This can be a good indicator to monitor, as can onchain BTC metrics, with most short-term holders at a loss. Next week’s momentous ETH merge should happen between the 13-15th, with US CPI released on the 13th as luck would have it. As with the massive put buying in equities, investors are taking preventative steps should there be any hiccups.

Macro

What to watch next week:

• Sept 13, US CPI: expected 8.1%, prior 8.5%
• Sept 13-15, Ethereum Merge
• Sept 15, Retail Sales: expected MoM 0%, prior 0%
• Sept 16, U. Of Michigan sentiment: expected 59.3, prior 58.2

WHISPERS

As has become traditional, the economics editor and Fed whisperer at the WSJ transmitted the Fed message that the target is a 75 bps hike at the September meeting, after a summer pause in August. 

The markets immediately moved to price the likelihood at 80% and Goldman Sachs promptly revised their hike forecasts upwards. 

Speaking at the Cato Institute’s annual conference and putting the nail in the coffin for the euro on ECB decision day, Fed chair Jay Powell said the US labor market remained “very, very strong” and raised concerns that inflation would become entrenched. Partly because of his hawkish stance, even a 75 bps hike by the ECB bringing deposit rates to above 0% for the first time in ten years, failed to lift the euro on the news.

Moreover, there was no hint from the ECB of quantitative tightening and they are continuing to incentivize banks with favorable rate loans. 

Some investment banks are estimating the energy shock to be a 15% hit to European GDP, which can only be resolved via higher rates and a weaker currency, a classic EM balance of payment crisis.

Source: Strategas

IN THE KNOW: INSIDER SELLING

We have all been monitoring the Nancy Pelosi family office trades of late but, joking aside, a good indicator is the overall trend among listed company executives. This week’s sale of almost US$20 mn in shares by Microsoft’s CFO Amy Hood is telling. This represents 14% of her shares and comes on the heels of the CEO divesting US $14mn in shares, admittedly small fry when compared to his previous sale.  

The CEO of MFST, Satya Nadella, sold half his shares in the company in November of last year, valued at US $300 mn. He timed it perfectly as the stock is down 25% from there but up almost 800% since he took over the helm in 2014.

Microsoft’s top brass are not alone. Corporate insiders selling is rising to the highest level since November 2021, the top of the market, on a net basis. They tend to sell shares early in the year for tax purposes though the opposite happened in 2020, as management took advantage of the steep sell-off to load up.

The ratio of companies with insider selling compared to insider buying at the start of the pandemic reached its highest level since March 2009, according to Washington Service, as executives saw their stock as undervalued.

Meanwhile, institutional put buying for individual stocks soared past GFC highs, as the market weakened and positioning on the Nasdaq remains long.

The Nasdaq fell for seven days in a row, the longest losing streak since November 2016

Source: Bloomberg

In the know: Net Insider selling on the S&P is picking up

Institutions panicked in the recent selloff, racing to buy individual stock puts

OIL FLASHES GROWTH WARNING SIGNS

Oil prices continue to decline, with WTI down 33% from its March high. This is despite OPEC+ agreeing to a symbolic production cut of 100k bpd as markets look through to declining GDP. Saudia Arabia and Russia said demand has been cooling for several months.

PMIs: CONTINUED CONTRACTION W/LESS COST AND SUPPLY CHAIN ISSUES

The S&P Global US Manufacturing PMI was revised higher to 51.5 in August of 2022 from a preliminary of 51.3,  but still recording the slowest growth in factory activity since July of 2020. Output contracted for a second straight month and new orders fell for the third month in a row. Employment growth was the weakest since January. 

On the positive side, supply chain disruptions were the least severe since October 2020. Input price inflation was the slowest since January 2021 but remained elevated. 

Source: Trading Economics

Crypto

Cryptocurrencies posted positive returns after a dismal few weeks, rebounding towards the end of the period, along with traditional markets. ETH had relatively high negative futures positioning leading into the rally, but both continue to see negative funding rates. ETH futures remain in backwardation.

Options open interest in ETH terms has resumed its rise ahead of the Merge. The put-to-call ratios of BTC and ETH continue to see a widening divergence (BTC 0.59 vs ETH 0.25).

BELLATRIX UPGRADE: CHECK

On September 6th, the penultimate step before the Ethereum Merge took place. The Bellatrix hard fork prepares the blockchain for the event now expected for September 13-15. Despite the milestone, ETH did not rally on the news, though it rebounded with the markets at the end of the week.

Just 5% of the validators on the Beacon Chain failed to update on time, which is not a major concern. The Beacon Chain introduced proof-of-stake to the Ethereum ecosystem and will coordinate the network, merging with the Mainnet execution layer and serving as the consensus layer. It is an essential precursor to upcoming scaling upgrades, such as sharding.

StETH has been trading at a discount to ETH since the Terra demise and perhaps because it won’t receive a potential hard fork after the Merge

BITCOIN: ONCHAIN METRICS

There is a large concentration of short-term bitcoin holders above the current price, which could lead to pressure if we fall further, with the majority nursing a loss.

Large concentration of short-term BTC holders at or above present levels

BINANCE STABLECOIN; THROWING THEIR WEIGHT AROUND

In an attempt to draw liquidity to their own stablecoin, BUSD, leading crypto exchange Binance announced this week that stablecoins USD Coin (USDC), True USD (TUSD) and Paxos (USDP) will not be available for trading on its platform as of September 29. Users will still be able to deposit, withdraw and convert to BUSD, but not the other way around or use the alternative stables for margin collateral.

USDC had been making important inroads and is the second largest stablecoin, with a $52 billion market cap, while the Binance-backed stablecoin, BUSD, is third with a market cap of $19.5 billion. TUSD and USDP are both under $1bn. 

While USDT is the most liquid, with 80% of volume, and a market cap of just under $70 bn, USDC is the most popular stablecoin in DeFi. DeFi stablecoins such as MakerDao’s DAI use USDC to back theirs, with USDC representing 35% of their reserves. 

This is the second blow for the Circle stablecoin as the Maker Dao founder had recently expressed the goal of gradually divesting from USDC and moving into ETH to avoid centralization risks given USDC froze Tornado Cash wallets at the behest of the US government.

In an interesting turn of events, Coinbase, a co-founder of USDC, is enticing MakerDao to keep its USDC holdings by offering a yield of 1.5% on a third of its holdings, US$1.6bn, as presently they get no return on those reserves. The community will have to vote on the proposal.

This comes after Binance introduced zero trading fees on some BTC pairs in the summer and recently extended the same to BUSD/ETH pairs up to September 26, in a race to attract flow in a down market. 90% of the exchange’s revenue derives from trading fees and the move helped the platform gain even more of the spot market (from 49% in May to 57% in August). 

COINBASE FIGHTS BACK ON SANCTIONS 

Coinbase is not only luring MakerDao with the siren song of interest on its USDC reserves. The exchange is also involved in funding a lawsuit against the US government for sanctions blocking Americans from using coin mixer Tornado Cash. 

This makes economic sense as the risk is that they may one day be forced to implement sanctions on the upgraded PoS Ethereum chain, which they say they would not do, foregoing the business. Given that they are the second largest ETH staker, this could jeopardize a potential $250 mn pa business, as per estimates by Goldman Sachs.

MARGIN SQUEEZE

It’s not only traditional listed firms that will feel a margin squeeze, leading to negative earnings momentum, particularly in Europe with soaring gas prices. BTC miner revenue remains low, pressured by rising electricity costs and lower bitcoin prices. 

The margin squeeze is happening at a time when the hash rate remains high as miners have a lot of computing power that they acquired during the bull run.

While many of the listed players have strong balance sheets, miners divested over 20k of BTC in June and July to raise cash, increased debt and sold equipment. Production was around 4k BTC pm so the sales were significant. Some players will struggle in this environment.

Margin squeeze for miners continues as the market remains competitive, while ETH revenues will disappear with PoS

BUILDING IN A BEAR

Former Meta employees who founded a startup called Mysten Labs raised $300 mn valuing their venture at over $2bn. The proceeds will be used to build out their blockchain, Sui, and the deal was led by FTX Ventures and included high-profile names such as a16oz, Jump Crypto, Binance Labs, Franklin Templeton, Coinbase and Circle Ventures. 

According to Messari, VCs have invested $33.8 bn dollars into crypto and blockchain so far this year, which is higher than the $31.6 bn raised in 2021, deploying the copious cash they raised during the bull run.

Until next week!

The Bequant Team

Martha Reyes

Emiliano Bruno

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