Summary:

Taking away Fed forward guidance and slotting in data dependency mean we may be seesawing between inflation and growth figures for a while. We have introduced a Bequant dollar index to help track the spillover into digital assets.  Meanwhile, tech names, correlated to digital assets, are posting markedly slower growth. In crypto, Ethereum dominates performance as The Merge draws closer. Coinbase feels the heat of regulatory scrutiny but stablecoin legislation is on hold. 

Macro

NOT TOO HOT, NOT TOO COLD

Fed Chairman Jerome Powell declared this week that after the 75 bps implemented on Wednesday, the agency had achieved a neutral interest rate, where the Fed was not loosening or tightening the economy. This despite inflation being at 9%. He also eliminated forward guidance and said policy would be data-dependent from here.

The use of the word “neutral” set the market alight, particularly riskier asset classes. This sent a message that the Fed is less worried about inflation, more in line with the market, which is only pricing in CPI of 2.9%. With the Fed funds rate at 2.25%-2.50%, we have now gone to pricing in a 50 bps hike in September, followed by 25 bps in November and December, respectively.

Being data dependent means the market will seesaw on inflation and growth data, potentially meaning more volatility over the coming months.

Large gap between Fed and market-implied rates: Market bets on a pivot in Q123

Buy the rumor, sell the fact: markets rose after a worse than expected GDP print (-0.9% vs +0.3%e)

EARNINGS

Despite the bounce resilience in ad revenue at Alphabet, plus a bullish outlook at Microsoft and a beat at Apple, tech earnings overall are falling.  

Despite the rally, some tech firms are markedly down from the peak, with others still holding up

Earnings growth is down markedly, with analysts reducing estimates on some names more than others

Meta (Miss):

Revenues of $28.8 billion were down almost 1% from a year earlier and EPS dropped over 30%. It is the first time the company reports a top line year-over-year decline. Mark Zuckerberg was cautious on the outlook, with ad revenue competition coming from TikTok, and warned they may see a further drop in Q3. The stock has now fallen out of the top ten.

Separately, the Federal Trade Commission announced it is seeking an injunction to block Meta's acquisition of Within, maker of the virtual reality fitness app Supernatural as they already own a leading VR fitness app. Zuckerberg continues to bet heavily on the potential of VR and the metaverse, sinking $2.8 bn into Reality Lab during the quarter, with losses to potentially continue for years to come.

Revenue: $28.8 billion vs. $28.9 billion expected

EPS: $2.46 vs. $2.54 expected 

Alphabet (Miss):

Reported the slowest rate of growth since Q22020 at $69.7 bn, however, analysts took heart in the resiliency of Search demand. Top line growth slowed to 13% from 62% a year earlier, during lockdown. The strong dollar had an impact which will grow next quarter. YouTube ad revenue was a disappointment, with some impact from TikTok and lower ad spend in general while management will slow spending and investment into 2023.

Revenue: $57.5 bn versus $58 bn expected

EPS: $1.21 versus $1.39 expected

Microsoft (Miss):

The company reported weaker than expected numbers, with the slowest revenue growth since 2020, but was optimistic about fiscal 2023. Revenues grew 12% and net income grew only 2%, with the biggest headwind coming from the dollar.

Revenue: $51.87 billion, vs. $52.44 billion expected.

EPS (adjusted): $2.23 vs. $2.29 per share expected.

Apple (Beat):

The company’s numbers came a bit above expectations driven by higher iPhone sales, with the CEO confident that sales would pick up over the coming months. Still, revenue is slowing to 2% YoY and earnings fell by 7.5%.

Sales: $19.44 bn vs. $19.05 bn expected

EPS: $1.20 vs. $1.16 expected

Amazon (Beat): reported slowing sales of 7.2% to $121.2 bn and a net loss in GAAP (-$2.2bn) for the second straight quarter, driven by weakness in retail while cloud-computing was strong. This was the slowest growth in 20 years with a stake in EV maker Rivian causing a pretax loss of $3.9bn. 

Revenue:$121.2bn vs. $119.6 expected

EPS (adjusted): $0.507 vs. $$0.496 expected

Crypto

BACK ABOVE $1 TRILLION LED BY ETH

Fed comments fuelled a rally in digital assets, with the ecosystem back above $1 trillion in market cap and July seeing a 26% recovery after a brutal May and June. BTC (+5.4%) lagged ETH (+11.9%), ADA (+9.5%), MATIC (+11.8%) and DOT (9.8%). Uniswap (+29%) and ETC (+72%) were the standouts among the top 20 coins (as of time of writing).

The knee-jerk reaction caused over $200 million in liquidations on short trades and $175 million on long trades. Activity was dominated by ETH, which has seen higher futures volumes than BTC over the last 24 hours.

Interest in Ethereum is high as devs announced the Goerli merger for Aug 6-12, the last test before the transition to proof of stake (POS). You can read all about the Merge here:

COINBASE: ARK DUMPS SHARES

This week, Cathy Wood’s Ark ETFs sold over 1.4mn shares in Coinbase, after an insider trading case against an employee and a Bloomberg report that the Securities and Exchange Commission (SEC) is investigating the platform for trading unregistered securities. The stock, which has been seeing strong volumes since May, fell 20% after the report.

Ark, the third largest holder of COIN, had been buying the dip in the crypto exchange through the year, purchasing 546k shares only just last May to reach a total of 9 mn shares. The sale was a substantial about-face and indicates Ark may be seeking to minimize regulatory fallout.

Buying high and selling low: Ark reduces it’s Coinbase position

FTX. US: FROM CRYPTO TO STOCK TRADING

Moving from strength to strength, FTX.US announced it has opened stock trading to users across the country. Customers will be able to trade hundreds of stocks and ETFs online or via the app without fees or payment for order flow. Robin Hood was widely condemned for using that strategy as a large part of their revenue generation so FTX gets brownie points for avoiding that route.

This was an expected move by FTX and sets it apart from its peers. The exchange has also acquired a traditional derivatives operation and has expressed a desire to bridge the gulf between crypto and traditional finance rather than being purely native.

BLOCKCHAIN FUNDING SEES FIRST DROP IN TWO YEARS

Unsurprisingly, in Q2 overall investment in blockchain declined, though the YTD run rate at almost $16 bn is still above that of 2021. CB Insights published a detailed report showing investment declined sequentially for the first time in two years. Investment fell by 29% to $6.5 bn but still above Q221’s $5.5bn and Q220’s $0.5bn.

Mega rounds (+$100mn) fell over 50% to $2.6bn and unicorns became rarer, halving to 8. Web3, which started to dominate funding rounds in Q421, continues to lead the pack at 57% of the total. 

Despite a gloomy economic outlook, Europe was the only region to show growth, up 40% QoQ to $1.4bn, perhaps a sign that companies are taking advantage of the weaker euro. The US ($3.4 bn) dwarfs Europe ($1.4bn) and Asia ($1.4bn). In terms of investors, Animoca Brands dominates, followed by Andreessen Horowitz and Coinbase Ventures.

INTRODUCING THE BRAND NEW BEQUANT DOLLAR INDEX

BEQUANT is proud to announce the creation of an in-house index, the BEQUANT Dollar Index (BQ), its first in-house index for institutional crypto traders. It measures the dollar’s strength against the basket of the top 8 cryptocurrencies including Bitcoin, Ethereum and Cardano, weighted by market cap and liquidity. The basket of coins is updated every month to reflect market movements.

The greater the market cap and liquidity of a coin, the greater the impact on BQ. As bitcoin has the largest weight relative to other coins, BQ will move almost in tandem with it.  The index is a way for investors to understand the spillover effects of US monetary policy on the crypto universe. Comparing the BEQUANT Dollar Index to US 10Y yields or the U.S. Dollar Index (DXY) can help investors determine if the current economic environment is directly linked to the border crypto market. 

If the link is strong investors can expect new releases of economic data to add volatility to the market. It also implies that investors can find coins that are independent of the macro volatility. The relationship between BQ and DXY is similar; however, there are differences as well. For example, by looking at the past few months, BQ has yet to catch up with DXY, which suggests more selling ahead. Another angle can suggest that we see the development of new fundamentals behind crypto. 

Regulation

While stablecoin regulation in the U.S. will be delayed to after the summer break, there has been activity around centralized exchanges and bad actors, including an investigation into Coinbase and another into scams which will involve Apple and Alphabet. 

COINBASE VS THE SEC: IS DOGE A SECURITY?

Regulators have come in with guns blazing lately, perhaps as a response to the negative headlines around algorithmic stablecoins and centralized lending and borrowing firms, that saw small investors get wiped out. 

Coinbase, one of the most high-profile retail exchanges in the U.S. is apparently facing an investigation from the SEC over whether it allowed customers to trade unregistered securities, according to Bloomberg. In order to keep up with the competition, Coinbase did not wait for regulatory clarification and started offering users trading in over 100 tokens, including meme coins. 

Gary Gensler has been warning for a while that most tokens are securities but has only now named some of them, in an effort to gain oversight over the exchanges vis a vis the CFTC. Coinbase is challenging the security claim and says it is confident it has followed a rigorous process reviewed by the SEC itself.

The purported investigation is in addition to the SEC’s case against a former Coinbase product manager, Nikhil Wahi, his brother, and a friend for insider trading. A first in crypto. Kraken, the West Coast-based exchange is also being investigated by federal authorities with regard to sanctions evasion in Iran and elsewhere.

DeFi

Defi volumes have tailed off significantly after the May and June turbulence, averaging $1-2 bn per day as investors remain on the sidelines versus centralized exchanges.

Uniswap recently announced a proposal to reduce the fees earned by liquidity providers on its exchange from 0.3% to 0.25% of revenue. The difference would go towards UNI token holders. The risk here is the LP’s would migrate to other platforms with better economics, keeping in mind that Uniswap dominates volume on dexes.

Defi volumes have been lackluster in July: Uniswap fee switch could lower liquidity even more

Until next week!

The Bequant Team

Martha Reyes

Emiliano Bruno

Callum Greaves

Artur Sakovich