Wednesday, Feb 22, 2023

A dose of economic reality, BTC Ordinals and market moves, Hong Kong's crypto positioning, digital bonds, enterprise services for real this time? and more

“The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” – George Bernard Shaw  ||

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MARKETS

Finally, a dose of concern

Yesterday’s market rout delivered a strange feeling, given the red on the screen: relief. The move down felt more “real” than previous plummets, more like the market was finally beginning to accept that the earnings outlook was more uncertain than originally estimated, and that valuations had not yet fully adjusted.

This morning, @IsabelNet shared a Goldman Sachs chart showing declining expected EPS for the next couple of quarters, with a rebound to 10% year-on-year by Q4. I haven’t seen the calculations, but given that it is still not clear whether the highly anticipated US recession has started yet, this feels, um, precipitate? (I know that some argue a recession isn’t coming, but sincerely, I’m not buying that. More on this later.) Given the intensifying uncertainty around inflation, rates, the war and much more, betting on an H2 recovery feels much risker than betting BTC will go up from here (not investment advice, just sayin’).

(chart via @IsabelNet)

Yesterday, Walmart and Home Depot reported earnings. Walmart did pretty well, but warned of a bleak outlook for 2023. Home Depot also emphasized caution, unsurprising given their exposure to not just personal consumption but also the housing market – data out this morning shows that US mortgage applications dropped 13.3% over the past week, after a 7.7% decline in the previous period.

This concern for the consumer came on a day that PMI data delivered much-higher-than-expected numbers across the board – I commented in yesterday’s note that the composite index for Germany, France and the UK moved from contraction into expansion territory. It turns out that the US index did the same, in spite of consensus forecasts that it would remain below 50.

This strength pushed rates expectations and yields even further up – yesterday the US 2-year yield briefly rose above 4.70% for the first time since early November, and the 10-year got worryingly close to 4.0%.

(chart via TradingView)

This is triggering worrying signals from the leading bond and equity volatility indices. MOVE, which tracks volatility in the US treasury market, is heading up fast, which is never a good sign. And yesterday, the equity market’s VIX volatility tracker hit its highest point since the beginning of the year.

(chart via TradingView)

I’ve written before about how the drop in volatility released liquidity into the market, which was one of the drivers of the BTC performance. Does this mean those days are over? No, but the volatility shifts are a headwind, and this could be why we are seeing some gradual repositioning.