What happened last week

Lately, there's been a lot of movement to assess, but two key factors are steering the TradFi markets: the labor market and inflation. In essence, investors hope for the labor market to improve and inflation to decrease. Nonetheless, reality is more nuanced, and these two trends can coexist.
Encouraging economic data and an enthusiastically received technology IPO helped push the SPX and the Dow Jones to their highest closes in over a week on Thursday. The rise in the overall monthly CPI & PPI was in large part driven by a 20% surge in gasoline prices, setting aside energy costs, that has held most of this year. The market reaction was one of continued optimism, with the stock market and dollar rising. With most of the big economic reports out of the way for the week, the market's focus shifts to the upcoming FOMC meeting on Wednesday, with no hike expected by investors with a 97% probability.
Earlier Thursday, the European Central Bank (ECB) also unexpectedly raised its benchmark rate, its 10th consecutive increase. However, the ECB signalled that this may be the last rate increase due to concerns about the sluggish euro zone economy. Despite inflation remaining well above the 2% target, economic growth prospects have dimmed, influenced by high borrowing costs and a downturn in China. This move by the ECB has created a dilemma for policymakers, as they aim to combat inflation while not stifling overall economic activity. The ECB indicated that further rate hikes are unlikely, leading to a drop in euro zone bond yields and the euro's value while boosting European stock markets, as investors anticipate rate cuts in the coming year.

In the crypto market, BTC is currently displaying subtle indications of increased intraday volatility in contrast to the past few weeks. As of the latest data, the price stands at $26'6k, up from $25'8k just one week ago. The trading range is, however, showing clear signs of widening. While the previous weeks also have been ripe with ETF news, no important news has come in the last seven days, but October looks more promising with deadlines coming up.

The current market sentiment bears a striking resemblance to the late-stage bear markets of 2015 and 2019. In the past week, trading volumes plummeted by a significant 46%, marking a 35-month low. A prolonged period of weak momentum has pushed the fear and greed index to its lowest level in 9 months. Furthermore, both the perpetual and options markets prominently signal a focus on safeguarding against potential downturns, reflecting the prevailing bearish sentiment.
This deteriorating sentiment is primarily attributed to anticipated sell-side pressure stemming from FTX's asset liquidation. Furthermore, the market anticipates additional sell-side pressure from Mt. Gox's trustees and U.S. Silk Road Bitcoins. While the exact timing and structure of these potential sell-side flows remain uncertain, they have all played significant roles in exacerbating the existing negative sentiment.

FTX Asset Liquidation Details
As we shared in our market update on Monday, FTX aims to divest its assets, holding a $3.4 billion crypto portfolio, with $1.3 billion in liquid assets (excluding stablecoins), with the court approval granted on Wednesday and potentially liquidating starting already this week. The court-approved plan starts with a $50 million initial sale limit, gradually increasing to $100 million weekly, with discretion up to $200 million. It's essential to assess tokens relative to their trading volume. For instance, FTX's $560 million Bitcoin holdings represent about 2% of BTC's weekly volume, showing manageable selling pressure. A similar situation applies to Ethereum.
In contrast, FTX holds 16% of Solana's supply, but most is locked until 2028, with only $9.2 million unlocked monthly, equivalent to 1.2% of weekly volumes, reducing market impact.

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Our take

Over the past week, both BTC and the broader crypto market have seen slight gains, accompanied by a widening trading range, indicating the potential for shifts. However, market sentiment mirrors late-stage bear markets, characterized by a substantial decrease in trading volumes, a nine-month low in the fear and greed index, and a prevailing focus on downside protection in the derivatives market. The primary focus in the past week has been on the anticipated sell-side pressure stemming from FTX's asset liquidation. Looking ahead, notable events such as ETF news and the SEC's Greyscale rehearing deadline, are looming on the horizon.

When examining the crypto events calendar, it aligns with this perspective, with a concentration of potential bearish event(s) (I.e., FTX liquidation) that transition to a neutral stance starting from mid-October. Nevertheless, we maintain a bullish outlook beyond that point, extending into the year-end and the first quarter of the following year.

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The week ahead

Wednesday, 20 September

• US Federal Funds Rate
• US FOMC Statement & Press Conference

Thursday, 21 September

• US Unemployment Claims
• UK Official Bank Rate

Friday, 22 September

• US Flash Manufacturing & Services PMI