🔻 Fitch warns it may be forced to downgrade dozens of banks, including JPMorgan Chase
🇨🇳 China state developers warn of losses as crisis spreads
📈 Fed officials see ‘upside risks’ to inflation possibly leading to more rate hikes, minutes show
✂️ China central bank unexpectedly cuts rates to support sputtering economy
The initial calm in global markets to start the week was shattered after Fitch reported that it might be forced to downgrade its rating on several US banks. This followed on the back of the Moody’s rating action last week. In US risk assets, it was a slow spiral lower, with concerted selling in equity barometers during the New York sessions this whole week. For a brief moment, SPX futures broke key support at 4370 on Friday night, trading as low as 4350. A small relief rally into the NY close helped stave off a bearish technical signal.
It certainly doesn’t help that between a US Q3 GDP Nowcast of 5.8% and FOMC minutes showing a consensus that leans more hawkish, expectations for tighter US monetary policy continued to drive US Treasury yields higher. The back end of the curve once again sold off, and 10 year Treasuries made a new year to date high. The bear steepening price action weighed heavily on risk assets.
Fears over contagion from Chinese property developers also contributed to the soggy atmosphere. The People’s Bank of China also took action last week to ease borrowing rates, by cutting both the one year Medium-Term Lending Facility Rate as well as the 7-day reverse repo rate (by 15bps and 10 bps respectively). This led to a very sharp spike in USD strength vs. the Chinese Yuan, with USD/CNH gapping above the 7.30 level from 7.28 on stop loss runs. The pair attempted to breach the 7.35 level as well, but it seems that Chinese banks stepped in to intervene, allowing the Yuan to recover back to the 7.30 levels into Friday’s close.
Malaysian Markets Highlights
🇲🇾 Malaysia's GDP growth eases to 2.9% in Q2
The FBM KLCI Index, which bucked the equity selloff trend last week, finally succumbed to peer pressure and traded lower at the tail end of the week. Regional equities were weighed upon by the troubled Chinese property developer narrative. Our MYR was also weaker mainly on the back of a weaker Yuan as well, now trading back near the highs of the year. While nothing much moved when our lower-than-expected GDP figures were released, we can expect that the Chinese deflation story will continue to provide headwinds for our local economy and risk assets.
Crypto Market Highlights
❗Bitcoin calm shatters with sudden tumble
📩 Coinbase applies to list crypto futures products
Crypto assets, which have generally been more resilient compared to traditional risk assets, decided to join the risk-off party as well. And they did so in dramatic fashion: a flash crash across all major crypto assets as large speculative long positions were wiped out. Early Friday morning, Bitcoin flash crashed over 10% to a low near USD 25,000 on major exchanges. Some altcoins like XRP fared much worse, crashing between 20-30%. It was reported by Decrypt that over $800 million of liquidations took place.
As with most flash crashes, prices subsequently recovered quickly. Local digital exchanges were relatively slow to react to the crash, with BTC/MYR trading near a 2% premium to the implied offshore rate early Friday morning. Nonetheless, sentiment across the board has certainly been damaged, as evidenced by the open-source Crypto Fear-Greed Index slipping 13 points into ‘Fear’ territory from ‘Neutral’.
What we are monitoring for the week ahead
What does all of this mean? Our thoughts
It’s certainly been a tough week for risk assets, and that bearish lean we mentioned last week has certainly paid off, albeit in a more dramatic fashion than envisioned. The US equity selloff that began at the start of the week continued to accelerate. On Friday, SPX futures breached a key support level at 4,370, and this opens up a drop to the next support at 4,200 (about 3.8% away) if the previous support doesn’t hold. The move could likely end up being rapid, due to a convergence of factors such as stop losses, pockets of short option gamma, and just an outright acceleration of negative sentiment. We still think that remaining cautious in risk assets is a prudent stance to take going into this week.
An interesting observation throughout the week has been that the risk asset selloff usually gets underway during the New York trading session, while in Asia the next day, prices are allowed a breather and recover slightly. Buying risk in Asia and squaring or flipping short into New York has been a very profitable strategy this week. Behavioural wise, it looks more like the purge is being led by onshore US investors, which make things less speculative and possibly give legs to this risk off move.
We mentioned this previously in our very first publication; that weak trading positions could be flushed out. Open interest in BTC futures contracts across major exchanges dropped by nearly $2.5 billion during the rout, and now settles nearer to levels before the Blackrock ETF headline in June.
We expect the sharp deterioration in sentiment to be a damper on the major crypto pairs, though pockets of idiosyncratic opportunity do exist in some pairs that have extended too far. It’s possible that Bitcoin trades lower in this new range of 25,000 to 28,000 for now as the dust settles.
With further delays now expected in the approval of a spot Bitcoin ETF by the SEC (perhaps till early 2024), the previous euphoria has completely given way to market forces. Again though, the ETF approval will be a game changer, both in terms of real money flows as well as sentiment. While things look grim right now, the washout in speculative long crypto positions is certainly healthier for the asset in the long run, clearing the way for more stable price appreciation. This dip in Bitcoin allows us to provide better value for investors looking to enter this market.
A final observation for our readers on market idiosyncrasies: Friday’s crypto flash crash provided a bit of opportunity for lucky dip buyers, but somehow BTC priced in MYR on major local exchanges were slow to correctly price this change. The BTC/MYR pair on local exchanges traded at nearly 2% premium to the implied BTC/USD x USD/MYR rates. While this premium narrowed over the day, dip buyers on local exchanges unfortunately could not fully enjoy the discount they could have.
As a licensed fund manager with experience navigating the markets, we didn’t have that problem. And if you are an investor of ours, you won’t either.
Thank you for reading and we’ll see you next week!
Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.