Is another crypto collapse imminent?
If the FTX continues to escalate, expect more contagion and cascading liquidations in the days ahead.
Just when we thought that the market would be relatively quiet as it waits for the results from the US midterm elections, the crypto market threatened to meltdown due to the possible failure of FTX, the second biggest crypto exchange in the world.
Here’s a good summary of what led to a “bank run”-like cascade of withdrawals from the exchange and what’s happening now is:
The fact that a reputable exchange such as FTX, and its founder, Sam Bankman-Fried, a well-respected giant in the cryptoworld, are in need of a bailout, is very worrying for the industry.
If the FTX continues to escalate, expect more contagion and cascading liquidations in the days ahead.
Trading Tip
Why does liquidity matter?
There are many assets to trade in the markets but it does not mean you have to have your hand in every single one of them. Sometimes some markets simply lack liquidity.
These are the markets you should avoid as you may face big movements in prices especially when it falls due to the lack of price takers. Additionally, such markets are usually traded by participants that are specialised in those fields where you are unlikely to have an edge against them.
Day Ahead
US Midterm elections are ongoing; headlines of the results will hit the wires as the vote counts come in.
Trading Plan
1. Currencies:
EUR - Short the EUR. USD continues to retrace from the highs, allowing the EUR to grind higher. Stay patient and stay short.
2. Commodities:
Uranium & Energy - The break higher is starting to look more likely. Stay invested.
3. Stocks:
US Stock Index: Active trading day but the range is fairly narrow. Expect market to continue to be volatile but in a range till the US inflation data.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The US midterm elections could cause some volatility in the markets. The situation with the possible failure of FTX, the second biggest crypto exchange, may cause shifts in risk sentiment depending on how it gets resolved. The Ukraine-Russia war drags on, and though the market impact is limited, the energy shortage situation could worsen if tensions should escalate.
What Happened Yesterday
The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.53%. The 2yr yield fell -0.05% while the 10yr treasury yield slid -0.08% as the midterm elections skewed towards the Republicans (lesser spending and hence less requirement to borrow more through US bond issuance).
The US stock market gained as the Republican tilt in the mid-term continues to be priced by the market. The S&P 500 rose +0.56% (intraday high: +0.65%, intraday low: -0.15%), the Dow Jones increased +1.02% (intraday high: +1.11%, intraday low: +0.07%) while the Nasdaq rose +0.75% (intraday high: +0.93%, intraday low: -0.36%).
The crypto market tried higher (FTT, the native token of the FTX exchange, spiked from 14.9 to almost 20, a 39% spike ; BTC: 20698 high, +4.3% spike; ETH: 1578 high, +5.8% spike) as Binance announced that it has entered into a tentative agreement to save FTX from its liquidity crunch by buying its non-US businesses but the reprieve did not last. The fact that the 2nd largest crypto exchange went from healthy to needing a rescue from a competitor within days fueled worries that the situation is worse than imagined and there could be more cockroaches across the industry. Binance’s offer is also subject to more due diligence and as such, the market continues to fear more bad news on this front. Bitcoin plummeted -10.0% (intraday high: +0.4%, intraday low: -17.8%) while Ether collapsed -14.8% (intraday high: +0.55%, intraday low: -20.6%). The FTT token collapsed -75% on the day, closing at the 5.50 level and it is currently trading below 4.
Headlines & Market Impact
Consumers are cutting back on holiday gift buying amid higher inflation
Notable Snippet: Inflation is weighing heavily on the holidays this year.
Roughly half of shoppers will buy fewer things due to higher prices, and more than one-third said they will rely on coupons to cut down on the cost, according to a recent survey of more than 1,000 adults by RetailMeNot.
Though the study found many consumers are also eager to get an early start on seasonal shopping, that surge is largely driven by concerns about affordability and money-saving strategies, other reports show.
“Inflation is, by far, the biggest issue for households this year,” said Tim Quinlan, senior economist at Wells Fargo and author of its 2022 holiday sales report.
What we think: The lower profits from this holiday season will likely speed up layoffs within the retail sector as companies anticipate further reduction spending in the year ahead as credit conditions become tighter.
Binance offers to buy FTX’s non-U.S. operations to fix ‘liquidity crunch’
Notable Snippet: Binance, the world’s largest cryptocurrency firm, has reached a deal with Sam Bankman-Fried’s FTX to buy the rival crypto exchange for an undisclosed amount amid, rescuing the company from a liquidity crisis.
Binance CEO Changpeng Zhao tweeted Tuesday morning that “there is a significant liquidity crunch” at FTX and that after FTX asked for Binance’s help, the company “signed a non-binding” agreement with the intent “to fully acquire http://FTX.com and help cover the liquidity crunch.”
Zhao added that Binance, which was initially based in China but now claims no official headquarters, will be conducting full diligence in the coming days, and the firm has the discretion to pull out from the deal at any time.
Sam Bankman-Fried confirmed the agreement in a tweet this morning.
The deal marks a cataclysmic collapse for a company that earlier this year was valued by private investors at $32 billion, with ambitions to acquire its way into becoming a crypto giant. Months prior, venture firm Sequoia Capital and BlackRock backed FTX at a $25 billion valuation. Forbes has pegged Bankman-Fried’s net worth at $17 billion, largely from his stake in FTX.
What we think: Binance’s offer is non-binding and is subject to more Due Diligence to be done in the days ahead. Expect volatility to be high as the situation remains fluid and expect more headlines to hit the wires in the days ahead.
Russia, US to hold first talks under nuclear treaty since Ukraine war: State Dept
Notable Snippet: The United States and Russia are expected to meet soon and discuss resuming inspections under the New START nuclear arms reduction treaty that have been paused since before Russia's invasion of Ukraine, US State Department spokesperson Ned Price said on Tuesday (Nov 8).
"We have focused on risk reduction in these conversations, but we’ve been very intentional about seeing to it that the ability of our two countries to pass messages back and forth and to engage in dialogue has not - does not - atrophy."
Russian newspaper Kommersant said earlier on Tuesday the resumed talks may take place in the Middle East, adding that Moscow no longer saw Switzerland, the traditional venue, as sufficiently neutral after it imposed sanctions on Russia over Ukraine.
What we think: This could be a sign that the US and Russia are more open to talks to resolve the protracted war. This is a development that needs to be closely monitored.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord