OTC Desk Market Update: Decoding Market Sentiment — Are Investors Hedging Against Short-Term Risks?
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- U.S. Crude Oil Inventory Report on Wednesday.
- U.S. Initial Jobless Claims Data on Thursday.
- U.S. Gross Domestic Product (GDP) Report on Thursday.
Macro
Federal Reserve Holds Rates Steady, Plans Multiple Cuts
The U.S. Federal Reserve maintained interest rates as expected and indicated its intention to implement several cuts before the year concludes. Following the two-day policy meeting, the Federal Open Market Committee (FOMC) announced it would retain the benchmark overnight borrowing rate within a range of 5.25%-5.5%, consistent since July 2023. The committee outlined plans for three quarter-percentage point cuts by the end of 2024, marking the first potential reductions in interest rates since the early stages of the COVID pandemic in March 2020.
Revised Economic Outlook
U.S. officials revised their GDP growth forecast for this year to a 2.1% annualized rate, up from the previous estimate of 1.4% in December of 2023. Unemployment rate projections were slightly lower at 4%, while core inflation estimates increased to 2.6%. The Fed’s post-meeting statement emphasized strong job growth and unanimous approval to maintain current rates. Expectations point towards a cautious approach to monetary policy adjustments, with markets anticipating the first cut in June followed by additional reductions later in the year.
Bank of Japan’s Policy Adjustment and Wage Dynamics
The Bank of Japan recently made a minor policy adjustment, increasing its target interest rate for the first time in 17 years. Despite the noise in the commentary suggesting a major shift, the actual move was from -0.1% to 0%, signaling a modest variation. This adjustment follows positive outcomes from the Japanese annual wage negotiations known as Shuntō, indicating a potential shift away from deflationary trends. The Bank’s decision reflects a gradual response to improving economic conditions rather than a radical change in approach.
The Bank of Japan’s decision to adjust interest rates reflects its focus on achieving stable inflation around 2% while supporting productivity and robust wage outcomes. The recent policy changes aim to maintain stability in overnight rates and bond purchases, with a cautious approach to potential adjustments based on economic activity and price trends. By aligning monetary policy with improving wage dynamics, the Bank aims to foster a more balanced economic environment driven by consumer demand.
Crypto Market Overview
Implied and Realized Volatility
Crypto markets experienced a correction from recent highs, as well as implied volatility (IV) declining throughout the week. Bitcoin (BTC) implied volatility dropped to 72, while Ethereum (ETH) fell to approximately the same level, marking a decrease of approximately 10 points for both assets. Despite this, implied volatility has been dragged lower primarily due to the dumping of call options upon the break of key support levels.
BTC volatility carry is currently hovering around zero, indicating a flat trend, while ETH is currently realizing 20 points higher than implied volatility. Additionally, the re-emergence of Solana (SOL) as a significant player in the market has been notable, with a sharp rally followed by a similar retracement to BTC and ETH
Term Structure and Skew
BTC term structure remains in contango with the front end of the curve shifting lower to levels not seen since January. Back-end term structure has shifted higher about 5 points, indicating a bid for longer term options in April and May following the Bitcoin halving. ETH term structure, like BTC has been hammered in the front-end, but unlike BTC it is also seeing some pressure on the back-end due to delays in the U.S. spot-ETF approval. ETH began the year outperforming most majors, but without a clear catalyst traders are shifting their attention elsewhere.
The relative value spread between ETH and BTC implied vol shows a slight shift favoring Bitcoin in the long end, with Ethereum’s premium over Bitcoin diminishing. This change may stem from Bitcoin gaining momentum as we approach the halving, while Ethereum faces pressure from the delay in ETF approval.
Skew reveals a divergence between the front-end and back-end, with front-end put premiums rising significantly while the back-end skew remains relatively stable. This divergence reflects market sentiment during the correction phase, with investors seeking short-term protection against further downside risks. However, the call skew in the long end indicates underlying traders are still betting on upside long term.
Options Flows and Positioning
BTC option flows came in at $14 Billion USD last week, down slightly from the week before. Though much of the short-term flows have been put-heavy, there is still a bias towards upside calls in the longer-dated maturities. Some notable trades include a large buyer of the April 26th $70,000/$90,000 USD call spreads and outright $90,000 USD strike calls expiring on September 27th. We also saw traders buying downside protection in the form of March 29th $65,000/$55,000 USD put spreads and outright puts with same expiry.
ETH flows came in at about $7.4 Billion USD this week, also down from a week ago. Similarly to BTC, the short-dated option flows were dominated by put buying contributing to the increase in skew we spoke about earlier. However, traders are beginning to take position in upside calls with the April 26th $5,000 USD strike calls being lifted by a large buyer, while call sellers were caught offside again having to roll up their strikes to $4,500 USD level.
Gamma positioning has seen a shift towards short positions in Bitcoin as put buyers came in and spot sold off. Ethereum dealer positioning is long, with those positions concentrated at the $3,000 and $3,200 USD strikes. As we have mentioned in the past, gamma becomes significant when dealers are short certain strikes, as price often moves towards those levels during large option expiries. After a large expiry like we had recently it will take some time for these levels to begin to amplify market moves again.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.
