Crypto Markets Daily Dec 9 2024

Rising Volatility, Spot Falling

BTC and ETH experienced relatively stable, sideways movements over the weekend. However, both have slid through Monday morning – BTC trades just above $98K and ETH is priced at $3,870.

Derivatives markets present divergent sentiments – BTC’s at-the-money implied volatility term structure, which had steepened throughout the sideways price action, has flattened overnight as front end vols have been bid up. In contrast, ETH's term structure has become inverted, even during the recent price action. While it's not unusual to see the term structure invert, it is unusual to see it invert in tandem with a spot slide. Such inversions have mostly occurred during bullish rallies over the last month, with drops in implied volatility at the front end of the term structure when spot falls. 

‍

‍

The skews of their volatility smiles reveal contrasting expectations too. ETH's front-end skew levels are declining, indicating a reduced relative demand for out-of-the-money call options to OTM puts. This decrease has happened as the left wing of the volatility smile has increased, implying that demand for protective puts has increased, while demand for calls has not decreased.

In contrast, BTC's skew remains positive and relatively unchanged, even amid falling spot prices, indicating that traders maintain a more consistent optimistic outlook for BTC's potential upside across tenors that now trades above ETH’s.

‍

‍

‍

Last week’s BTC spot decline was exacerbated by a wave of liquidations which also led to a recalibration of the previously elevated perpetual swap funding rates. Perpetuals’ funding rates, which had been indicating an overheated market due to extreme levels of leverage, have now stabilised at noticeably lower levels. Despite this adjustment, futures yields remain positive.

‍

‍

‍

‍

Macro. Last week presented a relatively mixed view on the Fed’s likely decision in next week’s FOMC meeting that the market took as a dovish signal regardless, almost fully pricing in a 25bps cut. Following Friday’s Non-Farm Payroll (NFP) report, the market-implied probability of a December interest rate cut has surged to 87.1%, up from 61.6% at the beginning of December. The market's certainty of a December cut is at odds with some other data points – jobs added beating expectations at 227K, JOLTS earlier in the week indicating increased number of vacancies and a higher quits rate, and PCE at the end of November rising to 2.3% YoY.

Wednesday’s CPI print is the last large data point we will get before the Fed’s decision. Economists anticipate the headline year-over-year CPI to rise to 2.7% in November from 2.6% in October, while core inflation is expected to remain steady at 3.3%, a level it has ranged at since June. Underscoring the cautious tone last week was Federal Reserve Governor Michelle Bowman, who dissented in September against a substantial rate reduction. In a conference last Friday, the governor advocated for a gradual approach to policy adjustments, emphasising that "inflation remains elevated", underscoring the need for vigilance in achieving the Fed's 2% target.

While markets appear to have locked in the chance of a cut next week, they are less certain about January (currently 64% chance of a pause if we assume next week is a cut). However, any significant upside surprise to CPI’s already high forecast could challenge the prevailing market sentiment.

‍