Weekly Market Update - 08/01/2023

Market Condition Updates

• TheDecember FOMC minutes indicates that we are near the end of the rate hiking cycle, yet the Fed intends to hold its position “higher for longer.” Last time when Powell mentioned risk management in terms of monetary policy in late 2018, the Fed stopped rate hiking in two months and began cutting rate in July 2019 to support the economy. We have included the most important discussion excerpt as follows:

Participants discussed a number of risk-management considerations related to the conduct of monetary policy. Many participants highlighted that the Committee needed to continue to balance two risks. One risk was that an insufficiently restrictive monetary policy could cause inflation to remain above the Committee's target for longer than anticipated, leading to unanchored inflation expectations and eroding the purchasing power of households, especially for those already facing difficulty making ends meet. The other risk was that the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population. Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy. A couple of participants noted that risks to the inflation outlook were becoming more balanced. Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective.

• TheFed expressing concerns about the economy per se is not bullish for risk assets, as we can see last time this happened, S&P 500 corrected ~20% while Bitcoin fell ~50%. Make no mistake as the US nominal growth is still strong despite street’s predictions of some level of “pains” in 2023.

• Market may rally between when Fed pauses and when recession actually hits. The market currently prices in a pause sometimes in 3Q23 but a terminal rate a little beneath what the December SEP (Summary of Economic Projection) projects. (Source: 3Fourteen Research).

Crypto Market Updates

• In anticipation of the Shanghai Upgrade, the LSD (Liquid Staking Derivatives) sector, has shown relative resilience in TVL. Now Liquid staking is the third largest category in terms of TVL, and has only seen -50% off ATH, c.f., -81% in Dexes, -80% in Lending Protocols, -73% in CDPs, and -73% in Bridges. (Source: DeFi Llama)

BNB retook the pivot ~250 level, though volume is lacking and BTC and ETH are still trading range bound. Net inflow to Binance has also led the market during the past week, probably indicating that the market participants have digested the previous concerns with Binance’s solvency/ We are glad to see that both on-chain flow and token price action corroborate each other. (Source: Nansen)

• $SOL price has witnessed a ~80% bounce from the bottom, but we want to caution that the ecosystem’s TVL has not recovered as much. Funding rate on $SOL perps have normalized after the spike to the negative territory following the new-year pump. We are not totally out of the woods yet. (Source: Nansen, Coinalyze)

• Rumors going around that Huobi Global is experiencing layoffs to cut operating cost. Users rushed to withdraw from the platform the same fashion we witnessed in the cases of Binance and FTX. One-month net outflow now amounts to ~7% of the platform’s “clean” net assets, a magnitude not so far not as severe as what Binance had experienced. We advise caution as this is still a developing story. (Source: Nansen, Dune Analytics)