Macro Analysis

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FED week is here, a key week for the markets. This Wednesday the FED will raise 75bps again according to market expectations, but all the focus will be on the guidance that Mr. Powell will give on the rate hike roadmap, which as he said before will be totally "data dependent". Some voices are already talking about a 50bps hike in December, the market is still dreaming and clinging to an (imaginary for the moment) narrative about the Fed's pivot.

The market is still anxiously looking for the central banks' "pivot" as the only argument to maintain valuations, but we have to point out that the consensus on inflation has been systematically wrong during the last months and this has been reflected in the yield curve, which does not relax its stress, the percentage of inverted curves reminds us of the definitive trigger of previous recessions.

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The strength of the dollar also makes us extremely cautious in terms of positive and ambitious medium and long term predictions for the markets and in particular for risk assets. Fixed income, as we have already mentioned in previous newsletters, is going through a storm never seen before.

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Last week was busy, Central Banks and U.S. corporate results. The Bank of Canada backed off and hiked 25bps less than expected, heavenly music for the markets which, lacking positive macroeconomic and fundamental catalysts, clung to the narrative of more dovish Central Banks, resulting in erratic dynamics typical of markets that live from day to day.

The ECB raised rates as expected, 75bps and threatening future strong hikes for the next meetings with special attention to the possibility of discussing QT (quantitative tightening) at the next meeting in December. The ECB balance sheet is huge as we all know and with an unprecedented acceleration in 2020 (covid).

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Third quarter US GDP came in higher than expected at 2.6% along with low unemployment figures, leading the market to fear mid-week that the Fed's pivot was still not solidly supported.

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However, the highlight of the week would come on Thursday with the results of Amazon and Apple. Amazon's results were really worrying (except for its AWS division), highlighting the lowest profit growth in its history. Amazon, a company with a capitalization of 1.1 Trillion $ fell -20% in the aftermarket, simply insane. On the other hand, Apple had very decent results (EPS 1.29 vs. 1.26 estimated) with a slight drop in its iPhone division. Even so, the generalized fear in the aftermarket made it fall -5%.

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The percentage of U.S. companies beating earnings expectations is not bad but it is not going through its best moment, as this chart shows

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The loss of competitiveness and the situation in Europe is what it is, we cling to the saying that a picture is worth a thousand words.

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Last week, the International Monetary Fund made a very strong statement. According to this organization, we are immersed in a cycle of rate hikes that combines all the characteristics of previous crises together.

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In the coming months, distillates and specifically diesel will be in the media spotlight. Inventories are well below any previous statistical record. Let us not forget that diesel is the lifeblood of our economic system.

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Cryptoassets

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Bitcoin

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With no notable changes, we are still waiting for a clear and forceful consolidation above $20,500 that would allow us to affirm that demand has taken control in the short term. This is the first major battle for more ambitious bullish scenarios.

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Ethereum

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Greater relative strength with respect to Bitcoin, reaching the first relevant upper volume node of 1500. Acceptance and consolidation of this intermediate control could give wings to go test the upper selling control

Everything will be conditional on Wednesday and the reaction of all markets to the FED event. The correlation of the crypto ecosystem and more specifically its benchmarks (bitcoin and ethereum) remain anchored to the evolution of risk assets (SPY and QQQ).

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On-chain Metrics and Derivatives

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The liquidation of leveraged short positions last week is the highlight. The lack of patience of market participants in this price range since June has led to a sharp rise in the leverage ratio and open interest in derivatives.

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We continue to insist that a healthy market is one that has organic growth via the spot markets and sustained inflows of stablecoins that provide buying power. Such inflows do not support this narrative at this time.

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The market is in a positive gamma regime which is favorable for a bull market, however the gamma call wall at 21000 is acting as a clear resistance and a wall for further upward continuation.

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Classic markets

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As we mentioned last week, the markets had to validate the breakout of the important level of 3775 (sp500 future) and so it was.

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The market's bullish continuation will be conditioned by the reaction after the Fed meeting. On Friday the market experienced a big short squeeze with a price dynamic that in our opinion leaves a lot to be desired and was basically fueled by the flow coming from ultra short term options. Markets live from day to day, in an environment of low liquidity and dominated by derivatives markets.

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Impressive $SPX options volume with same Friday expiration. Call buyers generate negative gamma that Market Makers need to cover by buying underlying to cover their delta, propelling the market even higher.

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Simplifying and as we can see in the chart, the 390 level of the $SPY is the key level to be conquered by buyers to reverse this weakness since the beginning of 2022. The FED will decide if we break 390 or find rejection to resume the bearish path, analogous to the $20500 level for the Bitcoin.

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