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March 6, 2021

Weekly Market Roundup

It was all about macro events this week as market participants kept a close eye on the Fed and its intentions to appease market concerns that inflation will overshoot its own targets. Comments by the central bank on the opposite side of the pond, specifically by the European Central Bank’s (ECB) Villeroy de Galhau of the French Central Bank, who said that the ECB “can and must react against” any unwarranted rise in bond yields that threaten to undermine the euro-area economy. 

The comments by the Bank of France governor, among the strongest yet by ECB officials, were seen as a precursor to what could come from the Fed and in turn encouraged investors to bet that the central bank is already stepping up its own emergency bond-buying program. However, Fed Chair Powell failed to deliver during his speech – and there were no hints at a ‘Twist’, refused to speculate on repo issues, no pushback against recent bond vol, and no mention of SLR exemption – sparked chaos across all asset classes with stocks, bonds, and gold witnessing a sea of red. 

At the same time, the USD index rose sharply as Eurodollar futures continued to indicate a more aggressive hiking schedule. Still, despite the apparent market unease, it is worth highlighting the recent fund flows by Bank of America, with the report showing that equity funds saw USD 22.2bln inflows; led by tech. The very same sector that led the downside and investor exodus. 

In addition to that, analysts at Bank of America believe that the Fed will inevitably move to YCC and sees a USD rally ahead of YCC but the announcement will trigger the start of a great bear market.

All this is particularly relevant to the digital asset markets given the tendency by Bitcoin to trade like a risk asset, as opposed to a safe haven asset. 

Another trend that has not helped Bitcoin to gain safe haven appeal is the aggressive rise in the demand for the Canadian ETF, which also resulted in Grayscale GBTC premiums collapsing as a result. The Grayscale premium refers to the difference between price of bitcoin as implied by cost of shares in the publicly-traded Grayscale Bitcoin Trust (GBTC), and the price of bitcoin as traded on cryptocurrency exchanges. The compression in the premium will have one knock on effect and that is cash & carry strategies. 

However, it is unlikely to evaporate the demand altogether, although some capital will look elsewhere, while others will turn more creative and may use various structured lending products to enter DeFi assets, especially given the recent announcement by Grayscale to launch a number of related entities. 

With that in mind, it is also worth recapping a note published by Bloomberg Intelligence analyst Mike McGlone, who wrote that a recent drop below zero in the so-called Grayscale premium – a closely watched metric in cryptocurrency markets – could signal that last week’s swift 21% sell-off to about $43,000 might have reset the market for a fresh run. 

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