AD Derivatives Newsletter: Middle East Tensions, BoJ Rates, & Market Panic

USA Week Ahead (ET):

1. Monday 9:45am: PMI & ISM Services

2. Thursday 8:30am: Jobless claims

3. Thursday 3pm: Richmond Fed Gov. speaks

Disclaimer: Nothing here is trading advice or solicitation. This is for educational purposes only.

Authors have holdings in BTC, ETH, and Lyra and may change their holdings anytime.

MACRO

Many themes exist for the market panic witnessed on Friday, August 2nd. 

1. Middle Eastern tensions
2. BoJ raises overnight rates from 0.10% → 0.25%
3. Friday’s NFP report was below expectations 
4. Fed FOMC continued to lean Hawkish
5. US elections feel chaotic

Middle East

In terms of middle eastern tensions, Israel now appears to be headed to war with Lebanon/Hezbollah and Iran. Or at least it’s close. 

The US stands ready to protect Israel and sent warships to the area, developments on-going. 

Flight to safety and panic Gold bids have been the reaction to the Ukraine war and the Israel terrorist attacks… Today, without a clear US president (Is Biden the president?!) the idea of war expanding seems VIX positive and GOLD positive.

The BoJ

The BoJ governor, Ueda, described the overnight rate raise as a way to defend the historically weak Yen. 

The Yen rallied in response as the Tokyo stock market crashed a massive -5.5% on the day.

Short-Yen is a historically crowded short trade, which causes the Yen to move with a VIX like return distribution. 

That said, I have a hard time believing the Yen fundamentals actually changed. USA overnight rates are 525 bps… moving Yen overnight rates from 10bps to 25bps doesn’t really change the situation. 

Instead I believe this move was related to extended positioning and the impact of higher rates in Japan hurting the economy. 

Japan is for sure the canary in the western fiat system coal mine.

Think about the NPV loss to bank loan assets when rates go from 0 to 1%... a 1% change on a 30-yr bond is not far from a 30% NPV loss when rates are 0. This instantly wipes out balance sheet assets (SVB banking style).

The opposite situation is do nothing OR finance losses with the Central bank. This works great, unless the currency is already in free-fall

Hence the trap the BOJ finds itself in. 

FOMC and the Employment situation

NFP came in below expectations with +114k jobs (vs +185k expected) the unemployment rate also moved higher from +4.1 → 4.3% (it was only 3.7% at the beginning of 2024). 

The Fed’s FOMC decision on Wednesday was to hold rates steady and continue to provide caution around cutting too soon. They were surprisingly more Hawkish than expected. 

All together this sent the cash VIX moving a lot higher, briefly touching 30pts VIX. 

Chart: Daily VIX Chart (ThinkOrSwim)

Chart: Daily VVIX Chart (ThinkOrSwim)

VVIX, or the VIX of VIX options, hit insane levels not seen in years… 160Pts. 

These two combined measures show a lot of panic in the market, but the where the VIX term structure settled isn’t too crazy. 

I can easily see things continue to get worse. There’s a lot more downside potentially in the market, especially Warren Buffet himself is aggressively selling stocks and the AI bubble is has been hitting 2000 dot.com bubble hype levels. 

ZeroHedge.com

Rates have reacted strongly, there’s 0% chance we don’t get a cut in the September Rates, according to the CME FedWatch tool. This is a far deviation from what was being priced merely two weeks ago for the September FOMC rate decision. 

Chart: SEPT FOMC CME FedWatch Tool 8/2/2024

Chart: SEPT FOMC CME FedWatch Tool 7/12/2024

Finally, the impact on crypto hasn’t been pretty. For the first time in a long while, BTC acted like a risk-on asset on Friday. This could be due to ETF buyers being trapped elsewhere… hence “Sell what you can” mentality drove BTC lower, or maybe the chaotic USA election noise is causing BTC prices to drop. 

BTC: $60,555 (-12.2% / 7-day)

ETH :$2,908 (-11.4% / 7-day)

SOL :$143.28 (-23.1% / 7-day)

Crypto

Looking at the term structure, we can see that forward volatility is clearly pricing in an election kink. 

This supports the notion that the BTC vol market is at least “paying attention” to the US election as a potential market moving catalyst. 

Chart: BTC Term Structure w/ Forward Vol

The term structure remains in slight Contango (or flat) despite the large market sell-off and associated rise in realized volatility. 

Chart: Constant Maturity Term Structure 1-min

Chart: 7-day VRP

We can see above that the rise in RV has flipped 7DTE options into negative VRP. Meaning, hedging this move with options (or speculating) isn’t expensive right now. Especially when compared to equities and the associated move in VIX products. 

Chart: ∆25 BTC Risk-Reversal

The risk reversal is at recent history lows, but could easily become more extended if BTC continues to break down, heading to $50k for whatever reason. 

Chart: GEX 8/3/2024

We can see that GEX exposure is now strangled between 60k puts and 70k calls, as the market is unsure of the direction and but wants volatility exposure (Above).

This is a much different picture that what we saw last weekend, going into the Trump Bitcoin Conference speech, as the market bought $70k strikes expecting a new breakout to ATHs. (below). 

Chart: GEX 7/27/24

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AMBERDATA DISCLAIMER: The information provided in this research is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this report constitutes, or should be relied on as a suggestion, offer, or other solicitation to engage in, or refrain from engaging, in any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.