17 Oct Bitfinex Alpha | Persistent Inflation Puts Global Markets Under Pressure

The worrying news on inflation did not go away last week. Even in a market of now heightened inflation expectations, both the Producer Price Index report and the Consumer Price Index report came in higher than forecast. Core CPI, up 6.6 per cent on the year, is at a 40-year high.

The Federal Reserve still has work to do, and really only one lever at its disposal: monetary policy.

The equity market is now experiencing volatility almost on a crypto scale. In two days, markets rose and then fell by more than two per cent. In the bond market, the two-year yield hit a 15-year high; and with shorter-term treasuries higher than the longer-end, the yield curve remains resolutely inverted.

Our analysis of the Chicago Fed’s National Financial Conditions Index, which measures financial conditions in the US money markets, debt markets, equities and in the traditional and shadow banking systems, confirms tighter than average conditions. Similarly, the Bond Market Option Volatility Index has exceeded levels reached during the 2020 flash crash, suggesting increasing stress in the bond markets.

The ongoing sentiment is that the Fed will keep raising rates and heaping pain on the markets until it is convinced inflation is tamed or until something breaks. The interesting thing is: things do seem to be breaking in places like the UK and Japan. Are these early signs that the market is cracking under the austerity?

On Chain and in crypto markets, sentiment is also looking decidedly bearish. Open interest in Bitcoin perpetual contracts has doubled since Mid-April. On one reading, this means more volatility is on the way, but as we look historically at BTC price trajectories, we believe it is on track with previous bear markets, but with a twist. Long-term holders are continuing to buy on dips, accumulating 500,000 Bitcoin in the last three months, in stark contrast to the weaker hands seen by retail investors and shorter-term holders.

For us, the question remains if we are in for a new period of intense volatility, will crypto emerge from such a stress test decoupled from other risk assets, or as we have seen to date, tied in lockstep with them.

In a sign of the growing maturity of the sector, though, Tether announced that it now has zero commercial paper in the reserves that back the world’s first and largest stablecoin. It is a huge achievement that puts other stablecoins in the shade.

Last week saw a major $100m plus hack of a Defi platform again. We deep dive into the risks of Defi platforms in our Learning Section and the slow progress that is being made to fix some of their inherent vulnerabilities.