Crypto rekt, US inflation ahead

Markets have a risk-off feel after Binance decided not to bail out rival crypto exchange FTX - sending crypto markets spinning - and attention fixes on key US inflation data later.

It all goes to nought

FTX and Binance had the feel of two drunks propping each other up; well now one seems to have sobered up a bit and can’t get away fast enough. Binance has walked away from the deal to rescue FTX as quickly as you can say ‘due diligence’. Was Binance just buying time to offload more of the FTT token? Sam Bankman-Fried looks less like the new JP Morgan and more like the new Ken Lay. This is yet another disaster for crypto markets and underscores the extreme riskiness of these ‘assets’.

Venture Capital firm Sequoia Capital is marking its $210m investment in FTX to zero. The US Department of Justice and SEC have begun investigations into the sudden collapse of the FTX exchange. Remember, exchanges shouldn’t have this kind of risk…but this is the wild west and it’s empire built on sand.

Binance said: “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.” The effect on crypto markets was immediate. Bitcoin plunged below $16lk for the first time in two years and others fell sharply before bouncing back this morning. Kind of market where late shorts might get punished so be careful.

Stocks caught up

Direct read across was obvious for certain outlier stocks like MicroStrategy, which holds 130,000 Bitcoins, with a carrying value of $1.99 billion. On the conference call earlier this month the company said the "low watermark" for Bitcoin was approximately $17,600. Take another $2k off that and you get some heavier impairment charges. MSTR exec chairman and founder Michael Saylor had this to say…No, me neither. Shares tumbled 20%, whilst Coinbase declined 10% and Robinhood fell almost 14%.

Whilst crypto isn’t necessarily that big a market overall, it’s certainly correlated to things like risk and liquidity and therefore it’s adding to a negative feeling in the market today. US election results are slowly pointing to Republicans taking the House of Representatives and the Senate will be decided by a run-off in Georgia in December. Not the red wave many had thought would happen. Russia pulling out of Kherson gave the market a bit of a lift – you saw the market rally shortly after that announcement crossed the wires, the S&P 500 up about 20pts or so on the news.

Uncertainty stalks markets today

But the market overall fell by 2%, with the Nasdaq down 2.5%. You can probably put that down to uncertainty around the elections persisting, the blow-up in the crypto market and worries about today’s US inflation data. European stock markets traded timidly in early trade on Thursday after a day of losses for Asian equities. You’ve also seen a bit of bid come through for bonds which suggests a bid of a safe haven bid, also evidenced by a rally for the USD in the last couple of sessions off the Tuesday lows, which saw the dollar index hit its weakest in almost two months. GBPUSD tested the 50-day and bounced with solid support at this level around 1.1330. EURUSD trades a little below parity. USDJPY is also finding good support at the 50-day line at sits around 146 this morning.

Inflation knife edge

US CPI is expected to remain high as the benefit from lower gas prices ebbs, but there is expected to be a marginal cooling in the rate of inflation, with core prices seen rising +0.5% on the month, down slightly from the +0.6% seen in September. Headline CPI is expected to rise by 8% on an annual basis, down from 8.2% in September. The risk is that we get another upside surprise which raises bets for a higher terminal rate and arguably nudges the Fed closer to another 75bps hike in December rather than the expected 50bps. There is a strong chance of volatility and outsize moves in index futures and rates, extending to FX on the reading and one point in either direction will move the market.

Meta rallies

Meta says it is looking to bolster capital ‘efficiency’, lowers capex outlook by $2bn, also lays off thousands and will focus on key growth businesses...still forecasts significant increase in Reality Labs losses in 2023. It helps and shows that Zuckerberg is listening to investors who have been tearing their hair out but doesn’t radically change the outlook. The question over the metaverse spending is still open: when does it lead to returns and until then can you as a dutiful fund manager be prepared to risk capital that could just get burned? Shares finished 5% higher.