What a difference a week makes
Last week, we came back from the weekend to a host of uncertainties – a ship became lodged in the Suez Canal, blocking a significant amount of global trade, President Erdogan of Turkey fired the head of his central bank in a move to politicize monetary policy, Several European countries ramped up lockdown measures in the face of a slow vaccine rollout and increased case numbers of covid-19. And US treasuries continued to be volatile while the US dollar saw increasing bids, prompting farther pressure in growth technology stocks. There was a lot going on, and much of it led to very nonobvious or conflicting messages and read throughs for both stocks and crypto. On the one hand, central bank political intervention should be a confirmation of the story for BTC as a reserve asset and store of value. On the other hand, demand for dollars from people and businesses caught up in the fallout from the crashing Turkish Lira needed liquidity in any way that they could get it and selling crypto and other assets that they could get dollars for was necessary. Likewise, European lockdowns were negative for the reopening trade, but they also signaled a likelihood that the ECB would ramp up dovish monetary policy. All these conflicting interpretations made traders step back and implement a “wait and see” approach, much how we discussed in this column exactly a week ago.
On Friday, the culmination of a week of uncertainty came to a crescendo. The massive family office, Archego, imploded on levered positions in Chinese tech stocks as well as some media companies that came under pressure after issuing secondary stock offerings. Of course, this information was just rumor circulating across trading desks on Friday – the only thing that was certain is that many stocks were in freefall on Friday morning, even as the overall stock market seemed relatively unphased. In the overnight session, the Chinese equity markets had just marked one of their first strong days in weeks, and I was watching closely as to what kind of appetite the US market would show moving into the weekend as a signal that Asian market traders would pick up on to show them whether they should turn from the defensive trading that they have been bogged down by for weeks and start to buy, or whether the bounce that they enjoyed Thursday night was just an opportunity to sell harder.
As Friday progressed, the rumors of the Archego trade spread and were all but confirmed. When stocks are in freefall and no one knows why, it creates uncertainty and fear. When traders can put a story to it and they think they understand the dynamics, it creates opportunity. Late Friday as confidence grew in the story, opportunistic traders started to jump in to buy up the beaten down shares in the names that Archegos was liquidating, and at the same time major indices started rebounding quickly. As uncertainty is removed from the market, prices rally as risk premium starts to evaporate. Around 3pm New York time on Friday, I looked at the overall market and said “if the next hour is strong, that will signal Asia to buy, and Europe will follow. If the next hour is weak, we’re in for a lot of pain”. I was on edge, and still in “wait and see” mode myself.
Then everyone else who was in “wait and see” mode decided that they saw. The rally in US equities into the close on Friday turned into a buying frenzy and markets closed on their highs. To me, this was a signal that all the buyers who had been waiting on the sidelines had finally decided that the coast was clear. There are still many risk factors out there, and tech stocks both in the US and China are still facing a lot of uncertainty – from a valuation perspective for the former and from a regulatory perspective from the latter – but the coalescence of a verifiable story of Archegos liquidation provided the clarity for traders to jump in to take on this risk. And in crypto, the headwinds that have been blowing strong – namely macro risk aversion, the strength of the US dollar, and maybe most importantly relentless de-risking from China – started to ease.
Last night, the Chinese markets were not as strong as I would have liked to see as a follow through from the move on Friday, however crypto is coming back with a vengeance. Throughout the anxiety filled week last week I remained encouraged by the fact that crypto, and specifically BTC, did not completely fall apart, and the pullback, while significant, was not disastrous. The correlation between crypto and both US and Chinese tech stocks cannot be ignored, and crypto held up relatively well during the turmoil. Friday afternoon, suddenly it felt like the clouds parted and a beam of sunshine shown through the tempest in Chinese tech stocks and China risk assets in general. With this break in the storm, crypto markets are breathing a sigh of relief and rebounding soundly.
For the time being, I believe we’ll jump right back into the market dynamic that we have seen for most of the year. With sidelined buyers jumping back into the game, we’ll once again see dips being bought creating support. We’ll of course find resistance at key levels, especially near 60k as investors who saw their gains slip away last week wipe their brows and take money off the table. But the trend is reestablishing itself, and until the next crisis comes our way, I think we will once again start to see resistance levels fall one by one, and as each one falls, new support levels will emerge, each new one higher than the last.
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