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  • Writer's pictureVimal Gor

April 2023 Monthly Flash Report

Updated: Feb 15

Macro Overview


Equity markets and bond yields stayed in narrow ranges in April after the larger price swings in March. The MSCI World equity index was up 1.8% and closed the month near its one-year high and the Bloomberg Global Aggregate Bond Index and 5-year US treasuries had modest 40bp and 20bp gains. The relative price stability in April gives the impression of some resolution or certainty in the forward-looking economic outlook. However, the outlook is far from certain and differs between asset classes. Bond markets are pricing in a recession, while equity markets have returned to the soft-landing scenario as quarterly S&P 500 earnings season has beaten (lowered) expectations and provided less gloomy forward-looking guidance.

At the recent AFR investor conference in Sydney overwhelming consensus was for tougher economic times ahead and the main point of difference between speakers was the central bank response function (steep rate cuts vs no cuts because of inflation) and market reaction post CB responses (return to QE and asset prices surge vs high rates cause economic pain and asset prices go sharply lower). Timing an “inevitable” recession and implementing portfolio protection strategies can be extremely expensive as the price of insurance, implied volatility, is priced at an elevated premium with high recession expectations.

The New York Fed probability of a recession in the next twelve months is at 58% and the highest reading in the last thirty years. The model uses the yield curve slope to calculate that probability and the steep downward slope of the curve implies the increased odds of a recession. The recession is the base case or has a higher probability of occurring for many economists than few times before. The uncertainty for many is not if but when is the inevitable recession going to happen. The following graph shows the NY Fed Index over the last thirty years.


April data points were not that informative on how close the economy is to entering a recession. Macro data did not show the economy tanking or show inflation spiking up again. The implied interest rates surface shifted slightly higher at the front of the curve to reflect the imminent May rate hike, but the rest of the surface stayed relatively unchanged and is still pricing in cuts of 100bps over the next year and 200bps over two years. The below graph shows the rates surface and the changes in the last two months.



The macro data is lagging the rates curve implications and likewise corporate reports have not seen aggregate profits drop significantly and are not matching the more dire forecasts. Corporate earnings reports from the first quarter have seen a small 4% drop in YoY earnings this quarter but companies are guiding, and analysts are modelling, strong earnings growth in 2024. Forward looking earnings expectations peaked in June 2022 for FY23 and FY24 and are predicting a small drop in Q1 2023 but growth in the second half of 2023 and 8-10% growth in 2024. The below charts show analysts’ S&P 500 earnings expectations for 2023 and 2024 since June 2021 and quarterly S&P 500 earnings since 2005 with expectations through to 2025.


The drop in earnings during the covid disruption was steep but recovered quickly with the monetary and fiscal stimulus especially benefitting the largest members of the index. The GFC or great recession of 2008-09 had larger percentage drops in corporate profits and took years for the index to fully recover to pre-GFC levels. Current expectations see the S&P 500 at the lows of quarterly earnings and are forecasting profit growth while rates models are forecasting the highest probability of a recession in 30 years. A recession with corporate profit growth seems the least probable outcome unless Apple and other big tech companies make up losses of the other 490 companies making up the index. An argument can be made that most of the data and forecasts are just lagging and will change quickly when new information that includes the recent banking crisis period is incorporated. However, the recent April data does include the March period and few negative surprises have occurred. As the S&P 500 index price level drifts toward its one-year high other equity market indicators show there are investor worries of the inevitable recession. Implied volatility in the S&P 500 is staying elevated versus reduced realised volatility and the implied index skew is steepening showing demand for index put buying and/or index call selling. The below chart shows normalised 25 delta skew at a one year high and at-the-money implied volatility and realised volatility hitting one-year lows.

If the inevitable downturn does take longer than anticipated to materialize, hedging too early through equity index derivatives could prove expensive as it often did in the 2022 market correction.



The uncertainty of when the recession will officially occur is matched by the debate over the Fed and other central banks response to the perspective recession. During the last 30 years the Fed has cut rates aggressively during recessions in 2001, 2008, and 2020 and the fed funds rate has been below 50bps for 10 of the last 14 years. QE, MMT and other monetary expansion policies have been employed to offset negative growth effects in the economy and utilized by most central banks globally. Since inflation has remained astronomically high some are arguing that central banks will not be able to cut rates this time and their policy response will be like Paul Volcker in the 1980’s with rates kept at the current level or even higher to combat the greater evil of inflation. Inflation would need to stay sticky and high for this argument to pan out and more specifically services inflation stays high as other core CPI goods inflation are already slowing. If unemployment stays low and spending on core services ex-housing stays high on items like travel and food, corporate profits will likely match the current rosy expectations. In our view, this high corporate profit during a recession scenario with interest rates staying high is less likely than no recession if all these conditional items above are true. If services inflation abates and unemployment rises, corporate profits will not match the optimistic forecasts and the FED and other central banks will return to the same policies of the past 30 years and not return to a Volker-type policies. The Trovio investment team believes central banks will have similar policy response function as the past 30 years when and if a recession occurs. In the coming months we do believe the recent banking crisis aftershocks will show up in data releases and economic conditions will deteriorate. Services inflation will not stay high in this scenario and inflation will track lower. More aggressive policy responses by central banks could be supportive of growth and long duration real assets as there were during 2020.

Digital Asset Overview


The total digital asset market cap closed its fourth straight month of gains up +0.80% at $1.1Trn. Bitcoin continues to lead the broader digital asset market and was up +2.71% for the month at $29.2K. Although April exhibited signs of bullish price continuation, trading volumes across major tokens saw a material decrease when compared with Q1. As seen in the chart below, the current 30-day average volume is similar to the late November and December last year when BTC and ETH traded in a narrow range around $16K and $1.2K respectively.


This low liquidity environment has made for volatile trading as large sell and buy orders cause liquidity cascades or sudden price drops and surges. An example of the low at-the-touch liquidity was the violent intraday move on April 26th which saw BTC move down -9% liquidating ~180m of long positions in just over an hour, before completely reversing those losses over the subsequent 24hrs. A combination of tightening USD onramps and buyer exhaustion following four consecutive months of price appreciation resulted in a consolidation of Bitcoin Dominance (BTC.D) at range highs of ~48%. The 48% BTC.D range has acted as a point of significant resistance for Bitcoin following the first pullback from the highs of early 2021. BTC.D is a useful tool to gauge the overall market sentiment towards Bitcoin versus the broader digital asset ecosystem. An increasing BTC.D can indicate investors are making initial investments into the space, expressing macroeconomic views on BTC as a hedge to the fiat currency system, or using BTC as the safer store of value within the eco-system. While a decreasing BTC.D can signal investors are diversifying away from the perceived safest crypto-currency asset and gaining exposure to digital technology adoption or specific projects. A breakout above the BTC.D resistance level may be a key indicator of larger institutional adoption.

Near term BTC resistance at 31k was observed in April and supported by the investment team’s analysis of the Short-Term Holder MVRV (Market Value to Realised Value). The Bitcoin MVRV indicator is a tool used to assess whether the current market price of Bitcoin is overvalued or undervalued relative to its realised value. As covered in previous reports, the realised value of Bitcoin is the value at which each unit of Bitcoin was last transacted on-chain, which means it represents the average cost basis of Bitcoin holders.



Many Ethereum ecosystem metrics continued to build momentum post Ethereum’s April Shapella upgrade. This significant event implemented restricted withdrawals of ETH from the 2.0 staking contract. The upgrade went smoothly, and the pre-upgrade fears of mass withdrawals and network instability were not realised. Since the fork, most of the Ether withdrawn has come from centralised exchanges, and in particular, Kraken, which was forced to un-stake as part of their agreement with US regulators. Outside of exchanges, most withdrawals were the un-staking of accrued rewards, rather than the principal 32 ETH required to become a network validator. If staking rewards (i.e., any additional ETH held by validators above the required 32 ETH) are discounted from net inflow figures since the Shapella upgrade, the network has added over 772K more ETH to the staking contract. As the number of network validators grows, decentralised liquid staking providers continue to attract a material portion of market share. Total value locked across all ETH Liquid Staking Derivatives (LSD’s) currently sits at 8.52 million ETH which represents ~43% of all staked ETH. Lido remains the largest LSD providers currently managing 73% of all ETH staked in LSD’s followed by Coinbase and Rocket pool which control 14% and 7% respectively. Another feature of the Ethereum network that continues to become compelling for investors is the “Fee Burn” function. Following the transition to a proof-of-stake consensus mechanism last year, the networks recent surge in activity has resulted in a sustained shift to a deflationary supply dynamic as seen in the chart below. Since ETH’s transition to POS, the function has burned 864K ETH, representing 0.7% of the total circulating supply.




The now enabled ETH un-staking and withdrawal mechanism offers stakers liquidity whilst supporting an increase in validators and new capital, combined with a continuation in deflationary supply dynamics and the continued rollout of Layer-2 scaling solutions will be drivers for strong ETH performance relative to the broader digital asset market.

This communication is provided for general information purposes only and should not be construed as a solicitation to buy or sell. It does not taking into account your personal circumstances nor including sufficient risks in an investment. Past performance is not an indication of future performance. Before acting on any information, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Opinions expressed are as of the date appearing on this material and represent the views of the author only and not those of Trovio, unless otherwise expressly noted: https://www.trovioassetmanagement.io/commentarydisclaimer

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