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LET THE PRICES HIT THE FLOOR
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BEQUANT Crypto&Coffee

There were two key developments to contend with over the weekend. First, Italy has taken drastic action to contain a worsening outbreak of the coronavirus after the number of confirmed cases in Italy rose to 7,375 on Sunday, while the number of deaths reached 366. The increase in cases came as the Italian government imposed a lockdown on its northern territory that is home to 16million people. It is worth highlighting that when coronavirus was largely confined to China, Italy was the first country to quickly ban direct flights to and from the Asian nation, although even seems to have failed to prevent the spread.

Secondly, Saudi Arabia announced it will raise production and offer its crude at deep discounts to win new customers next month, according to two people familiar with the country’s oil policy. As per press reports, the kingdom plans to pump more than 10m barrels a day next month while announcing unprecedented discounts of almost 20% in key markets, in an apparent attempt to punish Russia, while squeezing the US shale industry. In reaction to the above, WTI crude futures opened down in low $30 area, having traded in the low $40s on Friday.

Before reviewing the market, it is worth remembering that last week saw Bitcoin temporarily trade in tandem with equities, after the Fed announced an emergency rate cut of 50bps. Both spiked higher on the initial announcement and both subsequently witnessed reversal of fortune. This is important and it also goes to show how institutionalised crypto market has become, and it also suggests that liquidity crunch in one market may have a contagion impact on other markets. Now, the crypto market is not yet big enough to have a meaningful impact on the books of funds that have exposure to equities and Bitcoin. However, a liquidity event in equities will likely translate into worsening liquidity conditions in crypto because market participants will be forced to adjust their portfolios and deal with margin calls, alternative assets are unlikely to be prioritised. The same goes for commodities such as oil and gold.

As a result, the market continued to trade heavy over the weekend, ever as the underlying Bitcoin metrics continued to show plenty of resilience. In particular, Bitcoin hashrate sits near record highs in spite of the much-feared supply chain disruptions amid the spread of the coronavirus, while the upcoming mining difficulty adjustment is expected to result in an increase of over 7%. Still, the move lower by Bitcoin over the weekend saw around $180million in liquidations on Bitmex BTC swap, futures, and ETH quanto. In turn, the futures contango structure has flattened considerably. It is worth pointing out that the latest CME Commitment of Traders (COT) report showed that the number of short positions across the “other reportable” category fell to zero, while long positions were also reduced from 1,741 to 1,234. The previous week, longs in the other-reportable category (potentially sell-side in making markets) rose to an all-time high, while during the rally in Q2 2019 this category was net short. Could this be an indication of an imminent price squeeze?

Finally, volatility is something that crypto market participants are well accustomed to, even with BTC 1-month realised vol at 50%, it is still much below last years’ peak of 130% printed in July. However, for equity markets, very few expected the spread of the coronavirus to have such an impact on the market liquidity and the consequent flight to safety. So much so, that the same 1-month realised vol for SPX surged from 10% zone, all the way to 40%, while equivalent metric for gold also spiked higher to 24%. Further policy easing is net positive for gold, even if there is a risk that certain amount of capital will likely be subject to profit taking and potentially reallocated into riskier assets. Still, gold gained around 5% last week and traded near seven-year highs.

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