Market Thoughts: US Highs, China Drops, BTC Volatility - Hydra X
Market Thoughts: US Highs, China Drops, BTC Volatility

April 29, 2019

U.S. stocks capped the week with a record close on better-than-forecast earnings. Treasury yields fell after data signalled moderate inflation.

Chart from Sigma by Hydra X

S&P 500 Index closed at an all-time high of 2,939.88 after posting a 1.2% gain for the week following positive surprises from earnings releases. U.S. GDP expanded at a 3.2% annualized rate in Q1, beating estimates of 2.3%. Underlying data indicated softer demand, with weak consumer spending and a gauge of inflation coming in below policy makers’ target.

Despite breaking through to new all-time highs, a note of caution that momentum indicators do not seem to be validating price action. Bearish stochastic divergence has formed, in tandem with decreasing volumes.

Chart from Sigma by Hydra X

Meanwhile, in China, the Shanghai Composite endured its worst week since October, demonstrating the influence that Beijing continues to yield over its markets. The index lost 5.6% for the week after the government signalled that it would pare back support for the economy amid evidence of a recovery.

The index has lost all its gains after breaking out of a bull flag earlier in the year; it has retraced back to ~3,080 support levels.

Chart from Sigma by Hydra X

A look at the comparison between the S&P 500 to the Shanghai Composite (in blue) shows that correlations have broken down since mid-Feb, despite the vicissitudes imparted upon both markets together by ongoing of US-China trade talks.

Chart from Sigma by Hydra X

Semiconductors took a hit after Intel slashed its earnings outlook for 2019 amid a slowdown in equipment spending by cloud computing companies and headwinds from China. Intel lost 8.99% on its announcement, gapping down to close at $52.43 and forming a spinning top after finding support at ~$52.

Chart from Sigma by Hydra X

Amazon reported Q1 results, beating EPS estimates by $2.44 and doubling its profit. It also announced that it woud invest $800m to make one-day free shipping the new standard for all core Prime members. The stock continues its ascent towards $2,000.

Chart from Sigma by Hydra X

BTCUSD suffered a(nother) tumultuous week when the Office of the AG of New York State announced a lawsuit against Bitfinex and Tether, two affiliated companies. Tether is a ‘stablecoin’, each coin being ostensibly backed by one US dollar, ensuring that the value of the coin remains at or very close to parity with the dollar. Doubts have long existed about the bona fides of Tether and Bitfinex, but Tether remains the dominant stablecoin, representing ~96% of daily trading volumes in that category. Its status as the de factor ‘central bank’-issued medium of transactions has also given rise to its position as the single largest potential systemic risk for the cryptocurrency universe.

The allegations against the exchange essentially were that: (a) Bitfinex used a Panamanian financial intermediary, Crypto Capital (not a real bank), as a payments processor to transfer money to its customers; (b) over one billion dollars of co-mingled customer and corporate funds were deposited with Crypto Capital – with no contract or similar written agreement ever entered into, no less; (c) Crypto Capital stopped responding to requests from Bitfinex to process payments; (d) Bitfinex then took $625m from its Tether bank accounts (with a real bank) to use for itself in order to meet customer withdrawal requests; (e) in exchange for the $625m from the real bank, Bitfinex gave Tether back the same amount, $625m, but from the non-real bank, i.e. the money which it could no longer access; (f) eventually, Bitfinex then re-papered this as a $900m loan from Tether to Bitfinex.

In short, the stablecoin was then partly backed by a $900 million loan to an affiliate crypto exchange which no longer had sufficient funds to operate.

BTCUSD proved remarkably resilient, and apart from a wicked stop-hunt that took prices down to the low $4,000s (in the process, taking out all sensible stops placed by recent longs), it has recovered to trade firmly above $5,100, as if not much ever happened. Bitfinex has accused the AG of filings “written in bad faith and with false assertions”. It will be interesting to see if there will be a run on the bank, and how Bitfinex/Tether/BTC ride out this drama. In the crypto world, nothing surprises.

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