Commentary from the Desk: October 26, 2022

This week, mixed company results from Big Tech, while risk assets rise.

The Macro Front

Wednesday’s early market performance is a turn from the past three days of the major indexes rising.

• On Tuesday, the Nasdaq ended up 2.2%, while the S&P 500 and Dow added 1.6% and 1.1% higher, respectively.
  • Tuesday’s close marked the first time in October the major indexes rallied three days in a row.

• Worth noting: conditions for a trough in US equities are not visible yet as the asset class doesn’t fully reflect the latest rise in real yields and odds of a recession, according to analysts at Goldman Sachs. In case of a severe economic downturn, Wall Street expects the S&P 500 Index to drop to 2,888, implying 25% fall from Tuesday’s close.

  Company Earnings

• GOOGL missed expectations on the top and bottom lines. The search giant also reported a decline in YouTube ad revenue, which spurred investors to deliberate the outlook for other tech companies that rely on ad spending;
• MSFT reported weaker-than-expected cloud revenue in its latest quarterly results, despite beating earnings and revenue estimates. The company also issued current-quarter revenue guidance that fell short of expectations;
• Fellow megacaps AMZN, META, NVDA, TSLA and AAPL fell between 3.9% and 0.7%. The Facebook parent is slated to report earnings later this afternoon, with AAPL and AMZN reporting on Thursday;
• Note: While the majority of companies have beaten the lowered estimates, guidance continues to be mixed and margins pressure is clearly evident.

Rates took a breather today as the 10-year currently sits at 4.048%, down from 4.226% at the beginning of Tuesday’s trading.

• YUS 2yr/10yr spread sitting at around -38bps;
• Data from the S&P CoreLogic Case-Shiller National Home Price Index is showing that tight monetary policies are starting to ripple through the housing market, with home prices falling dramatically;
  • The home price index fell 1.1% in August from July, the second straight month-over-month decline;
  • The August decline was also the biggest month-on-month decrease since December 2011.
  • On a seasonally adjusted basis, meanwhile, the index posted two straight months of declines for the first time since 2012.

The Crypto Front

Crypto assets are performing particularly well, with Ethereum leading the way. This driven primarily from a rally across risk-sensitive assets creating short squeeze dynamics.

• ETHUSD rose 14% to near $1,550;
• BTC has climbed 7% over the past 24 hours to $20,600;
• Solana and Cardano surged 12% and 13% higher, respectively;
• Memecoins are showing similar strength, with DOGEUSD gaining 12% and SHIBUSD moving up 6%.

A closer look at ETH

• We are seeing investors disregard the Merge amidst an incredibly bleak macro backdrop. Since the Merge, ETH has traded in a very tight band;
• The structural changes in Ethereum’s fundamentals will be felt eventually, as they’re too meaningful to be ignored;
• If we look at the ultrasound money dashboard, which tracks the supply of ETH since the Merge, as of today:
  • The Ethereum supply has increased by +1,310 ETH since the date of the Merge (September 15).
  • Earlier this month, this figure was an estimated +13k, but an increase in activity has helped bring this number down slightly;
  • What is particularly revealing: what the net-supply increase would be today IF Ethereum were still operating under proof-of-work system. Currently, this figure is roughly +481.8k;
• Lastly, ETH Futures open interest is up to ~9.5b from ~7b at the beginning of this month.

ICYMI

• The only crypto story you need, by Matt Levine (Bloomberg Businessweek)
• zkSync, an Ethereum Scaling solution that utilizes Zero-Knowledge proofs to improve the cost and speed of using Ethereum is going live with the first zkEVM this week (Twitter)
• Asset managers add to bitcoin long positions ahead of price increase: crypto markets analysis (CoinDesk)
• Crypto-friendly Rishi Sunak to become UK Prime Minister following Truss exit (CoinDesk)
• Reddit NFTs surge as Polygon-based avatars reach millions of new users (Decrypt)
• Regulators increase their power over crypto but with little to show for it (Forbes)