Trade Letter #182 : Living on the Edge

Crypto

Weekly Review

The founders of Tornado Cash, an open-source tool designed for safeguarding privacy on the Ethereum blockchain, are facing allegations of engaging in money laundering and violating U.S. sanctions. Once again, the cryptocurrency "mixer" known as Tornado Cash has been pulled back into the spotlight. Approximately a year ago, it made history by being added to a US sanctions list, marking it as the first smart contract to receive such a designation. Shortly thereafter, Alexey Pertsev, one of the developers of Tornado Cash, was apprehended in the Netherlands. He remained in Dutch custody until April 2023, when he was subsequently placed under house arrest by the authorities. Presently, the Southern District of New York has officially issued an indictment against the co-founders of Tornado Cash, namely Roman Storm and Roman Semenov. The accusations center on purported involvement in money laundering actions and breaches of U.S. sanctions. Let this be a message to all you crypto money launderers out there: only using officially unofficial legacy channels controlled by the US government and their buds will be tolerated for any sustained illegal financial activity.

Meanwhile from September 12th to September 17th, the international Web3 community is uniting for gatherings in Lugano, Zug, and Zurich (Switzerland) aimed at exploring decentralized innovation. The Swiss Web3Fest guarantees attendees enlightening conversations and presents an extensive itinerary encompassing diverse facets of the Web3 domain. Going beyond the boundaries of Switzerland, this event will also branch into the metaverse, offering a platform for collaboration among innovators, investors, and creative minds.

BTC/USD

1-Day Timeframe

Bitcoin has been consolidating at around 26,000$ since its corrective drop on August 17. The RSI has slowly been creeping back up towards the 30 mark, but still has some ground to cover. As long as the bullish order block holds and RSI keeps grinding to the upside, there isn’t much to update on the technical side. Further weakness would be signaled through daily candle closes under the bullish order block (<24,824$) while the first level to break for some upside optimism is the 0.5 fib level of our current range (28,307,46$). 

ETH/USD

1-Day Timeframe

Similarly to BTC, ETH has also been consolidating. It is good to see sellside liquidity getting tapped while candle closes are staying above the relative equal lows we had marked a while back. RSI is already back above 30 which is a good first step. Daily candle closes below 1,625$ would be a sign of weakness and likely open the road to 1,370 - 1,400$, while on the upside the first hurdle to overcome is still the long term trendline, currently at around 1,840$. 

Legacy

Weekly Review

The past week witnessed diverse movements in benchmark returns, influenced by investors' responses to contradictory indicators concerning the economy and the trajectory of monetary policy. Growth-oriented stocks notably outperformed value shares, benefiting from another impressive earnings and revenue performance by NVIDIA, a prominent artificial intelligence chip manufacturer. The financial sector experienced an early-week retreat after S&P Global downgraded credit ratings for five regional banks due in part to strains in the commercial real estate lending market.

Several retailers disclosed their second-quarter results, which arguably painted a cautiously optimistic picture of the state of the U.S. consumer. Department store operator Macy's saw its stock plummet following a decline in earnings and a warning about increasing consumer wariness, coupled with a rise in credit card delinquencies. Nordstrom, a competitor of Macy's, provided a more optimistic report by exceeding earnings and revenue projections but voiced concerns about late payments on credit cards, leading to a reserved outlook. Companies like Nordstrom, Dollar Tree, and Dick’s Sporting Goods noted earnings impact from unusually high levels of in-store theft.

The University of Michigan's final reading of consumer sentiment in August, released on Friday, showed a slight dip from July's nearly two-year high, possibly due to heightened inflation expectations driven by recent gas price hikes. However, the study's primary researcher emphasized that consumers remain buoyed by strong income expectations, with lower-income consumers displaying the most confidence in anticipated wage increases. Nothing to see here, everything is fine.

Durable goods orders data unveiled on Thursday indicated a somewhat elevated level of business caution, particularly in specific sectors. While durable goods orders, excluding defense and transportation (often considered a proxy for business investment), inched up by 0.1% in July, this progress was overshadowed by a downwardly revised 0.4% contraction in June. S&P Global's manufacturing activity index unexpectedly decreased in August, erasing most of the robust gain seen in July and pushing further into contraction territory.

The housing market, on the other hand, displayed more vigor, with new home sales hitting their highest point in July since early 2022, despite facing the highest mortgage rates in years.  (Freddie Mac's report that the 30-year fixed-rate mortgage had reached its highest level since 2001.) Sounds very healthy (not).Existing home sales did not fare as well, falling short of expectations.

On Friday, in his speech at the central bank's annual symposium in Jackson Hole, Powell provided insight into his interpretation of these mixed signals. Powell acknowledged that higher rates had contributed to a slowdown in industrial production and wage growth, while also highlighting that tighter lending standards were tempering economic growth. Nonetheless, he pointed out that the overall economic growth remained above its long-term trend and that the housing sector was showing signs of resurgence after a pronounced slowdown over the past year and a half. In conclusion, he metaphorically described the current situation as navigating by the stars amid cloudy skies. Sounds like it may be a good time to start preparing the popcorn.

S&P 500 

1-Day Timeframe

The S&P 500 has continued to hover between the 0.702 and 0.618 fib retracement levels, with the bottom of the long term ascending trend channel currently giving a supportive reaction. Besides that, key levels to keep an eye on have not changed since last week. 

DXY 

1-Day Timeframe

DXY continues its quest towards 104.738 and potentially beyond. The first level to now hold for continued strength is 103.538.

Weekly Schedule

U.S.

This week significant attention will be directed towards economic updates, notably featuring the Fed's preferred measure of inflation (PCE) and the employment report for August. The hawkish stance adopted by Powell suggests that there will be limited room for easing in the effort to curb inflation. Furthermore, the job report scheduled for September 1st marks the final release of its kind before the FOMC meeting on September 20th. These economic summaries will coincide with rising Treasury yields, and futures trading indicating an approximately two-thirds likelihood of a 25bps increase in the central bank's key interest rate in November, following a pause in September.

Friday’s NFP report is expected to show private sector hiring is cooling moderately. 

This week will also be brimming with speeches from the Federal Reserve. Starting on Monday and continuing into Tuesday, Barr will deliver discussions regarding banking services. On Thursday, insights will be shared by both Bostic and Collins, and on Friday, Bostic is set to make another appearance just a few hours prior to the release of the NFP report. Additionally, Mester will provide her perspective on inflation later that morning.

I will also be keeping an eye on the Salesforce earning report. 

Eurozone

In the Eurozone this week will be characterized by a significant amount of data, with a few specific releases capturing particular attention. Among these, the most noteworthy event is the publication of the YoY inflation rate flash estimate for the Eurozone on Thursday. Forecasts anticipate a slight decline in both the headline and core levels. Prior to this, individual country releases in the preceding days could offer hints about whether the Thursday data is likely to surpass or fall short of expectations. Additionally, on Thursday, the release of ECB accounts will be of interest, especially since the prevailing market sentiment sees the rate decision at the upcoming meeting as an uncertain toss-up between a 25bps increase and no change.