No red tsunami but another crypto flash flood

Stocks wobbled after the “red tsunami” investors backed failed to materialize. Then the S&P 500 made new lows on the flash flood effects when Binance scuppered its deal to buy rival FTX triggering a flurry of bitcoin selling below $16,000, decimating long-positioned investors.

You can’t deny the growing correlation between bitcoin and risk assets. The FTX news is having an outsized effect on asset prices. Once the second largest crypto exchange globally, FTX has told investors that without more capital, bankruptcy is likely. Hence all ships were sinking on the crypto tumult.

All this unexpected noise is happening ahead of the hotly-anticipated US CPI, which will be a sensitive marker for the FOMC on how high to take interest rates.

Bitcoin spillovers are not negligible, and given how widely crypto coins are held, it could mean more forced liquidation of other assets to cover margin calls as long position investors were massively wrong-footed.

Unfortunately, for crypto buyers, there is no lender of last resort. Hence the sell-off could have more legs to run as industry liquidation chasers remain on the hunt selling a variety of cryptos and native FTX coins to protect their downside as the crypto contagion effect roils. Indeed, this could be a tipping point for crypto after investors were left bag- holding a series of significant industry insolvencies earlier this year.

Regarding the midterm election, of course, it wasn’t a great showing for Democrats either. A purple dilemma might be the best way to describe the red-blue tangle that emerged Wednesday. It’ll be gridlock, that’s for sure. But perhaps not the friendliest kind for market participants, many of whom were hoping for a more resounding rebuke of Democrats given inflation realities.

Volumes outside specific risk events this week have been a tad light, this theme will likely continue today ahead of the US CPI print, with excess risk-taking likely to be pared back. With the updated used car figures coming in a tad more robust than expected, economists are tweaking their headline and core forecasts to higher.

OIL MARKETS 

Crude oil prices moved lower overnight after the Energy Information Administration reported a bearish to consensus crude oil inventory build of 3.9 million barrels for the week of November 4. Unfortunately for oil bulls, that was only the tip of the iceberg as a run of bearish economic headlines put China in the headlights, or rather taillights, as reopening optimism fades fast as a spike in local covid cases weighs like an anvil on oil markets.

Adding to the oil spill, broad-based risk de-grossing, and a sturdy US dollar ahead of the hotly anticipated US CPI data is not helping matters for many oil investors caught long and wrong after splurging on last week now suspect China reopening speculation.

FOREX

The USD was choppy during the New York session, but the direction of travel turned higher ahead of tonight’s US CPI print as weaker China data sent growth fears reverberating through G-10 FX markets.