Market update - Oct. 6th 2023

Could a US government shutdown still happen? How have the recently launched ETH Futures ETFs been received by the market? What can you expect from the Greyscale case?

In today’s Market Update, we explore the latest economic developments and market trends, beginning with the latest on the US Government.

A shutdown is averted for now, that is what passes for good news about US politics these days, so you can see why people aren’t terribly impressed. The path to passing spending bills by November 17th is narrow and rocky and the overall spending battle for fiscal 2024 is far from over, with a shutdown on November 18th being entirely possible.

Dysfunctional politics in the US are raising market-based interest rates even as the Federal Reserve is on “hold”. We are in the midst of a new bear steepening, as long-term interest rates are now rising faster than they are on the short end.

Perversely, this situation has put pressure on stocks as yields on “risk free” assets become more attractive – it may also explain why appetite for bitcoin has deteriorated and why the ETH ETF launches have been lacklustre – why own a relatively riskier asset yielding 4% at best when you can get a risk free one at 4.8%.

The good news is that the next round of inflation data, no longer subject to delay, is hugely encouraging. The August core PCE deflator rose only 0.1%— pushing the year-over year rate down to 3.9% from 4.3%

CPI is released next week and it looks like it could be lower than expected - consensus is for 3.7%, down from 3.8%, with core falling to 4.1% (from 4.3%). Despite the strong JOLTS data, the more sanguine inflationary environment isn’t enough to shift expectations to another rate hike this year.

Moving on to crypto, and more specifically ETH futures ETF launches – we’ve seen 13m dollars of inflows in the first 2 days. In contrast, BITO, one of the largest  BTC futures ETFs secured 200 million dollars within the first 15 minutes and 1 billion dollars within the first week of their launch. Though, it's important to consider that the current market conditions differ significantly from those seen during the bull market in 2021.

Ethereum’s validator queue is now down to roughly 3 days, and the exit queue is 0 – there is virtually no one exiting, a highlight of overall staking demand.

Finally, a word on the XRP case: A Federal Judge denied the SEC’s motion to appeal, a reflection of increasing pushback by Washington towards the SEC. Rumour has it the SEC is not going to appeal in the Grayscale case, which seeks conversion from a trust to a Spot Bitcoin ETF, and that they are engaging more constructively with ETP and ETF providers. Connecting the dots suggests that SEC hostility towards Spot Bitcoin ETFs is waning. Note that Oct 13^th is d-day for Grayscale,  which on the back of a constructive outcome might bring some volume and positive narrative to the market.