Strong Dollar Pummels Risk Assets
Global markets opened risk-off at the open of Sunday night futures trading, and sold off further into the morning as volatility jumped, and the dollar approached multi-decade highs.
Risk Reverses as Dollar Strengthens
Today’s issue will cover legacy market dynamics and evaluate the current state of the “liquidity tide.” Readers are familiar with bitcoin and equity markets trading in tandem, we cover the relationship closely.
We also closely follow the volatility dynamics across asset classes, as the levels of historical and implied volatility in an asset class are very helpful for evaluating relative risk.
Before diving in, let’s revisit our current thesis on the state of global risk markets:
A large slowdown is amidst throughout the global economy, as short-sighted energy policy has worked to keep inflationary pressures elevated. Although equities and risk broadly have felt relief since the middle of June, we were and are of the belief that this is a bear market rally with further pain to be felt across risk.
July 20th - Caution: Bear Market Rallies
Global markets opened risk-off at the open of Sunday night futures trading, and sold off further into the morning as volatility jumped, and the dollar (as seen by the DXY) approached multi-decade highs once again.
A trap was indeed set last week for global risk markets, as a divergence between declining implied risk (VIX), a strengthening dollar, and complacent equities was the perfect storm for an imminent reversal.
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The VIX, which represents the market's expectation for front-month volatility for the S&P 500 index, is notably smaller than the implied volatility in bitcoin options markets, by an approximate factor of three.
Shown below is the 1-month forward implied volatility for bitcoin, which can be thought of as similar to the VIX. Whereas equities are currently trading with a 24% expected volatility for the next month (as expressed by VIX at 24), the options market for bitcoin implies 71% volatility for 1-month contracts.