The crypto and equity markets are witnessing significant turbulence. Today, the US equity market is grappling with a substantial buildup of negative gamma. Meanwhile, BTC finds itself in a precarious situation where the market maker’s hedging effect on support and resistance levels has nearly failed. This has resulted in a “random walk” market, emphasizing the need for stringent risk control, according to a recent analysis from BloFin Academy.
Crypto Random Walk: Impact of Failed Hedging
As per the analysis, the initial impact of the recent BoJ rate hike is starting to dissipate in the bond and FX markets. This is evidenced by a recovery in the Japanese equity index, the Nikkei225, following a historical plunge.
Additionally, the yield curve inversion in US Treasuries is gradually resolving. The critical question remains whether the current market risks have been fully priced in and what the short to medium-term expectations should be.
The BoJ’s delayed rate hike was anticipated, but the focus now shifts to their future actions. The BoJ may not have sufficient cash reserves to continue bond market interventions and might resort to rapid rate hikes to narrow the interest rate gap with the Fed. This move could bring the yen to a more reasonable level, making it crucial to closely monitor the magnitude and speed of rate changes between the Fed and BoJ.
Despite the volatility, the probability of carry trade unwinding, causing a complete turnaround in the US financial cycle, remains low. Fundamental employment and economic data do not indicate an impending recession.
Nevertheless, the end of the carry trade affects investor sentiment, leading to bearish expectations in the short and medium term across multiple markets. A rapid narrowing of the Fed-BoJ interest rate gap could cause further asset price declines.
In the crypto market, the behavior remains rational and consistent with investor expectations. Although the term structure has shifted to backwardation, the medium to long-term butterfly index has returned to average levels. Investors are still cautious about the short-term performance of BTC and ETH but have not priced in additional tail risks.
This suggests that they believe the impact of the unwinding carry trade will be short-lived. However, it is essential to acknowledge that price fluctuations are not over yet. Investors should exercise caution to avoid “catching a falling knife.”
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