FTX drama deepens, blurry midterm results and US inflation

Republicans gained field in this week’s US midterm elections, but much less than they expected. While the Republicans have a slim majority in the House, it’s still too close to call for who will control the Senate. We may not get the final picture until December 6 runoff in Georgia.  

Less aggressive support for the Republicans, and more importantly, looming uncertainty, are the major factors that weighed on investor sentiment yesterday. The S&P500 slid more than 2%, Dow Jones lost 1.95%, while Nasdaq dumped 2.40%. The selloff was also fueled by the shaking crypto markets, and perhaps some investors taking risk off the table before the US inflation data, due today. 

FTX drama got worse

The FTX drama got only worse since yesterday, as Binance, which gave a nonbinding offer to buy FTX on Tuesday, pulled out citing due diligence and a US probe into the exchange.  

FTT lost another 71% yesterday, and FTX could go bankrupt if they don’t find a $8 bn cash injection.  

Watching, what used to be the world’s 4th biggest crypto exchange go under the water, triggered panic across the sector, getting investors to question, whether FTX is an isolated case, or this is just the tip of the iceberg, and if and how many of the cryptocurrency exchanges may haves similar insolvency problems, that are only waiting to get revealed.  

Bitcoin slumped another 15% yesterday, and traded below the $16000 for the first time in two years, while Ethereum dumped another 17.50%, and broke the October support to the downside.  

No one can tell you exactly what will happen from here, but the downside risks prevail, with the risk of FTX not being saved by investors.  

Beyond that, the contagion will likely remain limited. However, we may not see Bitcoin take back the $20’000 for a long time, not because of the industry-wide drama, but also because market conditions beyond cryptocurrencies is not necessarily ideal for risk-taking, and hence may not support a full recovery from here. 

US inflation 

Investors hold their breath before the US inflation data due today. Headline inflation in the US is expected to have eased from 8.2%, to 8% in October, and core inflation is seen softer at 6.5%, compared to 6.6% printed a month earlier.  

Data in line with expectations, or ideally softer than expected, should help keeping the Federal Reserve (Fed) hawks at bay, and contain the market selloff, whereas figures above expectations would be another hit to the investor sentiment, and send equities lower, yields, and the US dollar higher.  

PS: in six of the prior seven months, inflation exceeded expectations. So, there is a good chance that it’s the case this time around as well.  

In the FX & Commodities 

The US dollar rebounded yesterday on the back of a better-than-expected Democrat results, and some repositioning before today’s inflation data. The EURUSD held ground above parity, as the euro-area inflation expectations for the next twelve months rose from 5% to 5.1% in September. Not a big change really, but enough to remind investors that the European Central Bank (ECB) will continue fighting inflation in the coming months (even if it doesn’t really reflect in the euro’s valuation, which almost fully depends on what the Fed does).  

In commodities, gold held ground above the $1700 mark. Whether the yellow metal could sustainably move above the 100-DMA, near $1715 per ounce, depends on the broad-based US dollar strength. 

Oil fell another 3.5% yesterday, partly on news that Covid cases in China are rising – which may mean more restrictive measures, and partly on the EIA data, which confirmed that the US oil inventories increased by 3.9 million barrels last week, compared to only 300’000 barrel build expected by analysts.  

On the geopolitical front, Russia pulled troops out of Kherson. Kherson was one of the first Ukrainian cities to be occupied when Russians invaded the country, and had a symbolic importance. Therefore, the announcement that Russians are pulling out has been described as a ‘humiliating defeat’ for Russia.  

We don’t know yet if the Ukrainian conflict enters a new phase, and what Russia plans to do next. European stocks briefly gained as the news broke in yesterday, but enthusiasm remained short-lived.