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Markets like their rate hikes rare

Wall Street up, US dollar down after Fed’s 0.75% hike Unless you were living on Mars, and even there they probably heard the news, the FOMC hiked the…

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Wall Street up, US dollar down after Fed’s 0.75% hike

Unless you were living on Mars, and even there they probably heard the news, the FOMC hiked the Fed Funds rate by 0.75% overnight to a target range of 1/50%-1.75%, as anticipated by the market. The Fed downgraded its US growth forecasts for 2022 and 2023 but remained adamant there would be no recession. I’m not so sure on this one given their track record over the last couple of years. The Fed’s dot plot was also moved higher with year-end rates expected to be 3.40% from 2.80% previously. That implies another 1.75% of hiking is still to come in 2022. The accompanying statement also inserted the words “strongly committed to returning inflation to its 2.0% objective.”

All nice and hawkish you say. Indeed, it was but the result was actually an intraday buy everything rally as sentiment rebounded. US bond yields recorded 20+ bps falls, stocks shot higher, while the US dollar fell and gold and cryptos rallied. The reason was that Fed Chairman Powell said that the overnight 75-basis-point hike was unusually large and that he didn’t expect such moves to be common. Hopes that the Fed would hike at a less angry pace over the rest of the year was enough for the downtrodden buy-the-dippers to flock back into the market. Markets like their large rate hikes to be rare and not well done.

That said, the buy everything rally was somewhat uneven. The rise in US stock markets overnight came nowhere near unwinding the five-day selloff preceding the FOMC meeting. US bond yields across the curve remain well north of 3.0% despite falling overnight. In the currency space, the rebound versus the US dollar was decidedly uneven. USD/JPY traded in a 200-point range overnight and finished 1.20% lower at 133.80, while AUD/USD leapt nearly 2.0% higher, with even a bombed-out sterling gaining 1.45%. But in the EM space, Asian currencies booked only modest gains and as the reality of a widening interest differential and a slowing US economy dawns, those gains are being reversed this morning. Bitcoin managed a dead-cat bounce of USD 20,000.00 but cryptos remain in the naughty corner, while gold remains in an induced coma.

Most interesting was EUR/USD which managed to close just 30 pips to 1.0445 overnight, an attempted rally towards 1.0500 being repelled with ease. There is drama in Europe anyway, with the general rise in government bond yields across the globe presenting itself in an undesirably way in Europe. While Northern Europe yields have moved higher, the southern Club Med countries, led by Italy, have seen outsized rises, with Italian BTPs climbing to 4.20%, sending alarms ringing. That led to an “ad hoc” meeting by the ECB council yesterday to address the “fragmentation” problem. The ECB said it would accelerate the development of an anti-fragmentation monetary tool and would tinker with rollovers of its stock of QE-don’t call it QE-bonds. We can read that as they will let Northern Europe holdings mature, while rolling over Club-Med holding, just don’t call it selective QE forever, ok?

Italian BTP yields duly fell back to 3.80%, but the rapidity of European bond market fragmentation, and the unusual urgency of the ECB to address it, have revealed the soft underbelly of Europe and the euro that has never gone away since its creation. The prospect of ECB intervention to bolster the Italian government balance sheet forever has rightly capped gains in the single currency. On top of that, reduced flows of natural gas from Russia have sent European gas prices spiralling, and with a war on its eastern frontier, creating a bullish case for the euro requires a fertile imagination.

In Asia today, we have also received a slew of data. The New Zealand dollar was another underperformer overnight, and today’s GDP shows that the bubble created by the Reserve Bank of New Zealand and the New Zealand government over the pandemic is deflating rapidly. GDP Growth QoQ for Q1 fell by 0.20% against an expected increase of 0.60%. The YoY Q1 print rose only 1.20%. The Reserve Bank, in particular, has left New Zealand with Norwegian prices and Nigerian wages and this data doesn’t even encompass catch-up RBNZ tightening and mortgage rate resets to come. Little wonder the NZD is setting the world on fire and New Zealand remains top of my list for a hard landing this year.

South Korean Export and Import prices rose 23.50% and 36.30% respectively in May YoY, a slight increase from April. That will keep the pressure up on the Bank of Korea to hike again in July, it’s just by how much. Japan’s Balance of Trade was negative again in May at -JPY 2,385 billion. Exports rose by 15.80%, but Imports leapt higher by 48.90%. Both numbers can be laid at the door of the weaker yen and the Bank of Japan meeting tomorrow will be the subject of intense focus. Markets are clamouring for the 10-year JGB 0.25% yield cap to be lifted. An unchanged BOJ likely sees the USD/JPY rally resume, but if they surprise and do adjust the corridor, we could see a very violent correction lower by USD/JPY.

The juice is back on the Reserve Bank of Australia today as well after mighty Australian employment data. Although the unemployment rate edged higher by 0.10% to 3.90%, full-time employment in May blew expectations out of the water, adding 69,400 jobs (-40k exp!). The participation rate rose to 66.70% while part-time employment lost only 9,000 jobs. With labour demand so robust, even as inflation continues to rise, the RBA may need to do more outsized rate hikes in the months ahead.

Taiwan should also hike rates in response to the FOMC’s move today. A hike of 0.25% is baked in and with the inflation backdrop benign in Taiwan, more than that would be a surprise. With USD/NTD remaining near 2022 highs, we can’t rule out the central bank’s surprising markets though, as Asian currencies in general today, have already started reversing their overnight gains.

We also have the Bank of England policy decision this afternoon. Soaring energy prices, robust labour demand, cost of living increases, and a central bank that raised the white flag on imported inflation some time ago, have torpedoed the British pound. The BOE has quietly gone about its business with a series of 0.25% hikes these past months and I don’t expect that to change today. A potential trade conflict with the EU over the unilateral rewriting of the Northern Ireland Protocol is another headwind the BOE doesn’t need, given the already poor growth outlook. It is another reason to not consider a 0.50% rate hike. That should mean that sterling’s overnight rally versus the US dollar will be temporary.

Given the potential Brexit conflict and trade repercussions between the United Kingdom and Europe right now, the prize for the irony of the week goes to ECB President Christine Lagarde and the London School of Economics. Ms Lagarde travelled from Europe to the United Kingdom yesterday to give a speech and receive an honorary degree from the London School of Economics.

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VanEck to donate 10% of profits from Ether ETF to core developers

The Protocol Guild, a team of over 150 Ethereum core developers, will be the beneficiary. VanEck argues that asset managers should give back some Ether…

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October 1, 2023

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The Protocol Guild, a team of over 150 Ethereum core developers, will be the beneficiary. VanEck argues that asset managers should give back some Ether ETF proceeds to the community.

Global asset manager VanEck will donate 10% of all profits from its upcoming Ether futures exchange-traded fund (ETF) to Ethereum core developers for 10 years, the company announced on X (formerly Twitter) on Sept. 29. 

The beneficiary will be the Protocol Guild, a group of over 150 developers maintaining Ethereum’s core technology. According to VanEck, it’s only fair for asset managers to return part of their proceeds to the community building the crypto protocol. It stated:

“If TradFi stands to gain from the efforts of Ethereum’s core contributors, it makes sense that we also give back to their work. We urge other asset managers/ETF issuers to consider also giving back in the same way.“

With this move, VanEck joins other crypto-native communities supporting the Ethereum network, including Lido Finance, Uniswap, Arbitrum, Optimism, ENS Domains, MolochDAO and Nouns DAO.

According to a public dashboard tracking donations sent to the Guild’s mainnet, 4,846 contributions have generated over $12 million in donations. Funds are then distributed among its members according to a weighted ratio based on their contribution periods.

The network core developers are reportedly working on Ethereum Improvement Proposal EIP-4844 (Proto-Danksharding). The upgrade will introduce a new kind of transaction type to Ethereum, promising to reduce transaction fees for layer-2 protocols.

VanEck disclosed its upcoming Ethereum Strategy ETF on Sept. 28, saying it will invest in Ether futures contracts. The fund will be actively managed by Greg Krenzer, head of active trading at VanEck, and is expected to be listed on the Chicago Board Options Exchange in the coming days.

Other traditional investment firms set to offer exposure to Ether futures include Valkyrie and Bitwise, while the line for a spot Ether ETF keeps growing with Invesco Galaxy, ARK 21Shares and VanEck waiting for regulatory approval. The United States Securities and Exchange Commission (SEC) recently delayed a decision on whether to approve a spot Ether product until December.

Magazine: Joe Lubin — The truth about ETH founders split and ‘Crypto Google’

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FTX exploiter moved over $17M in ETH in the last 24 hours

A significant portion of the 7,749 ETH, worth roughly $13 million, was directed toward the THORChain router and Railgun contract.
According…

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October 1, 2023

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A significant portion of the 7,749 ETH, worth roughly $13 million, was directed toward the THORChain router and Railgun contract.

According to recent information from Spot On Chain, an address linked to the FTX exploit identified as 0x3e9, has conducted transfers exceeding 10,000 Ether (ETH), worth roughly $17 million, across five different addresses since Sept. 30. The addresses had remained inactive for several months before the recent activity.

Within these transactions, a significant portion of 7,749 ETH, equivalent to $13 million, was directed toward the Thorchain router and Railgun contract. Furthermore, the exploiter engaged in a swap involving 2,500 ETH, valued at $4.19 million, converting it into 153.4 tBTC at an average rate of $27,281 per token. This address, which has recently become active, has exhibited noteworthy activity and is anticipated to continue transferring ETH, most likely to Thorchain.

At the time of the initial hack on Saturday, Sept. 30, the approximate losses amounted to nearly 50,000 ETH. This incident occurred just a short while before SBF's criminal trial scheduled for Oct. 2023.

Nevertheless, these occurrences have generated a significant amount of downward pressure on the ETH price, which currently maintains a level slightly above $1,650. This situation arises as the market anticipates the introduction of Ethereum futures ETFs on Monday, Oct. 2.

FTX co-founder Sam Bankman-Fried, commonly known as SBF, is scheduled to go to trial in October. This comes after his arrest in The Bahamas and subsequent extradition to the United States, marking several months since these events occurred.

The trial is expected to last for six weeks, beginning with the selection of the jury on Oct. 3, followed by the initial court proceedings on Oct. 4. Bankman-Fried faces a total of seven charges connected to fraudulent activities, comprising two substantive charges and five conspiracy charges.

Related: Valkyrie backtracks on Ether futures contract purchases until ETF launch

During the legal proceedings, the FTX founder has consistently pleaded not guilty to all allegations. Despite numerous attempts to secure temporary release, Bankman-Fried continues to be held in custody at the Metropolitan Detention Center. His most recent request for release was denied by Judge Lewis Kaplan, citing concerns about the possibility of him fleeing.

Magazine: Can you trust crypto exchanges after the collapse of FTX?

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SEC initiates legal action against FTX’s auditor

The SEC alleges that Prager Metis, an accounting firm engaged by bankrupt crypto exchange FTX in 2021, committed hundreds of violations related to auditor…

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October 1, 2023

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The SEC alleges that Prager Metis, an accounting firm engaged by bankrupt crypto exchange FTX in 2021, committed hundreds of violations related to auditor independence.

The United States Securities and Exchange Commission (SEC) has commenced legal proceedings against an accounting firm that had provided services to cryptocurrency exchange FTX before its bankruptcy declaration.

According to a Sept. 29 statement, the SEC alleged that accounting firm Prager Metis provided auditing services to its clients without maintaining the necessary independence as it continued to offer accounting services. This practice is prohibited under the auditor independence framework.

Extract from the SEC's September 29 statement. Source: SEC

To prevent conflicts of interest, accounting and audit tasks must be kept clearly separate. However, the SEC claims that these entwined activities spanned over a period of approximately three years:

“As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”

While the statement doesn't explicitly mention FTX or any other clients, it does emphasize that there were allegedly "hundreds" of auditor independence violations throughout the three-year period.

Furthermore, a previous court filing pointed out that the FTX Group engaged Metis to audit FTX US and FTX at some point in 2021. Subsequently, FTX declared bankruptcy in November 2022. 

The filing alleged that since former FTX CEO Sam Bankman-Fried publicly announced previous FTX audit results, Metis should have recognized that its work would be used by FTX to bolster public trust.

Related: FTX founder’s plea for temporary release should be denied, prosecution says

Concerns were previously reported about the material presented in FTX audit reports.

On Jan. 25, current FTX CEO John J. Ray III told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”

Furthermore, Senators Elizabeth Warren and Ron Wyden raised concerns about Prager Metis' impartiality. They argued that it functioned as an advocate for the crypto industry.

Meanwhile, a law firm that provided services to FTX has come under scrutiny in recent times.

In a Sept. 21 court filing, plaintiffs allege that U.S. based law firm, Fenwick & West, should be held partially liable for FTX's collapse because it reportedly exceeded the norm when it came to its service offerings to the exchange.

However, Fenwick & West asserts that it cannot be held accountable for a client's misconduct as long as its actions remain within the bounds of the client's representation.

Magazine: Blockchain detectives: Mt. Gox collapse saw birth of Chainalysis

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