Alpha Navigator: Quest for Alpha [February 2023]

Asset classes took a breather in February and sold off, although crypto bucked the trend. BTC and ETH options implied volatilities remain at subdued levels.

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Executive Summary

• After a good start to 2023, macro assets have taken a breather and sold-off in February across the board. Crypto is the exception though, with BTC and ETH actually up slightly and still outperforming by a significant margin on a YTD basis.

• The US Federal Reserve (Fed) FOMC minutes (released on 22 February) suggested a compromise between worries about persistent inflation and the risk of a slowing economy. Policymakers agreed rates would need to move higher, but the shift to smaller-sized hikes would let them calibrate more closely with incoming data. Bond yields and the US dollar advanced following the release. The market is currently anticipating a 25 bps rate hike on 22 March.
• Inflation indicator and consumer sentiment point to continued price pressure. The January US personal consumption expenditures (PCE) price index, used by the Fed as an inflation indicator, came in at 5.4% YoY. The closely watched University of Michigan consumer confidence index climbed from 64.9 points in January to 67.0 points in February, the highest level since the beginning of 2022.
• It is worth noting that major central banks in the East have so far walked a different path compared to the US Fed. The People’s Bank of China (PBoC) has kept rates stable while the Bank of Japan (BoJ) is maintaining its ultra-easy monetary policy. PBoC and BoJ’s next interest rate decisions are on 10 March and 20 March, respectively, and market observers will be watching for any signs of change in stance.
• BTC’s short-term, 1-month correlations with other risk assets turned negative in February.

• BTC options implied volatilities (vols) remain at subdued levels amid a market continuing to experience tepid trading activity and consolidation within a tight range.

• Market-Neutral Pair Trader hunts for strongly correlated tokens. Such pairs with price ratios that deviate from historical averages can be considered candidates for a market-neutral pair trade (i.e., long the underperforming token and short the outperforming token, with equal dollar value positions in each token to enable market neutrality). 

• This pair trade has played out slightly in favour of UNI since our last issue, as the price ratio (AAVE price divided by UNI price) has bounced off the 1-standard deviation (SD) ceiling band down to near the average. Uniswap recently allowed traders to buy NFTs with any Ethereum-based token.

• Our style-factor screens track momentum, value, growth, and risk for crypto tokens in the Layer-1 and Layer-2, DeFi, GameFi, and NFT categories. Below is the screen for selected top crypto tokens by market cap in the Layers 1 & 2 category. Layer-1 and Layer-2 tokens showed mixed 1-month price momentum and TVL growth across the board. Optimism (OP) continued to lead in terms of price performance.

• Our event driven section shows recent and upcoming catalysts for selected tokens, as well as crypto-related conferences and important macroeconomic events.

Read the full Alpha Navigator report: Alpha Navigator [February 2023]

Author

Andrew Ho (Senior Research Analyst)

Research and Insights team

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