Alpha Navigator: Quest for Alpha [April 2023]

Asset classes were generally flat in April, with crypto outperforming. US Federal Reserve could be on the cusp of ending rate hike cycle.

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Executive Summary

• Risk assets were generally flat in April, with crypto outeperforming. ETH led with a +6.27% rise in price.

• The US Federal Reserve (Fed) raised interest rates by another 25 bps to the 5.00%-5.25% target range on 3 May, in line with market expectations, but notably dropped from its policy statement language that it “anticipates” additional rate hikes. Interest rates are now at a similar level at just before the US subprime mortgage crisis in 2007, after which years of expansionary monetary policy commenced. Fed funds futures are also now showing significantly higher probability of rate cuts by the September Fed meeting.
• However, this doesn’t rule out further action from the Fed, as it will still be driven by incoming data. Inflation remains sticky in the US, with the core personal consumption expenditures (PCE) price index (a closely watched inflation indicator that excludes volatile food and energy prices) up by 4.6% YoY in March. This figure is still higher than the Fed’s inflation target of 2%. The next US CPI print is due on 10 May, while jobs data (e.g., non-farm payrolls and unemployment rate) will be published on 5 May.
• The European Central Bank (ECB) raised rates by 25 bps on 4 May, a slower pace than the previous 50-75 bps rounds of hikes, but said that rates are not yet sufficiently restrictive. Preliminary inflation data for the Eurozone showed a 7.0% YoY increase in April, slightly higher than March’s 6.9% YoY rise.
• The latest casualty of First Republic Bank and distressed loans in commercial real estate continue to raise concerns regarding the health of the financial sector. Markets are also anxious about the US debt ceiling, with US Treasury Secretary Janet Yellen warning on the risk of default as early as  June if the ceiling is not suspended or raised.   
• BTC’s 3-month, 6-month, and 12-month correlations with gold are now stronger than with most equity indices.

• BTC options implied volatilities (vols) drifted downwards in April after a spike during the banking sector turmoil in March.

• 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).

• For the LTC vs. MATIC pair, this has been playing out in favour of LTC since our last issue, as the price ratio (LTC price divided by MATIC price) has crawled up to near the 1-standard deviation (SD) ceiling band. Litecoin’s mining rewards halving is drawing nearer (July/August 2023). Polygon’s real-world use cases continue to be announced. For example, Franklin Templeton’s fund launch on the Polygon blockchain and Sports Illustrated’s Polygon-based NFT ticketing platform.

• 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 Layer-1 and Layer-2 category. Layer-1 and Layer-2 tokens mostly rose in price during April, with SOL and CRO being the best performers. They are up +12.4% and +10.2%, respectively.

• 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: Quest for Alpha [April 2023]

Author

Andrew Ho (Senior Research Analyst)

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