In a late-afternoon rally yesterday, U.S. equities recovered as bargain hunters began snapping up technology favorites such as Tesla and Nvidia. Once BTC bottomed out, markets started to calm down, with many suggesting that we already were in oversold territory.

We still have a lot to get through, so we aren't out of the woods yet. However, the one significant factor going into the FOMC looks to be whether hawkish rhetoric from the Fed suggests we get 3 or 4 rate hikes this year. The market-implied number of Fed Fund hikes by Dec 2022 is meaningfully below 4 for the first time since Jan. 14th. However, it's still very volatile. Players will keenly watch whether we tick back higher or remain below on Wednesday at 2 pm. 

Within crypto, the most significant risk I'm watching is MakerDAO. Per MakerDAO forum, there is $600M worth of debt from the second-largest vault owner, 7-siblings, at risk of liquidation from $1,900 levels. Notice how Nexo has topped up collateral and would not be at risk of liquidation until we get to $1,400 ETH levels. 

These liquidations will be done in chunks of 65M (current limit for MakerDAO ETH auctions) and would presumably take about 10 hours, assuming 10% slippage each time. It's highly likely the user would react before the end, but it could still be a very severe liquidation event that keepers and AMMs may not be able to handle.

The critical levels in ETH are:

• $1,900 with $600M to be liquidated (7-siblings).

• $1,400 with $1.7B to be liquidated (Nexo & others).

Good luck out there.

Market cheat sheet via Goldman:

Monday, January 24

• 09:45 AM Markit Flash US manufacturing PMI, January preliminary (Bloomberg consensus 56.7, last 57.7)

• Markit Flash US services PMI, January preliminary (consensus 54.8, last 57.6)

Tuesday, January 25

• 09:00 AM FHFA house price index, November (consensus 1.1%, last 1.1%)

• 09:00 AM S&P/Case-Shiller 20-city home price index, November (GS +0.9%, consensus +0.97%, last +0.92%); We estimate the S&P/Case-Shiller 20-city home price index rose by 0.9% in November, following a 0.92% increase in October.

• 10:00 AM Conference Board consumer confidence, January (GS 112.5, consensus 111.8, last 115.8); We estimate that the Conference Board consumer confidence index decreased by 3.3pt to 112.5 in January, reflecting negative signals from other confidence measures.

• 10:00 AM Richmond Fed manufacturing index, January (consensus 14, last 16)

Wednesday, January 26

• 08:30 AM Advance goods trade balance, December (GS -$96.0bn, consensus -$96.0bn, last -$98.0bn): We estimate that the goods trade deficit decreased by $2.0bn to $96.0 in December compared to the final November report, reflecting an increase in imports.

• 08:30 AM Wholesale inventories, December preliminary (consensus 1.4%, last 1.4%): Retail inventories, December (consensus 1.5%, last 2.0%)

• 10:00 AM New home sales, December (GS +2.0%, consensus +2.8%, last +12.4%): We estimate that new home sales increased by 2.0% in December, reflecting softer housing permits, starts, and mortgage applications relative to November.

• 02:00 PM FOMC statement, January 25-26 meeting: As discussed in our FOMC preview, we expect that the FOMC will use this meeting to hint at a March liftoff and begin formulating a plan for balance sheet reduction. We expect the FOMC to raise interest rates four times this year starting in March and to announce the start of balance sheet reduction in July.

Thursday, January 27

• 08:30 AM Initial jobless claims, week ended January 22 (GS 295k, consensus 260k, last 286k); Continuing jobless claims, week ended January 15 (consensus 1,650k, last 1,635k): We estimate initial jobless claims increased to 295k in the week ended January 22.

• 08:30 AM GDP, Q4 advance (GS +6.5%, consensus, +5.3%, last +2.3%); Personal consumption, Q4 advance (GS +3.2%, consensus +2.9%, last +2.0%): We estimate GDP growth picked up to +6½% annualized in the advance reading for Q4, following +2.3% in Q3. Our forecast reflects firming consumption growth (to +3.2%), with Omicron reducing activity only very late in the quarter. We expect lackluster growth in business structures and equipment investment—but expect a strong gain in the intellectual property category (+7%). We estimate a boost to GDP growth from inventories (+3.2pp qoq ar) but a drag from net trade (-1.4pp).

• 08:30 AM Durable goods orders, December preliminary (GS -1.0%, consensus -0.5%, last +2.6%); Durables goods orders ex-transportation, December preliminary (GS +0.4%, consensus +0.3%, last +0.9%); Core capital goods orders, December preliminary (GS +0.4%, consensus +0.3%, last flat); Core capital goods shipments, December preliminary (GS +0.5%, consensus +0.4%, last +0.3%): We estimate durable goods retrenched 1.0% in the preliminary December report, reflecting a pullback in commercial aircraft and defense orders. We expect firm gains in core capital goods orders (+0.4%) and core capital goods shipments (+0.5%), reflecting strong goods demand and higher prices.

• 10:00 AM Pending home sales, December (GS -1.5%, consensus +0.5%, last -2.2%): We estimate that pending home sales decreased by 1.5% in December. Existing home sales are an input into the brokers' commissions component of residential investment in the GDP report.

• 11:00 AM Kansas City Fed manufacturing index, January (consensus 19, last 24)

Friday, January 28

• 08:30 AM Employment cost index, Q4 (GS +1.1%, consensus +1.2%, prior +1.3%): We estimate that the employment cost index rose 1.1% in Q4 (qoq sa), which would boost the year-on-year rate by four tenths to +4.1%. Labor shortages continued to exert upward pressure on wage growth in the fourth quarter, though we expect a sequentially slower pace of ECI benefit growth after a jump in Q3.

• 08:30 AM Personal income, December (GS +0.6%, consensus +0.5%, last +0.4%); Personal spending, December (GS -0.7%, consensus -0.6%, last +0.6%); PCE price index, December (GS +0.37%, consensus +0.4%, last +0.61%); Core PCE price index, December (GS +0.40%, consensus +0.5%, last +0.46%); PCE price index (yoy), December (GS +5.72%, consensus +5.8%, last +5.73%); Core PCE price index (yoy), December (GS +4.77%, consensus +4.8%, last +4.68%): Based on details in the PPI, CPI, and import price reports, we forecast that the core PCE price index rose by 0.40% month-over-month in December, corresponding to a 4.77% increase from a year earlier. Additionally, we expect that the headline PCE price index increased by 0.37% in December, corresponding to a +5.72% increase from a year earlier. We expect that personal income increased by 0.6% and personal spending decreased by 0.7% In December.

• 10:00 AM University of Michigan consumer sentiment, January final (GS 70.0, consensus 68.8, last 68.8): We expect the University of Michigan consumer sentiment index increased by 0.2pt to 70.0 in the final January reading.

No Time for Heroes.

Many individuals have reached out to me asking where we go from here, if it's a good time to buy the dip, which tokens they should buy, etc. My short answer is: It's no time to be heroes. The common saying from crypto veterans is that survival and capital preservation are essential in markets like this. Crypto will inherently provide future opportunities given its growth and innovation potential. The key is surviving and outlasting the competition.

More generally, the event risks next week are aplenty, including, but not limited to:

1. Key earnings from bluechip tech/growth stocks, including Apple, Microsoft, Tesla.

2. FOMC rate decision on Jan 26th.

3. U.S. Jobless Claims, U.S. 4Q GDP on Jan 27th.

4. Crypto monthly options and futures expiry on Jan 28th.

That's a lot of crap to navigate through in a fragile market. A 3-5% upside move could quickly reverse to an 8-10% retracement. Crypto is not operating in a vacuum and will reflexively feed off Fed monetary policy cues, U.S. economic numbers, and equity earnings.

On earnings, nearly a fifth of the S&P 500 and almost half of the Dow Jones Industrial Average will provide their quarterly updates starting Monday, including FAAMG names like Apple and Microsoft, as well as Tesla. FAAMG names matter as they collectively account for 20% of the S&P 500's capitalization. Add Tesla into this basket, and that's another 2%. If these stocks underperform, it will put a drag on the overall U.S. equity market.

While tech giants have primarily benefited from the pandemic, these same stocks are struggling so far this year. The calculus is that as the Fed starts raising rates, tech's future earnings will be compromised, especially as the world emerges from Covid and will no longer need to rely on online services and gadgets to stay connected. As I have written in the past, given their recent unreasonably high Price-to-Sales ratios, earning beats have seen limited outperformance. Moreover, investors have shown no mercy in selling tech/growth stocks that miss estimates.

Case in point, despite Netflix (NFLX) beating EPS at $1.33 vs. est. 81c, and matching Rev. at $7.71B, the stock tanked after hours last Thursday (-19%) after Q1 subscription forecast numbers were projected to be just 2.5M, nearly 4M below Wall Street's estimate of 6.26M. Despite doing everything right in Q4 2021, Wall Street still punished the company on future earning's potential. This will not be an isolated example. Instead, any earnings outperformance from tech/growth stocks this week will likely witness better selling into strength. More succinctly, investors will sell good news. And sell bad news even harder.

On FOMC, the market will continue to look for further hawkish monetary policy cues. In Sept 2021, the FOMC penciled in one rate hike in 2022. Now, the debate centers around three, if not four, Fed funds rate hikes in 2022, with increases starting in March. The Fed already moved the end of tapering forward from mid-2022 to the end of March and is now telegraphing its aim to move far more quickly on balance sheet reduction compared to the past. Likewise, investors will also be focusing on the economy with initial jobless claims and Q4 advance real GDP in the pipeline.

Finally, we have month-end crypto options and future expiry on Friday. Unsurprisingly, a lot of the froth in the futures market has come undone over the last 48-hours, with OI in BTC back to levels before the ETF-Bullrun from Sept of last year. Likewise, we've witnessed an inversion in the ATM IV curve and further richening in the skew given recent price action. The last time this behavior occurred was in early December when the DeFi desk argued that the probability of a reflexive unwind was highly imminent.

With the IV vs. RV downtrend over the last 3-months at such depressed levels, it finally looks like we may get the spike in vol the market has been so desperately waiting to materialize. Furthermore, this Friday's options expiry is notable, with over 62.3K contracts set to expire, the largest amount so far in this year, of which 40K are calls, though these are largely OTM. How dealers pre-position ahead of the expiry will be critical. Still, we may not see this behavior manifest until Thursday midday/afternoon with so much headline risk to wade through ahead of expiry.

Ultimately, the starting point ahead of all this event risk will be Asia Monday morning when CME S&P E-mini futures open and the general sentiment from Asian bourses. If investors are willing to buy the dip, it may provide short-term support as we head into the U.S. Monday morning, though quarterly earnings will ultimately inform market forces from thereon. As always, remaining tactical will be imperative.

Solana is SOLed out.

Micro-structurally, the crypto markets have witnessed interesting developments over the last 48-hours, the most notable being Solana's instability and performance degradation.

As I have written at length in previous commentaries, a consequence of creating a blockchain with artificially low transaction fees and high throughput, such as Solana, is that bots can congest the network with DDoS attacks without adverse economic consequences. While Ethereum has been criticized for its high gas fees during heavy congestion, a positive byproduct of this mechanism is that it is economically expensive for bad actors to spam the network. Not so on Solana.

Over the last several days, Solana has witnessed severe stability issues off the back of the crypto selloff, with bots spamming the network to try to liquidate users' positions. Don't believe me? Check out all the Reddit upvoted threads of users complaining of transactions failing and being unable to swap tokens or top-up collateral. Binance went so far as to suspend withdrawals on Solana given the instability issues, and Solana's developers had to hot-fix the mainnet version yesterday to improve the state of the network, at least temporarily.

These teething issues are likely the last straw for retail users, especially if they've HODL'ed their positions since the summer of last year. SOL notably breached the psychological $100 level last night. I expect to see a continued flight of capital from Solana to other chains such as Avalanche and Fantom, which performed adequately during the crypto selloff. As I had correctly prophesied, Fantom has been the most significant net beneficiary of this rotation of capital. In the past several days, the chain has become the fourth-largest blockchain. I expect this outperformance in TVL inflows to continue ahead of ve(3,3)/Solidity Go-Live.

Good luck out there.