Weekly Market Update - Friday, March 17, 2023

What Happened This Week?

Takeaways: A lot happened over the past 10 days! Three banks failed within a week of each other, pushing the Federal Reserve to guarantee customer deposits across the United States. The resulting impact of the bank failures saw a major stablecoin briefly lose its peg, while a boost in crypto prices followed early in the week. The confluence of events has continued to put a spotlight on the Fed, as the potential for large interest rate hikes loses steam.

U.S. banking failures spur government action: This past week was quite eventful, with a number of significant developments in the crypto and wider financial markets leading to surging volumes and heightened volatility. Igniting the fuse, three U.S. banks collapsed all within a week of each other.

As discussed last week, the first to go was crypto-focused bank, Silvergate, which announced it was shutting its doors on Wednesday, March 8, 2023.¹ Then Silicon Valley Bank (SVB) rocked the markets on Friday, March 10, 2023, being the largest bank to fail since the 2008 financial crisis.² Two days later, another crypto-focused bank, Signature, was closed by state regulators.³

To contain the simmering crisis, the Federal Reserve Board of Governors released a statement on Sunday announcing the availability of “additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors,” creating the Bank Term Funding Program (BTFP).⁴ On Monday morning, before the markets opened, President Joe Biden reiterated that the government would guarantee the safety of customer deposits across the banking industry.⁵

On the crypto banking front, the collapse of Silvergate, SVB, and Signature, which offered the ability to complete fiat transfers 24/7, may limit crypto participants’ banking options. This may reduce liquidity, particularly on weekends, increase settlement times, and make arbitrage between exchanges more difficult.

USD Coin (USDC) briefly loses its peg: The second largest stablecoin, USDC, saw its price depeg from its 1-to-1 dollar backing over the weekend, trading as low as ~$0.88.⁶ Circle, the group behind USDC, had significant cash exposure to SVB, and Coinbase paused conversions between USDC and U.S. dollars over the weekend creating a brief panic across the stablecoin market. Multiple other stablecoins pegged to the U.S. dollar also saw their prices depeg, and bitcoin (BTC) prices dropped as low as $19.5k along with double-digit declines across altcoin prices. By Monday, USDC had recovered its peg as U.S regulators stepped in over the weekend to guarantee deposits.

Crypto prices rise following weekend turmoil: Increased market liquidity from the BTFP, an expected reduction in interest rate hikes, and a lower than expected terminal interest rate all helped to push crypto prices higher throughout the start of the week.

Bitcoin (BTC) prices broke above the strong $25k resistance, reaching ~$27k on Friday morning.⁷ Ether (ETH) prices rallied higher too, touching ~$1,780,⁸ although it has lagged BTC, trading toward the bottom of long-term range on the ETHBTC pair.⁹ The outperformance of BTC and to a lesser extent ETH would suggest a flight to quality and is further evidenced by some weakness across alts with some down for the week and Bitcoin dominance rising to ~46%.¹⁰

Shifting interest rate expectations: This week saw a shift in expectations regarding upcoming interest rate changes, as the potential fallout of rapid rate increases becomes more pronounced.

Although inflation remains a concern, the immediate worry now lies with bank health and potential contagion to the rest of the banking sector. The events of the past week may limit the Fed’s ability to implement further rate hikes to dampen inflation. At its peak last week, market expectations for a 50bps rate hike at the upcoming Fed policy meeting on March 22 reached 80%. The consensus has tempered a bit, with the market expecting that the Fed will announce a 25bps rate raise.¹¹

-From the Gemini Trading Desk