Merge and Acquisitions

Traditional Market Commentary

• Probability of a 75bp hike at the next FOMC meeting continues to rise
• The 2/10 treasury yield curve continues to point towards a recession
• Winter months may further stress energy markets, at home and abroad

Markets continued to digest the hawkish comments given by Fed Chairman Powell the week prior, as interest rates moved higher with the back end of the yield curve stretching over 20 basis points week to week. Probability of a 75 basis point hike at the next FOMC meeting in three weeks rose to over 70%, after a brief respite motioning towards only a 50 basis point hike. One optimistic metric that has climbed from historical lows is the 2/10 treasury yield spread, moving from around -35 and climbing over -20 through the weekend. The recessionary indicator reached a low close to -50 basis points early last month, which accurately depicted the environment at that time. As planned months ago, the quantitative tightening strategy proceeded ahead raising the monthly runoff total to $95 billion, trying to make a dent in the ~$9 trillion balance sheet mainly accumulated over the last two years. Equities trended lower ahead of the long weekend given the pessimistic outlook.

The unemployment rate rose to 3.7% from 3.5%, marking the first move higher since the January reading at 4%. While somewhat welcomed by investors as a possible result of recent rate hikes, the labor market remains relatively robust as the economic tightening measures continue to find some points of progress.

Now that summer is officially over, the change of seasons might bring unwelcomed challenges both stateside and abroad. Stress is being seen in debt issued by companies with lower credit profiles, as refinancing becomes an issue in the current interest rate environment. Bankruptcy filings are beginning to trend higher for both corporate and individuals here in the US. Meanwhile, the ECB and Bank of Canada meet this week to try and gain more control on their current inflation situation with similar style hikes between 50-75 basis points. Investors here in the US look ahead to the next CPI reading released next week which may continue lower after pivoting last month. But main concern is planning around the Russian shut down of the Nord Stream natural gas pipeline to Europe with winter now months away. Higher energy prices could reverberate across the globe pending a viable solution.

On-Chain Commentary

• Ethereum’s upcoming protocol change will reduce yearly inflation to near 0%
• Bullish expectations for ETH continue, along with ETH-related tokens
• To better serve users, projects are moving their ecosystems multi-chain

Digital asset market activity has been generally muted over the past week, leading into the long Labor Day weekend. The upcoming Ethereum protocol shift from Proof-of-Work to Proof-of-Stake, and associated reduction in token issuance, is now slated for September 14th. Many traders have increasingly begun positioning themselves bullish for the event, hence the strong bid and associated rise in the ETH/BTC pair and many associated Ethereum tokens such as Polygon and Chainlink. Ethereum Classic, which arose out of a contentious hard fork in 2016, has also seen significant appreciation over the past week. However, this coin and ecosystem have minimal onchain activity and almost zero DeFi presence, suggesting the move to be purely associated with speculation and hedging behaviors.

On the flip side, the purpose-built blockchain Helium recently announced a vote to move from their native chain onto the Solana blockchain. This news has not been welcomed by the community, as price has fallen nearly 50% since the proposal was released on August 30th. Earlier this year, popular DeFi derivatives exchange also announced their fourth iteration will be deployed on the Cosmos blockchain. We may continue to see this type of multi-chain partnership and absorption of smaller, less reliable blockchains, with the rise of increasingly scalable Layer 1 blockchain technologies, such as Ethereum, Binance Smart Chain, Solana, Polkadot, Avalanche, and Cosmos.

DeFi Commentary

• Ethereum miners will likely launch an ETH Proof-of-Work (ETHW) chain after the Merge
• In anticipation, many traders have been hoarding ETH to receive the free ETHW airdrop
• Despite wanting to collect the airdrop, most believe the ETHW chain will be short lived

Ethereum’s Bellatrix upgrade was recently activated on the Beacon chain, which signals the start of ETH’s transition to Proof-of-Stake. As the merge approaches, many are anticipating a group of ETH miners will be launching a Proof-of-Work fork (ETHW) which would allow them to keep mining and securing a network for some degree of mining profitability.

On-chain data suggests many market participants are looking to take advantage of this opportunity. ETH has had a net outflow from exchanges of over 1.21 million coins ($2.01 billion as of today’s price) in the past 60 days. Many believe this is a repositioning of coins out of exchanges and into wallets in order to maximize the amount of airdrop tokens participants will receive as many exchanges may not provide users with the airdropped tokens from their ETH holdings. Borrow rates on DeFi platforms like Aave are soaring to recent highs as market participants are holding as much ETH in their wallet as possible to maximize their potential airdrop. As of this writing, the variable borrow rate on Aave is 47.19% and climbing. ETHW debuted on several exchanges last month ahead of the possible fork/airdrop at around $30 per token, rallied over 300%, and has now traded back to $43.54 as of this writing. Many forked chains are short lived but a few receive zombie status, like Ethereum Classic or Bitcoin Cash. There are some supporters of ETHW who claim to have teams of developers working to keep the new chain up and running, while others have labeled the fork as a way to make a quick buck.

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