Eyes on ETF flow support

Macro

Last week we had the FOMC minutes released on Wednesday which showed most officials expect another increase by year-end, with cuts not mentioned anywhere in the document. The debate seems to have moved from when the Fed eases to how far it tightens, and a December hike was already completely priced in, so the U.S. 10y ran into a multi-decade high on the day. Currently market’s pricing in about 20% odds of a hike at the end of October.

Looking at the performance across asset classes, we see the S&P 500 set a record on Tuesday and finished the week up 1.2%, with 20Y+ Treasuries up 0.65%, the Nasdaq up 0.2%, Brent up 1.4%, gold up 1.2% and the Russell 2000 down 0.9%. In crypto, BTC fell 3.2%, ETH fell 7.0% and altcoins fell 2.9%.

The S&P 500 shrugged off the hawkish minutes because Q3 earnings growth estimates sit near 29% y/y and are still rising, so profit growth is paying for a 10y yield of 5.24%. Crypto has no earnings to do that, so at these yields it rises only while new money keeps arriving, which is how we read the six weeks of defying gravity we flagged last week. When flows turned this week, there was nothing underneath it.

Digital Assets

BTC opened the week near $86k to $87k, failed there for a third time on Tuesday and washed out to roughly $83k on Wednesday’s minutes and the yield spike. It bottomed near $80.4k on Thursday and recovered to the mid-$83ks by Monday as oil eased, with Trump saying the US would not strike Iran before the midterms, and dip buyers stepped in. That puts it back above the $82.5k range high we called confirmed last week after a brief dip below it, though we have not verified the daily closes.

The washout feels like a bit of a flush. US spot BTC ETF outflows of $679M were the largest weekly total since late June, with $542M out of ETH ETFs, and CoinGlass shows $1.19B of liquidations in 24 hours around Thursday’s low, about $1.06B of it longs.

BTC held up better than the rest of crypto, with dominance rising toward 59.5% on a reported basis, which is the clearest internal signal of the week. ETH fell most because it carried a second shock, with a researcher associated with the Ethereum Foundation urging users to migrate to new addresses. Only 11 of the 66 large cap alts (>$1B) finished green and the median fell 3.7%, with UNI the most notable, down 15.8% after a strong run the prior month.

The money that left the liquid DeFi narrative and large caps went to AI-related names, with NEAR the standout, continuing its outperformance after a very brief dip, with post-quantum signature support and a short squeeze both cited as causes that we could not confirm.

Our take:

“Crypto lost its flow support while equities kept their earnings support, so we stay constructive only if yields ease and flows return.”

Last week we flagged that crypto was defying gravity with that catchup part of the reason for its weaker performance this week. With most Fed officials leaning to another hike, yields are unlikely to ease before the midterms on November 3, so we now need two conditions, a settling long end and spot ETF flows back to net inflows. Until both arrive BTC stays the high-beta, negative-skew expression of the equity market, and we would not chase lower-quality alts on anything that resembles a rally. BTC attention below trend leaves room in a cycle we still call early, which keeps us constructive longer term.

We would turn cautious if the 30y breaks above the 5.64% it printed on September 30 or if BTC continues to bounce off the $82.5k levels.

This week we have September CPI on Wednesday which will tell us is energy inflation is spreading into core, which is important for the rate narrative, as well financial institutions and AI related earnings which will start hitting the tape on the equity side which are important to follow as the entire global economy is still hinging on that trade to go well.