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This week with Sadiq

Chaos in Crypto: Should Investors Be Worried?

November 14 to 18, 2022
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Market Recap

  • Equity markets rallied sharply last week, as a softer-than-expected U.S. CPI report was just what the market needed.
  • The S&P 500 jumped 5.9%, while the Nasdaq surged 8.1%.
  • Despite plenty of noise elsewhere—see the midterm election and an imploding crypto market—inflation was the key for equities.

Crypto Chaos

Last week, we saw unsettling news about a major cryptocurrency exchange filing for bankruptcy protection. The company—FTX—paused withdrawals from clients’ accounts and sought a rescue package from one of their main rivals. After the potential bailout was abandoned, contagion eventually spilled into traditional equity markets. Some investors stood to lose substantial amounts of money—and that affected risk appetites across the board. On a positive note, equity market declines were limited to under 3% that day, as traditional finance’s exposure to crypto remains relatively small and prices had already fallen earlier in the year due to other organizational failures. Moving forward, institutional investors will likely be more cautious about entering the space. Even in broad equity markets, where the risks are well known, investors were blindsided this year by Russia’s invasion of Ukraine and the de-listings in China. As an unregulated market, crypto adds yet another layer of unpredictable risk. Case in point: after the FTX news came to light, not only did the CEO resign and the company enter bankruptcy proceedings, but 130 other crypto firms associated with the exchange also filed for Chapter 11 protection in the U.S., showing there will likely continue to be knock-on effects across the industry.

Bottom Line: The recent collapse of a crypto exchange highlights, once again, the importance of clear regulation.

Oil Prices

With crude prices dropping for several consecutive days, markets are somewhat concerned about softening consumer demand. We are not—our confidence on being overweight to Energy remains high at this point. Remember, energy producers had already moved up a fair amount by the time the declines began. And although we did sell some covered calls on our energy position, the move was not intended to reduce our exposure. Rather, we wanted to generate premium income from short-dated options contracts that were attractively priced. We still believe demand will be strong. We continue to think China will increase consumption as the country opens up and now that we see them softening their COVID stance this will further help push prices higher. And we remain skeptical about supply coming off in the near future. From our vantage, the overall picture points to stronger fundamentals for energy, particularly as better-than-expected inflation numbers start to reduce the possibility of a hard landing.

Bottom Line: Despite momentary dips in crude oil prices, we remain bullish on Energy markets.

U.S. Inflation

Last week’s CPI report showed that inflation dropped more than expected, which came as positive news for investors. The market needed hope again. For weeks, the U.S. Federal Reserve has provided negative information about the need for rates to go higher than expected, and for longer. But with improving inflation data came a market rally. On closer inspection, the report does show that some parts of inflation—such as grain—spiked again after one month’s decline. Nonetheless, everyone believes that topline inflation has peaked and will continue to come down in the months ahead. Our only caution is that 7% is nowhere close to the Fed’s 2% target. The momentum of rate hikes could certainly slow if the Fed decides to scale back to 50 or 25 basis-point increases. However, regardless of their path, we will likely see several more rate hikes before reaching a terminal rate of around 5%. We think the market is still overrating too much to this one print.

Bottom Line: We strongly believe the current rally is due to the market rooting for upside, and as such, may be short-lived.

Positioning

Each month, our Multi-Asset Solutions Team meets to determine the firm’s ‘house view’ on various asset classes, regions, sectors and styles. We share research and engage in deep discussions—now, we’re choosing to share those trusted insights with Advisors. You will gain access to specific ratings and expert commentary from seasoned investment professionals, including Fred Demers, Steve Shepherd and Marchello Holditch. Click here to read the November Strategy & Outlook Report: Playing the Fed’s Game.

Disclosures

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

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