More Turmoil in Crypto, the Outlook for Energy, and Volatility Continues in Fixed Income

Author: Marco Santanche

The latest turmoil in crypto

Binance CEO Changpeng Zhao pleaded guilty to breaking US anti-money laundering laws, and resigned. Binance also failed to report more than 100,000 suspicious transactions. This followed years of investigations into the largest cryptocurrency exchange in the world, and the resolution - a $4.3 billion settlement, with Changpeng Zhao paying $50 million himself - is one of the biggest to include charges for an executive.

This likely means that Coinbase will profit in terms of market share, since it is the largest competitor in the space. But it is not as big a blow as one might think for the market, and BTC just briefly dropped about $1,000 before bouncing back. The major cryptocurrency has managed to prove its own value during the course of the year, as it perhaps appeared to the public that these events were contained.

Not even Binance coin got a particularly relevant impact. The year seems to be solid for all cryptos in general, and the resolution of such problems could give some stability over the medium term. There is definitely a liquidity problem though, since Binance saw an outflow of almost $1 billion over 24 hours this week.

What's next? On the negative side, the focus is now on Tether, after the freeze of $225 mln that the company said had been linked to a human trafficking group, and Kraken, sued by the SEC under the accusation of operating as an exchange without first registering with the regulator. In any case, the impact on the market does not seem to be critical, and these events will likely have an even softer effect than Changpeng Zhao's final settlement.

On the plus side, Blackrock intends to launch its first ETH trust, and the International Monetary Fund is focusing on Central Bank Digital Currencies, urging governments to adopt them, and saying the public sector can "act as a catalyst, to ensure safety and efficiency and to counter fragmentation." The main question is: will this be an actual improvement from the current payments and transactions systems? The answer from several countries is yes, given their early adoption of the technology at a government level.

Oil and energy outlook

At an OPEC technical panel, Onyx Capital Group stated that while sentiment remained uncertain over the course of the year, this might be the time for a bearish call on Oil.

The company is the largest market maker in the world by volume in oil swaps, and their prediction and analysis are based on their examination of market positions.

The upcoming OPEC+ meeting (scheduled for Sunday, but surprisingly delayed) will define the next output policy.

The main problem in the market is the drawdown of about 13% since the start of the quarter. The war does not seem to provide support to the thesis that the world oil supply will be impacted enough to increase prices, and the likelihood of cuts from the major producers is growing day by day. The major ETF on the market, United States Oil ETF, booked some of the largest outflows since 2016 and the supply seems to be growing despite the efforts of voluntary cuts from OPEC+ countries.

On a related note, hedge funds are profiting from their bets against wind energy stocks, capitalizing on their trouble, which might reflect the loss of confidence in the space (although governments are strongly pushing for tax benefits and subsidies to companies producing green energy). Moreover, high interest rates have a clear strong impact on the whole renewable energy sector, given the long-term nature of their contracts, fixing the price of their energy sales, and the high investments necessary in new technologies to improve efficiency, production and storage.

Fixed income

It has been a volatile year for many ETFs in fixed income, even the best performing ones. Corporate bonds in particular have exhibited a mixed performance, although the European and emerging markets segment has gained more than 8%, followed by regions such as Switzerland, Italy and the UK.

However, APAC bonds are amongst the worst performers, and government bonds from the US and Japan are falling dramatically after an overall relatively positive first quarter.

What's next for the asset class? Policy rates and inflation are key in this case. Rates will likely hold still or fall in the upcoming months for the US, but it is just not as simple for Asia. Most of the central banks are hawkish, and while the past month has been particularly positive for US treasuries, the Asian counterparts are lagging, and corporate bonds are doing even worse. Default rates are increasing fast, likely related to the real estate crisis in China, and the massive outflow in September is reducing liquidity. With a flattening of the yield curve, the market is exposed in particular in India, Philippines and Thailand government bonds, according to BNP Paribas, due to the size of deficits and high inflation rates.

And Warren Buffett is looking to tap more liquidity from the market: Berkshire Hathaway is going to issue 122 bln yen ($815 mln) in corporate bonds denominated in the Japanese currency.

This content is for educational purposes only and is NOT financial advice. Before acting on any information you must consult with your financial advisor.