FTX's collapse shows the Fed's tightening is crushing speculative assets like crypto – and don't expect a pivot anytime soon, UBS says
(Photo by Jabin Botsford/The Washington Post via Getty Images)
- FTX's collapse shows Federal Reserve tightening is crushing speculative assets, UBS said Tuesday.
- Its aggressive interest rate hikes have injected "vulnerability" into crypto, the bank CIO said.
- "It is too soon to assume a shift in Fed policy," Mark Haefele warned, on the odds it will stop hiking.
The collapse of crypto exchange FTX shows the Federal Reserve's interest rate hikes are hammering cryptocurrencies – and investors shouldn't expect the central bank to pivot to dropping its policy any time soon, according to UBS.
The Fed's aggressive tightening campaign is weighing on speculative assets like bitcoin, the Swiss bank's chief investment officer wrote in a research note Tuesday.
"The bankruptcy of crypto exchange FTX, while driven by company-specific factors, underlines the threat to speculative assets as global liquidity ebbs," Mark Haefele said.
The Fed has raised interest rates by an outsized 75 basis points at four consecutive meetings as it bids to tame inflation, which cooled to 7.7% in October.
That tightening campaign has badly hit cryptocurrencies and other risk assets.
Bitcoin fell to a two-year low of $16,000 Friday after FTX filed for bankruptcy and said CEO Sam Bankman-Fried would resign. That means the leading cryptocurrency by market value has lost 64% of its value in 2022.
Investors should treat the unregulated crypto space with extreme caution, because jumbo Fed rate hikes could expose further issues in the sector, Haefele said.
"Recent developments support our long-standing view that cryptos are a highly risky investment proposition, given the potential asset runs along with limited transparency or regulatory oversight," he said.
"The reduction in central bank liquidity has added to the vulnerability of this market."
Haefele also dismissed the idea that the Fed is about to start easing its tightening campaign, even though investor optimism about October's lower-than-expected inflation print carried the benchmark S&P 500 index to a 5.9% gain last week.
"We believe it is too soon to assume a shift in Fed policy," he said.
Christopher Waller, Fed governor and voting member, said Sunday the central bank still had "a ways to go" before it'd consider ending its rate hikes. Meanwhile, San Francisco Fed president Mary Daly said while inflation is cooling, the rate last month was "far from a victory".
Those remarks suggest that the central bank will continue taking a tough stance on inflation rather than pivoting to support economic growth, stocks and cryptocurrencies, Haefele said.