With the introduction of blockchain-based assets for games comes the possibility of entirely new business models and innovative development.
The first computer games were developed in the late 20th century with the sole purpose of entertaining their audience. One of the first goals was to distract players from their routine work and provide them access to a fantasy world. Very soon, games began to compete for users' time against traditional forms of entertainment, such as movies, circuses, theater performances, zoos, etc.
Planet Earth entered the new millennium with a population of over 6 billion people, and the forecast is that this number will reach 8 billion as early as 2023. If we assume that computer games will cease to be an alternative to work and become complementary to it, there will be 4 billion gamers in the world by then.
Not surprisingly, the traditional boundaries between games, media, sports and communication are rapidly disappearing, creating new business partnerships and causing more and more mergers and acquisitions around the world.
The still-active virtual world Second Life, which represented a first attempt at a portal to the metaverse with its own in-platform virtual currency, was an important example of this process between 2003 and 2006, during its most rapid period of growth. Players in many countries quit their jobs and dedicated 100% of their time to the virtual world.
But why is the use of blockchain in games causing a real revolution in the gaming industry? That is what this article seeks to answer.
The gaming markets
According to data from mid-2021, there were 3.2 billion people playing computer games, and as a report by Newzoo states, the global gaming revenues in 2021 were about $180.3 billion — 20% more than before the pandemic began in 2019.
Digital distribution channels are responsible for most of this revenue. Mobile games act as the main growth engine for the games industry, driving this segment to $93.2 billion dollars.
The game development industry has experienced a profound transformation over the past five years. With the emergence of mobile app stores and digital distribution platforms, even smaller studios have gained the ability to create games for the global market.
China remains the largest regional segment in terms of both revenue and number of players, accounting for more than a quarter of all sales. The Asia-Pacific region as a whole holds 55% of all players and offers the highest profits and fastest growth rates.
The introduction of new technologies, such as artificial intelligence (AI), virtual reality (VR) and blockchain, has become a major trend in the market. In recent years, numerous blockchain-enabled gaming apps and services have emerged, and the number of such projects promises to cause a boom in the market by 2022.
The evolution of business models in the games industry
Pay-to-play (P2P) model
From the 1970s until the 2000s, the most prevalent business model for the games industry was "pay-to-play." In this model, development studios and publishers generate revenue from initial game sales and, in some cases, subscriptions. Collaborations with advertisers for in-game ads were few and far between.
In this model, players have little or no opportunity to extract value from games, except the satisfaction and enjoyment gained from the in-game experience.
Free-to-play (F2P) model
In the late 2000s and early 2010s, the “free-to-play” gaming model gained traction. This model was once considered a disastrous business model that would, at best, bring in lower revenues for a given game and, at worst, cannibalize the entire gaming industry. However, it has instead proven to be the best way to monetize, as well as being a main reason behind the cultural rise of games.
In the free-to-play model, games are offered to players at no upfront cost. In this type of model, in-game purchases (items and upgrades that improve features in the game) and ads make up the vast majority of the publishing studios' revenues. Streaming and esports services act as monetization levers for players, while allowing "elite" players to receive rewards.
A perfect example of how some of these free-to-play business models have become successful is Fortnite. The game, launched in July 2017, generated over $5 billion in revenue in its first year of production. In addition, its userbase climbed to approximately 80 million monthly active users in 2018.
Play-to-earn (P2E) model
The “play-to-earn” model is exactly what the name suggests: A model where users can play and earn tokens or crypto while playing. This model has a very powerful psychological incentive, because it combines two activities that have driven humanity since the beginning of time: reward and entertainment.
The main idea in P2E is that players are rewarded as they invest more time and more effort in the game, and thus become part of the in-game economy (tokenomics), creating value for themselves, for other participants in the game ecosystem, and also for the developers. They receive an incentive/reward for their participation and playing time in the form of digital assets with potential appreciation over time.
Note that the use of blockchain technology in such assets has brought scarcity to digital assets in games, which can take the form of NFTs and can represent absolutely anything from characters like the kittens in CryptoKitties to cryptocurrencies like Bitcoin (BTC) or Ether (ETH).
Along these lines, the key component in this model is to give players "ownership" over certain "digital assets" in the game, allowing them to increase their value by actively participating. This is where blockchain technology has become decisive for gaming business models.
Many concepts come from traditional games
The blockchain-based gaming industry is still in its early stages and it is still centered around many concepts coming from traditional gaming. NBA Top Shot, for example, is building on the “collect and trade model” that has prevailed in baseball cards and other collectibles for decades.
Axie Infinity, currently the most famous blockchain-based game, uses the “breed and battle” game model that Pokémon launched in the 1990s.
Sorare, on the other hand, a game in which players buy and trade soccer cards and build competing soccer teams, is based on the “recruit and compete” model. Similarly, virtual worlds like Decentraland and Somnium Space are immersing people in alternative realities, like Second Life and The Sims before them.
Thus, although many games that use blockchain technology (such as The Sandbox, Gods Unchained and Star Atlas) often fall into the same categories as games that do not use such technology, the most important feature that distinguishes them from their counterparts in the traditional market is the use of blockchain-based cryptocurrency support.
Overview of blockchain gaming
Advantages of blockchain games for players
With the introduction of blockchain technology, native game assets go to global, non-permitted blockchain platforms, rather than being tied up and locked in the particular game's platform or in local environments controlled by video game development companies. We've talked about this before, when we covered the role of blockchain in NFTs in this column.
Here, it is important to highlight how blockchain technology has enabled digital assets, such as nonfungible tokens, to be interoperable and immediately viewable across dozens of different wallet providers, tradable on other gaming platforms and required in various virtual worlds of the Metaverse. And interoperability, in turn, has extended the negotiability of digital assets by enabling their free trade on other gaming platforms, thanks to blockchain technology. This puts users in direct ownership of their in-game items, giving them full and irrevocable control over their use.
That is, blockchain game players can access NFT marketplaces and crypto-active brokers and extract value from their in-game experiences by buying and trading digital assets obtained in games, 24/7, globally. In addition, tokenization of in-game assets opens up numerous other opportunities.
The decentralized finance marketplace is a place where some players can put their acquired in-game assets to yield. Platforms like Yield Guild Games facilitate, for example, the lending and borrowing activities of in-game assets, so that players who do not have the initial capital needed to purchase in-game items can, through DeFi, participate in a given game by ceding a portion of the monetization and their earnings to “in-game item lenders.”
The advantage of blockchain games for developers
In addition to increasing monetization opportunities for gamers, the use of blockchain-based assets can also be beneficial for game developers.
Under the current structure of in-game item exchange, the practice known as “gold mining” has become prevalent. Gold mining involves players selling accounts or game “coins” on dark markets or over-the-counter markets, limiting secondary market monetization opportunities for developers and making players vulnerable to fraud.
With the expansion of marketplaces for digital assets obtained in blockchain games, developers can obtain information about the trading volumes of these assets and encode royalties into NFTs, so that with each subsequent sale, they receive a portion of the sale price as a royalty fee. This represents a real evolution in the way intellectual property and copyrights are thought of in the digital world.
The game industry and the property dispute
Games that use blockchain are fundamentally different from traditional games because of the way they approach ownership. Blockchain games give players full control over the digital assets they earn or acquire through their participation in the games.
In traditional games, even though players pay real money for their digital assets, they can no longer access them if the server is down. That is, in traditional games, the money and assets remain the property of the publisher or developer.
Ultimately, blockchain game players retain full ownership of their digital assets, allowing them to trade them freely with other players, sell them for real money, and potentially use them in other games or virtual worlds in the Metaverse.
The trend in the games industry is towards the adoption of blockchain in games as a path of no return, and at the moment, the P2E model is the driver of this adoption. However, over time, the use of blockchain in games will likely span a variety of use cases beyond the play-to-earn model. This is because the technology enables a myriad of combinations and incentives.
Against this backdrop, it's no wonder that, in the last four months alone, hundreds of millions of dollars have flowed into blockchain or NFT-centric games, with investors allocating large amounts of funds to startups that, in turn, are looking for expert developers to build their teams.
Parallel to this, governments are already considering taxing the profits made by the more than two million players of Axie Infinity, currently the most popular game on blockchain and using the P2E model.
What about you? Would you invest your time to compete and be rewarded with digital assets in a game, including it as work experience on your resume?
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Kyle Bass: Fed Will Start Cutting In 2023 After US Enters Recession Later This Year
Kyle Bass: Fed Will Start Cutting In 2023 After US Enters Recession Later This Year
Subprime star investor (and China nemesis) Kyle Bass told…
Subprime star investor (and China nemesis) Kyle Bass told CNBC on Thursday that while the Fed's "kneejerk" reaction to the Covid-19 pandemic was "let's say necessary," they're now grappling with how to remove the '40% more money' they dumped into circulation.
Echoing what has now become a consensus view (when just one year ago it was reserved for the tinfoil-hat, conspiracy-theorist corners of the interwebs, such as this website), Bass said that thanks to a "decade of bad policy," Americans are going to see higher food and energy prices, at the same time as the economy is cooling - which he says the Fed can't control with monetary policy, and will lead to a shallow recession at the end of 2022 or beginning of 2023.
"I think the economy is going to cool off and we will have a recession by the end of this year or the beginning of next year"
According to Bass, the Fed will be limited in terms of how high it can raise rates because it started with such a low base. As such, a true neutral rate will be impossible - as they'll have to pause hikes at around 200 basis points, or 2% on the key rate.
Pointing to yesterday’s minutes, he notes that Fed staff is still projecting 2.8% growth in 2022 which means growth would need to be at a 4% rate to hit that target after the negative Q1 GDP reading. -Bloomberg
"Clearly printing 40% more money than was in circulation in the first place was a little too much," he said.
As far as where he sees energy, Bass said that while he supports alternative energy, 'green' policies such as windfall taxes on oil producers only lead to higher prices.
"I believe this is a 30-40 year transition and I think that everybody else that is run by NGOs and some teenagers believes that we can just flip a switch and move to alternative energy," he said, adding "We need some adults in the room to map out a plan for energy transition."
That's a smart thing to say... if he is long old, boring fossil fuel companies - after all, as we have repeatedly said...
The best thing to happen to Exxon was Biden's "green" agenda— zerohedge (@zerohedge) February 1, 2022
... there has been no greater gift for the Exxons of the world than Biden's "green" idiocy.
Who wins as energy bills soar? Oil and gas companies
Decommodifying energy could ensure no one dies because they can’t afford to pay a bill.
Your annual energy bill could rise by another £800 in October according to UK electricity and gas market regulator Ofgem, which is set to lift the cap on energy prices (the maximum that energy suppliers can charge customers on a default tariff) in the autumn. The cap was already raised by £693 last month, bringing the average annual bill to £1,971. October’s hike could see household energy bills reach £2,800 for the year.
Don’t have time to read about climate change as much as you’d like?
Get a weekly roundup in your inbox instead. Every Wednesday, The Conversation’s environment editor writes Imagine, a short email that goes a little deeper into just one climate issue. Join the 10,000+ readers who’ve subscribed so far.
Why are energy prices going up and up? According to Sara Walker, a professor of energy at Newcastle University, the answer is simple: “Gas is almost four times more expensive than this time last year.” The UK is a net importer of fossil gas, which is used to heat boilers in 85% of homes nationwide and generate a third of the country’s electricity.
A spike in demand for gas as countries emerged from pandemic lockdowns last year, supply complications due to Russia’s invasion of Ukraine and the UK government’s failure to renew gas storage sites have all sent prices soaring, Walker says.
The result has been almost a quarter of homes entering fuel poverty. In other words, 6.5 million households are now unable to adequately heat their homes, which is “staggering for a developed country”, Walker adds.
Breaking down where all that extra money is going, Walker reveals a 104% increase in the wholesale price of energy (largely tied to rising gas prices) which now accounts for roughly £1,000 of an average annual bill, compared with £500 before the cap was lifted.
“Networks are the next biggest cost, making up around £371 of the new cap – an increase of 39%,” Walker says. “Part of the increase in network cost is because many smaller energy suppliers have gone bust recently, and when a supplier goes bust, other companies are asked to take on their customers.”
These “suppliers of last resort”, as they are called, have operating costs (such as paying workers to manage customer queries and complaints) which cannot be recovered when they take on new customers. Instead, “the cost is spread over everyone’s bills”, Walker says.
If customers are being made to prop up the market by paying significantly higher bills and many energy suppliers have already gone out of business, who is actually benefiting from the present arrangement? The companies extracting the increasingly lucrative oil and gas in the first place, Walker explains. And their big profits “are primarily because of the sales of oil and gas they are making in the wholesale market, so this is different to the profits of your energy supplier,” she says.
Energy market failure
If fossil fuel companies raking it in during an unprecedented squeeze on living standards seems unfair, then Lee Towers, a PhD candidate in energy and politics at the University of Brighton, has worse news. He argues that injustice is baked into the way the energy market operates, and that it’s not just galling for struggling consumers, it’s a major obstacle to cutting emissions.
“On top of their energy use, every home in the country is paying extra on their bill to cover the cost of retrofitting programmes to increase the energy efficiency of homes, help for those in fuel poverty and subsidies for renewable [energy] generation,” he says. “All of these costs are added to energy bills at a flat rate.”
Towers explains that, in practise, this means “those on the lowest incomes pay a six times higher share of their income for the [green] transition than the highest income group, who also happen to have the highest CO₂ emissions on average”.
“Through energy bills, people in the lowest income groups effectively self-fund their own fuel poverty support, including measures like the warm home discount – a one-off winter payment of £140 towards energy bills – while also paying towards measures that mainly benefit higher income groups, like subsidies for rooftop solar panels.”
Towers believes that letting the cost of decarbonising the UK’s energy system fall disproportionately on the poorest is “slowing the speed and reducing the motivation for a transition in the first place”. So what’s the alternative?
Gordon Walker is a professor at Lancaster Environment Centre. Writing in the aftermath of the February 2021 Texas blackouts, when fierce winter storms downed power lines and left millions shivering without heat or electricity, he argued that we must rethink the idea of energy as a commodity, and instead treat access to it as a universal right.
“When the power fails, the consequences can be devastating. Those most vulnerable to the cold or heat – older people in particular – and those living in poor quality housing, can die as a consequence of technologies losing their power. This adds to the background toll of ‘excess deaths’ linked to energy poverty on an annual basis,” he said.
While UK residents have a legal right to not have their water supply disconnected if they can’t meet bills, there is no such provision in place for those struggling to cover the cost of energy. The result is that people die – from exposure, or spoiled food and medicine – when they can no longer afford to pay.
One in ten people worldwide don’t even have basic electricity provision. And yet, as Gordon says: “energy enhances many of the basic capabilities of a decent life, not only good health, but also education, communication, livelihood, self-respect and conviviality”.
The idea of a universal right to energy seems less far-fetched once we remember how essential energy is to almost everything we need to do, Gordon says.
“Nobody really wants to consume energy per se. It is the heat, light, cool, communication, mobility and so on that are really valued and that really matter. There should therefore be much more focus on realising such services in ways that minimise energy use and energy bills, and cutting energy demand as part of zero carbon trajectories.”
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S&P Futures Jump Above 4,000 As Fed Fears Fade
S&P Futures Jump Above 4,000 As Fed Fears Fade
After yesterday’s post-FOMC ramp which sent stocks higher after the Fed’s Minutes were…
After yesterday's post-FOMC ramp which sent stocks higher after the Fed's Minutes were less hawkish than feared and also hinted at a timeline for the Fed's upcoming pause (and easing), US index futures initially swung between gains and losses on Thursday as investors weighed the "good news" from the Fed against downbeat remarks on the Chinese economy from premier Li who warned that China would struggle to post a positive GDP print this quarter coupled with Apple’s conservative outlook. Eventually, however, bullish sentiment prevailed and even with Tech stocks underperforming following yesterday's disappointing earnings from Nvidia, e-mini futures rose to session highs as of 715am, and traded up 0.6% above 4,000 for the first time since May 18, while Nasdaq 100 futures were up 0.2% after earlier dropping as much as 0.8%. The tech-heavy index is down 27% this year. Treasury yields and the dollar slipped. Fed policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed.
Investors took some comfort from the Fed minutes that didn’t show an even more aggressive path being mapped to tackle elevated prices, though central banks remain steadfast in their resolve to douse inflation. Still, volatility has spiked as the risk of a US recession, the impact from China’s lockdowns and the war in Ukraine simmer.
While the Fed minutes “provided investors with a temporary relief, today’s mixed price action on stocks mostly shows that major bearish leverages linger,” said Pierre Veyret, a technical analyst at ActivTrades in London. “The war in eastern Europe and concerns about the Chinese economy still add stress to market sentiment,” he wrote in a report. “Investors will want to see evidence of improvements regarding the pressure coming from rising prices.”
“We expect key market drivers to continue to be centered around inflation and how central banks react; global growth concerns and how China gets to grip with its zero-Covid policy; and the geopolitical conflict between Russia and Ukraine,” said Fraser Lundie, head of fixed income for public markets at Federated Hermes Limited. “Positive news flow on any of these market drivers could sharply improve risk sentiment; however, there is a broad range of scenarios that could play out in the meantime.”
In premarket trading, shares in Apple dropped 1.4% after a report said that the tech giant is planning to keep iPhone production flat in 2022, disappointing expectations for a ~10% increase. The company also said it was raising salaries in the US by 10% or more as it faces a tight labor market and unionization efforts. In other premarket moves, Nvidia dropped 5.3% as the biggest US chipmaker by market value gave a disappointing sales forecast. Software company Snowflake slumped 14%, while meme stock GameStop Corp. fell 2.9%. Among gainers, Twitter Inc. jumped 5.2% after billionaire Elon Musk dropped plans to partially fund his purchase of the company with a margin loan tied to his Tesla stake and increased the size of the deal’s equity component to $33.5 billion. Other notable premarket movers include:
- Shares of Alibaba and Baidu rise following results, sending other US-listed Chinese stocks higher in US premarket trading. Alibaba shares shot up as much as 4.5% after reporting fourth- quarter revenue and earnings that beat analyst expectations.
- Lululemon’s (LULU US) stock gains 2.4% in premarket trading as Morgan Stanley raised its recommendation to overweight, suggesting that the business can be more resilient through headwinds than what the market is expecting.
- Macy’s (M US) shares gain 15% in premarket trading after Co. increases its adjusted earnings per share guidance for the full fiscal year
- Williams-Sonoma (WSM US) shares jumped as much as 9.6% in premarket trading after 1Q sales beat estimates. The retailer was helped by its exposure to more affluent customers, but analysts cautioned that it may be difficult to maintain the sales momentum amid macroeconomic challenges.
- Nutanix (NTNX US) shares shed about a third of their value in US premarket trading as analysts slashed their price targets on the cloud platform provider after its forecast disappointed.
- US airline stocks rise in premarket trading on Thursday, after Southwest and JetBlue provided upbeat outlooks for the second-quarter. LUV up 1.5% premarket, after raising its second-quarter operating revenue growth forecast. JBLU up 2% after saying it expects second-quarter revenue at or above high end of previous guidance.
- Cryptocurrency-tied stocks fall in premarket trading as Bitcoin snaps two days of gains. Coinbase -2.6%; Marathon Digital -2.3%; Riot Blockchain -1.2%. Bitcoin drops 1.9% at 6:11 am in New York, trading at $29,209.88.
It’s time to buy the dip in stocks after a steep global selloff in equity markets, according to Citi strategists. Meanwhile, Fidelity International Chief Executive Officer Anne Richards said the risk of a recession has increased and markets are likely to remain volatile, the latest dire warning on the outlook at the World Economic Forum.
“If inflation gets tame enough over summer, there may not be continued raising of rates,” Carol Pepper, Pepper International chief executive officer, said on Bloomberg TV, adding that investors should look to buy tech stocks after the selloff. “Stagflation, I just don’t think that’s going to happen anymore. I think we are going to be in a situation where inflation will start tapering down and then we will start going into a more normalized market.”
In Europe, the Stoxx Europe 600 Index rose 0.3%, pare some of their earlier gains but remain in the green, led by gains for retail, consumer and energy stocks. IBEX outperforms, adding 0.6%, FTSE MIB is flat but underperforms peers. Retailers, energy and consumer products are the strongest-performing sectors, with energy shares outperforming for the second day as oil climbed amid data that showed a further decrease in US crude and gasoline stockpiles. Here are the most notable European movers:
- Auto Trader rises as much as 3.5% after its full-year results beat consensus expectations on both top- and bottom-lines.
- Galp climbs as much as 4.1% as RBC upgrades to outperform, saying the stock might catch up with the rest of the sector after “materially” underperforming peers in recent years.
- Rightmove rises as much as 1.5% after Shore upgrades to hold from sell, saying the stock has reached an “appropriate” level following a 27% decline this year.
- FirstGroup soars as much as 16% after the bus and train operator said it received a takeover approach from I Squared Capital Advisors and is currently evaluating the offer.
- United Utilities declines as much as 8.9% as company reports a fall in adjusted pretax profit. Jefferies says full-year guidance implies a materially-below consensus adjusted net income view.
- Johnson Matthey falls as much as 7.5% after the company reported results and said it expects operating performance in the current fiscal year to be in the lower half of the consensus range.
- BT drops as much as 5.7% after the telecom operator said the UK will review French telecom tycoon Patrick Drahi’s increased stake in the company under the National Security and Investment Act.
- JD Sports drops as much as 12% as the departure of Peter Cowgill as executive chairman is disappointing, according to Shore Capital.
Earlier in the session, Asian stocks were mixed as traders assessed China’s emergency meeting on the economy and Federal Reserve minutes that struck a less hawkish note than markets had expected. The MSCI Asia Pacific Index was little changed after fluctuating between gains and losses of about 0.6% as technology stocks slid. South Korean stocks dipped after the central bank raised interest rates by 25 basis points as expected. Chinese shares eked out a small advance after a nationwide emergency meeting on Wednesday offered little in terms of additional stimulus. The benchmark CSI 300 Index headed for a weekly drop of more than 2%, despite authorities’ vows to support an economy hit by Covid-19 lockdowns. Investors took some comfort from Fed minutes in which policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed. Still, Asia’s benchmark headed for a weekly loss amid concerns over China’s lockdowns and the possibility of a US recession.
“The coming months are ripe for a re-pricing of assets across the board with a further shake-down in risk assets as term and credit premia start to feature prominently,” Vishnu Varathan, the head of economics and strategy at Mizuho Bank, wrote in a research note.
Japanese stocks closed mixed after minutes from the Federal Reserve’s latest policy meeting reassured investors while Premier Li Keqiang made downbeat comments on China’s economy. The Topix rose 0.1% to close at 1,877.58, while the Nikkei declined 0.3% to 26,604.84. Toyota Motor Corp. contributed the most to the Topix gain, increasing 1.9%. Out of 2,171 shares in the index, 1,171 rose and 898 fell, while 102 were unchanged.
In Australia, the S&P/ASX 200 index fell 0.7% to close at 7,105.90 as all sectors tumbled except for technology. Miners contributed the most to the benchmark’s decline. Whitehaven slumped after peer New Hope cut its coal output targets. Appen soared after confirming a takeover approach from Telus and said it’s in talks to improve the terms of the proposal. Appen shares were placed in a trading halt later in the session. In New Zealand, the S&P/NZX 50 index fell 0.6% to 11,102.84.
India’s key stock indexes snapped three sessions of decline to post their first advance this week on recovery in banking and metals shares. The S&P BSE Sensex rose 0.9% to 54,252.53 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. Both benchmarks posted their biggest single-day gain since May 20 as monthly derivative contracts expired today. All but one of the 19 sector sub-indexes compiled by BSE Ltd. gained. HDFC Bank and ICICI Bank provided the biggest boosts to the two indexes, rising 3% and 2.2%, respectively. Of the 30 shares in the Sensex, 24 rose and 6 fell. As the quarterly earnings season winds up, among the 45 Nifty companies that have so far reported results, 18 have trailed estimates and 27 met or exceeded expectations. Aluminum firm Hindalco Industries is scheduled to post its numbers later today.
In FX, the Bloomberg Dollar fell 0.3%, edging back toward the lowest level since April 26 touched Tuesday. The yen jumped to an intraday high after the head of the Bank of Japan said policymakers could manage an exit from their decades-long monetary policy, and that U.S. rate rises would not necessarily keep the yen weak. Commodity currencies including the Australian dollar fell as China’s Premier Li Keqiang offered a bleak outlook on domestic growth. The Chinese economy is in some respects faring worse than in 2020 when the pandemic started, he said.
Central banks were busy overnight:
- Russia’s central bank delivered its third interest-rate reduction in just over a month and said borrowing costs can fall further still, as it looks to stem a rally in the ruble and unwinds the financial defenses in place since the invasion of Ukraine.
- The Bank of Korea raised its key interest rate on Thursday as newly installed Governor Rhee Chang-yong demonstrated his intention to tackle inflation at his first policy meeting since taking the helm. New Zealand’s central bank has also shown its commitment this week to combat surging prices.
In rates, Treasuries bull-steepen amid similar price action in bunds and many other European markets and gains for US equity index futures. Yields richer by ~3bp across front-end of the curve, steepening 2s10 by ~2bp, 5s30s by ~3bp; 10-year yields rose 2bps to 2.76%, keeps pace with bund while outperforming gilts. 2- and 5-year yields reached lowest levels in more than a month, remain below 50-DMAs. US auction cycle concludes with 7-year note sale, while economic data includes 1Q GDP revision. Bund, Treasury and gilt curves all bull-steepen. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing 5.1bps to 194.6bps.
The US weekly auction calendar ends with a $42BN 7-year auction today which follows 2- and 5-year sales that produced mixed demand metrics, however both have richened from auction levels. WI 7-year yield at ~2.735% is ~17bp richer than April’s, which tailed by 1.7bp. IG dollar issuance slate includes Bank of Nova Scotia 3Y covered SOFR; issuance so far this week remains short of $20b forecast, is expected to remain subdued until after US Memorial Day.
In commodities, WTI trades within Wednesday’s range, adding 0.6% to around $111. Spot gold falls roughly $7 to trade around $1,846/oz. Cryptocurrencies decline, Bitcoin drops 2.5% to below $29,000.
Looking at the day ahead now, and data releases from the US include the second estimate of Q1 GDP, the weekly initial jobless claims, pending home sales for April, and the Kansas City Fed’s manufacturing index for May. Meanwhile in Italy, there’s the consumer confidence index for May. From central banks, we’ll hear from Fed Vice Chair Brainard, the ECB’s Centeno and de Cos, and also get decisions from the Central Bank of Russia and the Central Bank of Turkey. Finally, earnings releases include Costco and Royal Bank of Canada.
- S&P 500 futures little changed at 3,974.25
- STOXX Europe 600 up 0.2% to 435.16
- MXAP little changed at 163.17
- MXAPJ down 0.3% to 529.83
- Nikkei down 0.3% to 26,604.84
- Topix little changed at 1,877.58
- Hang Seng Index down 0.3% to 20,116.20
- Shanghai Composite up 0.5% to 3,123.11
- Sensex up 0.4% to 53,975.57
- Australia S&P/ASX 200 down 0.7% to 7,105.88
- Kospi down 0.2% to 2,612.45
- German 10Y yield little changed at 0.90%
- Euro little changed at $1.0679
- Brent Futures up 0.5% to $114.55/bbl
- Gold spot down 0.3% to $1,847.94
- U.S. Dollar Index little changed at 102.11
Top Overnight News from Bloomberg
- Federal Reserve officials agreed at their gathering this month that they need to raise interest rates in half-point steps at their next two meetings, continuing an aggressive set of moves that would leave them with flexibility to shift gears later if needed.
- Russia’s central bank delivered its third interest-rate reduction in just over a month and said borrowing costs can fall further still, halting a rally in the ruble as it unwinds the financial defenses in place since the invasion of Ukraine.
- China’s trade-weighted yuan fell below 100 for the first time in seven months as Premier Li Keqiang’s bearish comments added to concerns that the economy may miss its growth target by a wide margin this year.
- Bank of Japan Governor Haruhiko Kuroda said interest rate increases by the Federal Reserve won’t necessarily cause the yen to weaken, saying various factors affect the currency market.
A more detailed breakdown of global markets courtesy of Newsquawk
Asia-Pac stocks were indecisive as risk appetite waned despite the positive handover from Wall St where the major indices extended on gains post-FOMC minutes after the risk event passed and contained no hawkish surprises. ASX 200 failed to hold on to opening gains as weakness in mining names, consumer stocks and defensives overshadowed the advances in tech and financials, while capex data was mixed with the headline private capital expenditure at a surprise contraction for Q1. Nikkei 225 faded early gains but downside was stemmed with Japan set to reopen to tourists on June 6th. Hang Seng and Shanghai Comp were mixed with early pressure after Premier Li warned the economy was worse in some aspects than in 2020 when the pandemic began, although he stated that China will unveil detailed implementation rules for a pro-growth policy package before the end of the month, while the PBoC issued a notice to promote credit lending to small firms and the MoF announced cash subsidies to Chinese airlines.
Top Asian News
- PBoC issued a notice to promote credit lending to small firms and is to boost financial institutions' confidence to lend to small firms, according to Reuters.
- BoK raised its base rate by 25bps to 1.75%, as expected, via unanimous decision. BoK raised its 2022 inflation forecast to 4.5% from 3.1% and raised its 2023 forecast to 2.9% from 2.0%, while it sees GDP growth of 2.7% this year and 2.4% next year. BoK said consumer price inflation is to remain high in the 5% range for some time and sees it as warranted to conduct monetary policy with more focus on inflation, according to Reuters.
- Morgan Stanley has lowered China's 2022 GDP estimate to 3.2% from 4.2%.
- CSPC Drops After Earnings, Covid Impact to Weigh: Street Wrap
- China Builder Greenland’s Near-Term Bonds Set for Record Drops
- Debt Is Top Priority for Diokno as New Philippine Finance Chief
European bourses are firmer across the board, Euro Stoxx 50 +0.7%, but remain within initial ranges in what has been a relatively contained session with much of northern-Europe away. Stateside, US futures are relatively contained, ES +0.2%, with newsflow thin and on familiar themes following yesterday's minutes and before PCE on Friday. Apple (AAPL) is reportedly planning on having a 220mln (exp. ~240mln) iPhone production target for 2022, via Bloomberg. -1.4% in the pre-market. Baidu Inc (BIDU) Q1 2022 (CNY): non-GAAP EPS 11.22 (exp. 5.39), Revenue 28.4bln (exp. 27.82bln). +4.5% in the pre-market. UK CMA is assessing whether Google's (GOOG) practises in parts of advertisement technology may distort competition.
Top European News
- UK Chancellor Sunak's package today is likely to top GBP 30bln, according to sources via The Times; Chancellor will confirm that the package will be funded in part by windfall tax on oil & gas firms likely to come into effect in the autumn. Subsequently, UK Gov't sources are downplaying the idea that the overall support package is worth GBP 30bln, via Times' Swinford; told it is a very big intervention.
- UK car production declined 11.3% Y/Y to 60,554 units in April, according to the SMMT.
- British Bus Firm FirstGroup Gets Takeover Bid from I Squared
- Citi Strategists Say Buy the Dip in Stocks on ‘Healthy’ Returns
- The Reasons to Worry Just Keep Piling Up for Davos Executives
- UK Unveils Plan to Boost Aviation Industry, Passenger Rights
- Pakistan Mulls Gas Import Deal With Countries Including Russia
- Dollar drifts post FOMC minutes that reaffirm guidance for 50bp hikes in June and July, but nothing more aggressive, DXY slips into lower range around 102.00 vs 102.450 midweek peak.
- Yen outperforms after BoJ Governor Kuroda outlines exit strategy via a combination of tightening and balance sheet reduction, when the time comes; USD/JPY closer to 126.50 than 127.50 where 1.13bln option expiries start and end at 127.60.
- Rest of G10, bar Swedish Crown rangebound ahead of US data, with Loonie looking for independent direction via Canadian retail sales, USD/CAD inside 1.2850-00; Cable surpassing 1.2600 following reports that the cost of living package from UK Chancellor Sunak could top GBP 30bln.
- Lira hits new YTD low before CBRT and Rouble weaker following top end of range 300bp cut from CBR.
- Yuan halts retreat from recovery peaks ahead of key technical level, 6.7800 for USD/CNH.
- Debt wanes after early rebound on Ascension Day lifted Bunds beyond technical resistance levels to 154.74 vs 153.57 low.
- Gilts fall from grace between 119.17-118.19 parameters amidst concerns that a large UK cost of living support package could leave funding shortfall.
- US Treasuries remain firm, but off peaks for the 10 year T-note at 120-31 ahead of GDP, IJC, Pending Home Sales and 7 year supply.
- Crude benchmarks inch higher in relatively quiet newsflow as familiar themes dominate; though reports that EU officials are considering splitting the oil embargo has drawn attention.
- Currently WTI and Brent lie in proximity to USD 111/bbl and USD 115/bbl respectively; within USD 1.50/bbl ranges.
- Russian Deputy PM Novak expects 2022 oil output 480-500mln/T (prev. 524mln/T YY), via Ria.
- Spot gold is similarly contained around the USD 1850/oz mark, though its parameters are modestly more pronounced at circa. USD 13/oz
- CBR (May, Emergency Meeting): Key Rate 11.00% (exp. ~11.00/12.00%, prev. 14.00%); holds open the prospect of further reductions at upcoming meetings.
- BoJ's Kuroda says, when exiting easy policy, they will likely combine rate hike and balance sheet reduction through specific means, timing to be dependent on developments at that point; FOMC rate hike may not necessarily result in a weaker JPY or outflows of funds from Japan if it affects US stock prices, via Reuters.
US Event Calendar
- 08:30: 1Q PCE Core QoQ, est. 5.2%, prior 5.2%
- 08:30: 1Q Personal Consumption, est. 2.8%, prior 2.7%
- 08:30: May Continuing Claims, est. 1.31m, prior 1.32m
- 08:30: 1Q GDP Price Index, est. 8.0%, prior 8.0%
- 08:30: May Initial Jobless Claims, est. 215,000, prior 218,000
- 08:30: 1Q GDP Annualized QoQ, est. -1.3%, prior -1.4%
- 10:00: April Pending Home Sales YoY, est. -8.0%, prior -8.9%
- 10:00: April Pending Home Sales (MoM), est. -2.0%, prior -1.2%
- 11:00: May Kansas City Fed Manf. Activity, est. 18, prior 25
DB's Jim Reid concludes the overnight wrap
A reminder that our latest monthly survey is now live, where we try to ask questions that aren’t easy to derive from market pricing. This time we ask if you think the Fed would be willing to push the economy into recession in order to get inflation back to target. We also ask whether you think there are still bubbles in markets and whether equities have bottomed out yet. And there’s another on which is the best asset class to hedge against inflation. The more people that fill it in the more useful so all help from readers is very welcome. The link is here.
For markets it’s been a relatively quiet session over the last 24 hours compared to the recent bout of cross-asset volatility. The main event was the release of the May FOMC minutes, which had the potential to upend that calm given the amount of policy parameters currently being debated by the Fed. But in reality they came and went without much fanfare, and failed to inject much life into afternoon markets or the debate around the near-term path of policy. As far as what they did say, they confirmed the line from the meeting itself that the FOMC is ready to move the policy to a neutral position to fight the current inflationary scourge, with agreement that 50bp hikes were appropriate at the next couple of meetings. That rapid move to neutral would leave the Fed well-positioned to judge the outlook and appropriate next steps for policy by the end of the year, and markets were relieved by the lack of further hawkishness, with the S&P 500 extending its modest gains following the release to end the day up +0.95%.
As the Chair said at the meeting, and has been echoed by other Fed officials since, the minutes noted that the hawkish shift in Fed communications have already had a noticeable effect on financial conditions, with Fed staff pointing out that “conditions had tightened by historically large amounts since the beginning of the year.” Meanwhile on QT, which the Fed outlined their plans for at the May meeting, the minutes expressed some trepidation about market liquidity and potential “unanticipated effects on financial market conditions” as a result, but did not offer potential remedies.
With the minutes not living up to hawkish fears alongside growing concerns about a potential recession, investors continued to dial back the likelihood of more aggressive tightening, with Fed funds futures moving the rate priced in by the December meeting to 2.64%, which is the lowest in nearly a month and down from its peak of 2.88% on May 3. So we’ve taken out nearly a full 25bp hike by now, which is the biggest reversal in monetary policy expectations this year since Russia’s invasion of Ukraine began. That decline came ahead of the minutes and also saw markets pare back the chances of two consecutive +50bp hikes, with the amount of hikes priced over the next two meetings falling under 100bps for only the second time since the May FOMC. Yields on 10yr Treasuries held fairly steady, only coming down -0.5bps to 2.745%.
Ahead of the Fed minutes, markets had already been on track to record a steady performance, and the S&P 500 (+0.95%) extended its existing gains in the US afternoon. That now brings the index’s gains for the week as a whole to +1.98%, so leaving it on track to end a run of 7 consecutive weekly declines, assuming it can hold onto that over the next 48 hours, and futures this morning are only down -0.13%. That said, we’ve seen plenty of volatility in recent weeks, and after 3 days so far this is the first week in over two months where the S&P hasn’t seen a fall of more than -1% in a single session, so let’s see what today and tomorrow bring. In terms of the specific moves yesterday, it was a fairly broad advance, but consumer discretionary stocks (+2.78%) and other cyclical industries led the way, with defensives instead seeing a much more muted performance. Tech stocks outperformed, and the NASDAQ (+1.51%) came off its 18-month low, as did the FANG+ index (+1.99%).
Over in Europe, equities also recorded a decent advance, with the STOXX 600 gaining +0.63%, whilst bonds continued to rally as well, with yields on 10yr bunds (-1.5bps) OATs (-1.5bps) and BTPs (-2.7bps) all moving lower. These gains for sovereign bonds have come as investors have grown increasingly relaxed about inflation in recent weeks, with the 10yr German breakeven falling a further -4.2bps to 2.23% yesterday, its lowest level since early March and down from a peak of 2.98% at the start of May. Bear in mind that the speed of the decline in the German 10yr breakeven over the last 3-4 weeks has been faster than that seen during the initial wave of the Covid pandemic, so a big shift in inflation expectations for the decade ahead in a short space of time that’s reversed the bulk of the move higher following Russia’s invasion of Ukraine. Nor is that simply concentrated over the next few years, since the 5y5y forward inflation swaps for the Euro Area looking at inflation over the five years starting in five years’ time has come down from aa peak of 2.49% earlier this month to 2.07% by the close last night, so almost back to the ECB’s target. To be fair there’s been a similar move lower in US breakevens too, and this morning the 10yr US breakeven is down to a 3-month low of 2.56%.
That decline in inflation expectations has come as investors have ratcheted up their expectations about future ECB tightening. Yesterday, the amount of tightening priced in by the July meeting ticked up a further +0.2bps to 32.7bps, its highest to date, and implying some chance that they’ll move by more than just 25bps. We heard from a number of additional speakers too over the last 24 hours, including Vice President de Guindos who said in a Bloomberg interview that the schedule for rate hikes outlined by President Lagarde was “very sensible”, and that the question of larger hikes would “depend on the outlook”.
Overnight in Asia, equities are fluctuating this morning after China’s Premier Li Keqiang struck a downbeat note on the economy yesterday. Indeed, he said that the difficulties facing the Chinese economy “to a certain extent are greater than when the epidemic hit us severely in 2020”. As a reminder, our own economist’s forecasts for GDP growth this year are at +3.3%, which if realised would be the slowest in 46 years apart from 2020 when Covid first took off. Against that backdrop, there’s been a fairly muted performance, and whilst the Shanghai Composite (+0.65%) and the CSI 300 (+0.60%) have pared back initial losses to move higher on the day, the Hang Seng (-0.13%) has lost ground and the Nikkei (+0.07%) is only just in positive territory. We’ve also seen the Kospi (-0.08%) give up its initial gains overnight after the Bank of Korea moved to hike interest rates once again, with a 25bp rise in their policy rate to 1.75%, in line with expectations. That came as they raised their inflation forecasts, now expecting CPI this year at 4.5%, up from 3.1% previously. At the same time they also slashed their growth forecast to 2.7%, down from 3.0% previously.
There wasn’t much in the way of data yesterday, though we did get the preliminary reading for US durable goods orders in April. They grew by +0.4% (vs. +0.6% expected), although the previous month was revised down to +0.6% (vs. +1.1% previously). Core capital goods orders were also up +0.3% (vs. +0.5% expected).
To the day ahead now, and data releases from the US include the second estimate of Q1 GDP, the weekly initial jobless claims, pending home sales for April, and the Kansas City Fed’s manufacturing index for May. Meanwhile in Italy, there’s the consumer confidence index for May. From central banks, we’ll hear from Fed Vice Chair Brainard, the ECB’s Centeno and de Cos, and also get decisions from the Central Bank of Russia and the Central Bank of Turkey. Finally, earnings releases include Costco and Royal Bank of Canada.
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