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CBDC activity heats up, but few projects move beyond pilot stage

Does government-issued digital money pose an existential threat to cryptocurrencies? Probably not, but stablecoin usage could narrow.

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Does government-issued digital money pose an existential threat to cryptocurrencies? Probably not, but stablecoin usage could narrow.

Government-issued electronic currency seems to be an idea whose time has come. 

“More than half of the world’s central banks are now developing digital currencies or running concrete experiments on them,” reported the Bank for International Settlements, or BIS, in early May — something that would have been unthinkable only a few years ago.

The BIS also found that nine out of ten central banks were exploring central bank digital currencies, or CBDCs, in some form or other, according to its survey of 81 central banks conducted last autumn but just published.

Many were taken aback by the progress. “It is truly remarkable that some 90% of central banks are doing work on CBDCs,” Ross Buckley, KPMG-KWM professor of disruptive innovation at the University of New South Wales, Sydney, told Cointelegraph. “The year-on-year growth in this field is extraordinary.”

“What I found most surprising was the speed at which advanced economies were moving toward retail CBDCs,” Franklin Noll, president at Noll Historical Consulting, LLC, told Cointelegraph. “As recently as the middle of last year, central banks in advanced economies were taking a rather relaxed view of CBDCs, not seeing them as particularly necessary or worthy of much attention.”

Momentum accelerated last year, the report observed. After the Bahamas launched the world’s first live retail CBDC — the Sand Dollar — in 2020, Nigeria followed in 2021 with its own electronic money, the eNaira. Meanwhile, the Eastern Caribbean and China released pilot versions of their digital currencies, DCash and e-CNY, respectively. “And there is likely more to come: a record share of central banks in the survey — 90% — is engaged in some form of CBDC work,” said the BIS.

The Bahamas struggles, Sweden deliberates, Chile delays

Implementing a successful CBDC may be easier said than done, however. The Bahamas’ new digital money has struggled to gain traction, accounting for less than 0.1% of currency in circulation in that island nation, the International Monetary Fund said in March, and “there are limited avenues to use the Sand Dollar.” More education of the populace is needed, said the IMF, a challenge that other government-issued electronic currencies will probably face as well. 

Sweden’s central bank, the Riksbank, has been researching, discussing and experimenting with digital currencies longer than most. Its e-krona project began in 2017, and a pilot program, launched in 2020, is now in its second phase. Carl-Andreas Claussen, a senior advisor in the Riksbank’s payments department, told Cointelegraph that there are lots of reasons why central banks might want to implement a CBDC, but “at the Riksbank, it is first of all the decline in Sweden’s use of cash.”

Sweden is racing toward becoming the Western world’s first cashless society. From 2010 to 2020, the proportion of Swedes using cash fell from 39% to 9%, according to the Riksbank. But, this also raises questions. As Claussen told Cointelegraph:

“If physical cash disappears, the public will not have access to central bank money anymore. That will be a serious change from how it has been over the last 400 years in Sweden. With an e-krona, the Riksbank will offer central bank money that the public can use.”

Still, nothing has been decided in Sweden. “It is not clear that we will need it,” Claussen said. “So first, we have to sort out if we need it at all and if it is worthwhile to do it. We are not there yet.” 

Claussen has little doubt, however, that if a modern government decides to issue a digital currency it can succeed. It will need to be sure that it really needs a CBDC, however. “Neither the Riksbank nor the larger central banks around the world have decided whether or not to issue a CBDC,” he declared. Not even China? “I have not heard that they have made a final decision to issue,” he told Cointelegraph.

Riksbankshuset, the headquarters of the Swedish National Bank in Stockholm. Source: Arild Vågen

Elsewhere, Chile announced last week that it was delaying the rollout of its CBDC, explaining that a government-issued digital peso required more study. Chile is looking to develop a national payment system that is “inclusive, resilient, and protects people’s information,” according to a report. But, its central bank said that it still doesn’t have enough information to make a final decision on it.

According to CBDC Tracker, only the Bahamas and Nigeria have progressed to full CBDC “launch” in the real world, while 2022 thus far has seen more canceled projects like Singapore’s Project Orchid than full roll-outs. On the other hand, only five “pilot” programs were underway in January 2020, compared with 15 in May 2022, which suggests more launches could be imminent.

Related: Blockchains are forever: DLT makes diamond industry more transparent

What is driving the trend?

The BIS sees different motivating factors behind this “growing momentum” toward CBDCs. Advanced economies tend to be interested in improving domestic payment efficiencies and safety, while maintaining financial stability. Poorer economies, emerging markets or developing economies, by comparison, may focus more on financial inclusivity, or look for ways to enable people who have never had a bank account to participate in the economy.

Andrey Kocevski, co-founder at WhisperCash.com — whose firm has developed a digital bearer instrument that could be used by CBDCs — agreed that developing countries usually “want to compensate for the lack of private sector fintech or payment companies and to increase financial inclusion for the unbanked,” further telling Cointelegraph:

“I am not surprised that the number of central banks exploring digital currencies is at 90% now, considering last year it was 80% and in 2018 it was around 30%.”

“For advanced economies, the catalyst was stablecoins,” said Noll, adding that 2021 was “the year of the stablecoin.” Central banks in the developed world began taking seriously the possibility that stablecoins could make headway against fiat currencies, threatening their monopoly on money and disrupting monetary policy potentially, he said.

As for BIS’ contention that the COVID-19 pandemic may have been a prod, “I do not see much evidence for the impact of COVID-19 and a flight from cash driving new interest in CBDCs,” added Noll. “Cash usage remains strong and may be rebounding to pre-pandemic levels.”

Peer pressure, too, could be a factor — yes, even among central bankers. As Buckley told Cointelegraph:

“If one’s major competitor countries do this, everyone feels the need to follow or risk being left behind — some form of sophisticated FOMO.”

Kocevski seemed to agree: “Central banks in developed countries feel the need to digitize in order to stay relevant.”

Could state-run digital currencies co-opt crypto?

Where do cryptocurrencies figure in all this? Just to be clear, government digital money is typically issued in the currency unit of the land such as pesos in Chile, and dollars in the United States, and is a “liability” of the central bank. Cryptocurrencies, by comparison, have their own currency “unit” — like Ether (ETH) — and are private digital assets with no claim on the central bank. 

According to the BIS survey, most central banks see payment networks like Bitcoin and Ethereum posing little threat to their activities, and stablecoins even less: “Most central banks in the survey still perceive the use of cryptocurrencies for payments to be trivial or limited to niche groups.”

Still, couldn’t CBDCs pose an existential danger to cryptocurrencies at some point? “A year ago I thought they would — now I don’t,” Buckley told Cointelegraph. CBDCs are essentially payment instruments, while cryptocurrencies are more like speculative assets. “These new instruments will not represent an existential threat to Bitcoin and the like, but they will make it harder for Bitcoin to argue for itself as anything other than a speculative play,” he said.

Gourav Roy, a senior analyst at the Boston Consulting Group in India, who also contributes to CBDC Tracker, told Cointelegraph that many governments still view crypto as a “big threat to their country’s macroeconomics and main financial/payment landscape,” and for that reason, these countries regularly issue warnings about cryptocurrencies, introduce legislation to tax crypto transactions, and sometimes even ban crypto trading. Roy offered China as a case in point: It banned cryptocurrencies while at the same time “carrying out the world's biggest CBDC pilot testing with 261 million users.”

That said, Roy still sees stablecoin projects surviving and continuing to play an important part in the decentralized finance ecosystem — even with widespread CBDC adoption. Kocevski, for his part, didn’t think government-issued electronic money was an existential threat to crypto.

Related: DeFi attacks are on the rise — Will the industry be able to stem the tide?

Noll not only believes that CBDCs and cryptocurrencies can co-exist, but CBDCs could potentially “work to popularize and mainstream crypto in general.” As public and private sectors become more informed and comfortable with cryptocurrencies, “this should advance the entire industry,” he told Cointelegraph, adding:

“The downside for crypto is that CBDCs will work to crowd out private cryptocurrencies, especially stablecoins focused on retail payment areas. Cryptocurrencies will stay in niches in the payment system where they serve unique functions and provide specialized services.” 

Overall, much has happened on the CBDC front in recent years. While most advanced projects so far have been in non-Western economies like the Bahamas, Nigeria and China, interest in many Western economies like France and Canada seems to be picking up, all the more noteworthy because many already have advanced payment systems in place. As Noll said: 

“Just look at President Biden’s recent executive order, which is all about advancing a U.S. CBDC and is a far step from 2020 and 2021 speeches by Fed officials that questioned the need for any such thing.”

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Zillow Case-Shiller Forecast for May: Slowing House Price Growth

The Case-Shiller house price indexes for April were released this week. The “April” report is a 3-month average including February, March and April closings.  So, this included price increases when mortgage rates were significantly lower than today. Th…

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The Case-Shiller house price indexes for April were released this week. The "April" report is a 3-month average including February, March and April closings.  So, this included price increases when mortgage rates were significantly lower than today. This report includes some homes with contracts signed last December (that closed in February)!

Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close.

From Zillow Research: April 2022 Case-Shiller Results & Forecast: Putting on the Brakes
With rates continuing their steep ascent and inventory picking up in months since, April is likely the first month of this deceleration as buyers balked at the cost of purchasing a home and pulled out of the market, leading to slower price growth. While inventory is improving, there is still plenty of room to go before it reaches its pre-pandemic trend. Still, coupled with relatively strong demand, that will continue to be a driver for sustained high prices even as sales volume is dropping in response to affordability constraints. As a result, more buyers will take a step to the sidelines in the coming months, which will help inventory to recover and price growth to slow from its peak, leading the market back to a more balanced stable state in the long run and providing more future opportunities for homeownership for those priced out today.

Annual home price growth as reported by Case-Shiller are expected to slow in all three indices. Monthly appreciation in May is expected to decelerate from April in both city indices, and hold in the national index. S&P Dow Jones Indices is expected to release data for the May S&P CoreLogic Case-Shiller Indices on Tuesday, July 26.
emphasis added
The Zillow forecast is for the year-over-year change for the Case-Shiller National index to be 19.5% in May. This is slightly slower than in February, March and April, but still very strong YoY growth.

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Airline stocks have been beset by external problems but could now be a good time to invest in a sector many think is in crisis?

It’s fair to say it has been a tough couple of years for the commercial aviation sector and investors in airline stocks. In 2019 the sector enjoyed record…

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It’s fair to say it has been a tough couple of years for the commercial aviation sector and investors in airline stocks. In 2019 the sector enjoyed record passenger numbers and 2020 was expected to be better yet. Low cost airlines were expanding aggressively, as they had been for years, and national carriers, in response, had made strides in cutting costs and introducing other efficiencies.

Then the Covid-19 pandemic struck, devastating the sector. Over the early part of the pandemic when international travel was severely restricted, airlines operated skeleton schedules. Severely reduced capacity, and schedules regularly interrupted by new lockdowns and shifting government policies bedevilled the sector for the next two years.

Even over the past few months which have seen most pandemic-related travel restrictions drop, a spate of new problems has hampered the sector’s recovery. Staff shortages, the result of a combination of the continuing need for those that become infected with Covid-19 to isolate and a tight labour market, have been a major headache. London-listed easyJet recently cut its capacity forecasts as a result of staffing issues.

And last week over 700 Heathrow airport staff voted to strike over the peak summer period, which promises chaos, and hundreds of cancelled flights, if an agreement can’t be reached over pay in the meanwhile. Staff at three Spanish airports are also calling for industrial action this summer and strikes are a threat elsewhere around Europe’s favourite holiday destinations.

Sky high fuel costs will also put pressure on margins this summer and potentially well into next year and a growing cost of living crisis sparked by inflation levels at 40-year highs will not help demand.

Airline share prices have predictably slumped since the onset of the pandemic. EasyJet’s valuation is down over 50% in the past year and over 75% since summer 2018. Its shares haven’t been worth as little as they currently are since early January 2012.

easyjet plc

Hope on the horizon?

But despite the fact the immediate future still looks tough for airlines, there are a number of reasons why investors might consider dipping into their stocks now or in the months ahead.

The first is that the bulk of the problems that have crushed airline valuations over the past couple of years have been external factors outwith control and unrelated to the underlying quality of companies. They are also all problems that are expected to be temporary and will ease in future. Covid-19 restrictions are, with the notable exception of China, no longer a big issue and hopefully won’t return. And even China recently reduced its mandatory quarantine period for anyone arriving in the country from two weeks to seven days.

That’s still problematic but a sign that an end to the dark cloud of the pandemic may finally be in sight. Most airlines were forced to either take on significant new debt or raise cash through equity issues that diluted existing shareholders, or through mechanisms such as selling and leasing back aircraft.

It will take time for that gearing to be unwound and balance sheets brought back to health. But the sector will eventually recover from the pandemic which should see higher valuations return, providing a buying opportunity at current depressed levels.

Airlines that have come out of the pandemic in the strongest positions will also likely gain market share from weaker rivals, improving their future prospects. British Airways owner IAG, for example, currently has access to more than £10 billion in cash after raising capital to cover losses over the pandemic. EasyJet has access to £4.4 billion. That means both should be well placed to cover any continuing short term losses until passenger numbers return to 2019 levels and push their advantage over less well-capitalised rivals.

Both IAG and easyJet have also seen their passenger capacity improve significantly in recent months. Over the all-important summer quarter to September, the latter expects its passenger capacity to reach 90% of 2019 levels despite the ongoing operational challenges. IAG expects to return to 90% of 2019 capacity over the last quarter of the year.

A full recovery to 2019 levels is possible by next year even if higher costs are likely to mean ticket price increases are inevitable. That does pose a risk for near-term leisure travel demand but there is confidence that remaining pent-up demand from the pandemic period will help soften the impact on discretionary spending on international travel that might have otherwise been more pronounced. Western consumers have also, the pandemic period apart, become so accustomed to taking foreign holidays that some analysts now question if they should still be considered discretionary spending rather than a staple.

Despite the transient and external nature of the problems that have hit easyJet’s valuation, not all analysts are convinced the current share price offers good value even despite its depressed level. They still look relatively expensive given the risks still facing the sector at a forward price-to-earnings ratio of close to x160.

iag

IAG could offer better value, currently trading at a price-to-earnings ratio of just x5.8 for next year. It is also expected to reverse return to a healthy profit by 2023. The company also has exposure to the budget airline market through Vueling and Aer Lingus and while it abandoned its move to take over Air Europa late last year it shows it has ambitions to further expand in this area. And it has plenty of capital available to it to make major acquisitions that could fuel growth when the sector recovers.

IAG’s cheap valuation does reflect the risks it faces over the next couple of years but for investors willing to take on a little more risk the potential upside looks attractive.

A dollar-denominated airline stock play

On the other side of the Atlantic, American airlines also suffered during the pandemic but are now recovering strongly. For British investors, dollar-denominated U.S. stocks also offer the attraction of potential gains in pound sterling terms as a result of a strengthening U.S. dollar. The Fed’s more aggressive raising of interest rates compared to the ECB or Bank of England is boosting the dollar against the pound and euro and it is also benefitting from its safe haven status during a period of economic stress.

One U.S. airline that looks particularly interesting right new is Southwest Airlines, the world’s largest low cost carrier. The USA’s domestic travel market has recovered so strongly this year that Southwest expects its Q2 revenues to be 10% higher than those over the same three months in 2019. It’s already profitable again and earnings per share are forecast to come in at $2.67 for 2022 and then leap to $3.84 in 2023. It’s a much more profitable operator than easyHet.

It also, unusually for an American airline, hedges a lot of its oil. That’s expected to see it achieve much better operating margins this year, predicted to reach 15.5% in Q2,  than other airlines being hit by much higher fuel costs. The company isn’t immune to the risk of the impact the inflationary squeeze could have on leisure travel but is seen as one of the most resilient airlines in the sector. It could be a better bet than either of its two London-listed peers.

The post Airline stocks have been beset by external problems but could now be a good time to invest in a sector many think is in crisis? first appeared on Trading and Investment News.

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Falling VIX Spells BIG Trouble For The Bears

If there’s one thing that a bear market – secular or cyclical – feeds on, it’s fear. The further the drop, the bigger the spike we see in the Volatility…

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If there's one thing that a bear market - secular or cyclical - feeds on, it's fear. The further the drop, the bigger the spike we see in the Volatility Index ($VIX). From the CBOE.com website, the VIX "measures the level of expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of S&P options. Thus, the VIX is a forward-looking measure..." So let's be clear about this. The VIX does NOT measure what's happening now or what just happened last week. Instead, it looks forward to determine expected volatility. High volatility is generally associated with falling equity prices and low volatility typically accompanies rising equity prices.

As fear dissipates, expected volatility drops, and bear markets end. That's the historical formula. Let's start off by looking back to the financial crisis in 2008 and how the spiking VIX unfolded:

The VIX topped in October 2008 and though the S&P 500 hit two lower price points, the bear market ran out of sellers as fear came tumbling down in late 2008 and into the first quarter of 2009.

During the market turbulence in 2014-2016, we saw a somewhat similar pattern:

Q4 2018 was a very short cyclical bear market (less than 3 months), as was the pandemic-led selling in March 2020 (4 weeks), so there really wasn't much time to evaluate the VIX at various low points, but currently we're seeing a similar pattern in the cyclical bear market of 2022:

But the action on the VIX was really strange this week. The S&P 500 saw selling pressure once again, yet the VIX finished very close to a 3-week low. Check out this 1-month 30-minute chart:

From mid-day on Thursday through the early morning Friday, the S&P 500 fell from 3820 to 3750 and the VIX was dropping right along with it. That's extremely unusual behavior. The VIX is looking ahead and it's pricing in less volatility. That suggests that we're being given a signal of a rally ahead. That's the reason the VIX goes down. Less volatility means higher equity prices.

We're heading into a fresh quarterly earnings season and I'll be featuring one company that I believe is poised to make a big run into its quarterly earnings report later this month. To read about it in our next newsletter article, simply CLICK HERE and sign up for our FREE EB Digest newsletter. It only takes a name and email address. There is no credit card required and you may unsubscribe at any time.

Happy trading!

Tom



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