Investability Bulletin 10/03/21: Crypto’s coming of age?

The US government could be about to make a big move with digital currencies

Photo by Aleksi Räisä

Do you want your government to issue currency it can control and programme to stop naughty citizens from using for certain things? Obese? Your digital pound won’t work in McDonald’s! A central bank digital currency seems the natural direction of travel as governments respond to the birth and development of cryptocurrency. The White House has signed an executive order on ‘ensuring responsible development of digital assets’. Now a lot of what was in this was welcomed by the crypto community.

Crypto markets rallied on Wednesday on a Treasury Sec Janet Yellen statement on crypto applauding Biden’s executive order for supporting “responsible innovation.” “I applaud this constructive approach to thoughtful crypto regulation and look forward to working together with the various stakeholders to ensure that the US remains a leader in crypto,” said Cameron Winklevoss, co-founder of crypto exchange Gemini. “It’s not talking about outright bans so the market took it as a positive.”

But, here’s the rub: the EO calls for measures to “explore a U.S. Central Bank Digital Currency (CBDC) by placing urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest”. A CBDC can be programmed by the government; it is not like cash. Another step on the road to a Chinese-style social credit system where the government completely controls you and ranks you based on your behaviour and compliance? Attend the wrong rally and see your CBDC account frozen? Look at Canada…it’s already happening. When it comes to the loss of our freedoms I wouldn’t be surprised by anything anymore. 

Crude prices rebounded this morning after being whipsawed on various Russia headlines. Brent and WTI plunged yesterday in a brutal reversal as the UAE indicated it could start pumping more oil and call on friends at OPEC to do more. Comments from Russian and Ukrainian officials also pointed towards a path to peace, but the situation on the ground is no different. It was the biggest one-day drop for crude in two years with Brent moving in $25 range. Some confusion with the UAE following up those comments from its ambassador to the US with a statement from its oil minister: “The UAE believes in the value Opec+ brings to the oil market.” So not clear, but for now markets are trading these headlines and crude remains super-volatile…treacherous markets. Brent is up 3.5% this morning at $116, having hit a low of $106 yesterday from a peak at $131. 

So where now for oil? There has been a shift in the Biden administration: “We need oil and gas production to rise,” said Energy Sec Granholm. “We are on a war footing.” Strong words, but we know the White House is also saying that producers have the licences to drill (they do) but won’t. This is broadly accurate – they are focused on shareholder returns and fiscal discipline right now and can’t source the gear or workers anyway. But what would help would be for the White House to shift its longer-term outlook…commit to US oil, set a goal to end all imports. Meanwhile Senator Warren is preparing a bill for a windfall tax on oil firms…hardly the right tone to encourage more production. They need to not only say that we need more oil today, but we need more oil over the next ten years. Rigs take 12-18 months to produce… 

European stock markets are in give-back mode after yesterday’s sharp rally saw the DAX and CAC both rally 7%, whilst the FTSE rose 3%. They’re down around 1%, give or take, this morning. Markets reacted like the war was over – clearly, it’s too early and clearly the impact of western sanctions are only beginning to be felt. Are you ready for the massive inflation and cuts to earnings guidance ahead? Stocks seemed to be trading on commodity prices…not only oil but wheat down big yesterday. The S&P 500 rallied 2.7%, its best day since June 2020, recovering the 3% lost in the previous session. 

The market certainly latched on to Ukraine President Zelensky’s remarks on being willing to compromise as well as comments from Russia’s Foreign Ministry spokeswoman Maria Zakharova, who said the Kremlin has no intention of occupying Ukraine or overthrowing its government. Who’s willing to back down? Russia does not seem minded right now…Nato has shown its hand. We don’t yet know how sanctions and the exit of Western businesses from Russia will play out…but it won’t be pretty for Russians or Ukrainians. Foreign ministers from the two nations meet in Turkey for talks today. Watch for the headlines….anything hinting at peace will be grabbed at.

ECB today – there was maybe something in the talk of the EU issuing joint debt for energy and defence in yesterday’s rally…what does Christine Lagarde have in store for us today? It is a fine balancing act for the ECB – inflation needs to be tamed, but growth is slowing and a recession could be headed the way of the Eurozone. Given the uncertainty, I would expect the ECB to maintain as much flexibility as possible…PEPP to end, raising APP but not committing to any calendar for exiting QE. Record high inflation means it must maintain the exit strategy but not get bogged down sticking to dates. 

Russia – capital controls and now price controls as the parliament prepares to introduce proposals to regulate prices for foods, medicines and other goods. 

Data…US JOLTS job openings hit 11.263m, massive – tightest jobs market in history. US CPI today could see +8%…heading to 10%. 

Company updates

DS Smith – despite macro-economic and geo-political uncertainty, the outlook for the year remains unchanged by recent events. The company has seen continued momentum during H2 with good progress in profitability and cash generation. Volume growth and continuing packaging price increases have more than offset ongoing input cost increases with overall trading in line with our expectations. 

Rio Tinto – latest to pull out of Russia, ex-dividend factors sending it down 2% today…13% yield! 

Boohoo +14% today, +23% in the last 5 days, though still –72% in the last 12 months. Shares seem to be recovering on the absence of any more bad news. Management expects adjusted EBITDA for the financial year ended 28 February 2022 of approximately £125 million, in line with prior guidance issued in December and market expectations. 

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