InvestMacro

by JustForex

After Powell’s hawkish speech last week, analysts predict an almost 100% chance of a double interest rate hike in May, June, and July. At the same time, Powell has raised doubts that the Fed will be able to overcome inflation without throwing the economy into recession. This situation frightened investors, who began to sell-off at the end of last week. At the closing of the stock exchange on Friday, the Dow Jones index (US30) decreased by 2.82% (-1.74% for the week), and S&P 500 (US500) lost 2.77% (-2.60% for the week). The NASDAQ Technology Index (US100) fell by 2.55% on Friday and ended the week with a loss of -3.60%.

Now the big question is: can the earnings season pick up indices based on this recessionary sentiment? That’s where analysts disagree. It should be noted that markets set future scenarios at the current price. Therefore, the main indices fall only from rumors. But the real data will not show a decline, and any dovish forecast will be considered positive by the market. So, if the Fed officials don’t say about an aggressive rate hike this week and the corporate earnings are better than expected, the indices might jump impulsively. Nearly 180 companies in the S&P 500, which are worth about half the market value of the benchmark index, are expected to release their results this week, including the four largest US companies by market capitalization: Apple, Microsoft, Amazon, and Google.

Major European indices were trading lower on Friday. German DAX (DE30) lost 2.48% on Friday (+0.31% for the week), French CAC 40 (FR 40) fell by 1.99% (+0.36% for the week), Spanish IBEX 35 (ES35) decreased by 1.84% (+0.29% for the week), British FTSE 100 (UK100) lost 1.39% and ended the week as the leader of falling with -0.78%. UK PMI data showed steady growth in March as further recovery from the COVID-19 restraint helped offset the negative factors. However, the war in Ukraine led to an unprecedented price increase and drove business confidence to a year-and-a-half low. Contrary to the consensus forecast, the Eurozone economy started the second quarter stronger than expected. Nevertheless, weakness in the manufacturing sector is a major concern, as it indicates that the economy is not operating at full capacity. In addition, the ever-increasing cost of living indicates that service sector growth may decline sharply once the initial boost caused by the economic opening fades, especially if business confidence is not restored. Business expectations in Europe for next year have risen from a 17-month low. However, confidence remains low as fears of war in Ukraine, rising prices, and the lingering effects of the pandemic do not inspire optimism. All these factors directly and indirectly put pressure on ECB policymakers, who are increasingly inclined to a more hawkish stance.

The second round of presidential elections took place in France yesterday. Incumbent President Macron (58.54%) won the election against Le Pen (41.46%), who gained record votes for the far-right. After the election of Emanuel Macron as President of France for a second term, protests erupted in France, and police used tear gas in Paris.

The situation in the oil market remains very uncertain. On the one hand, Russia’s invasion of Ukraine, with all that entails, including a possible ban of Russian oil to Europe, suggests that oil prices should only rise. On the other hand, the restrictions imposed in Shanghai and the plans of the US and allies to release strategic reserves to the market prevent oil prices from rising. It is difficult to answer how the situation will develop further. Most analysts believe that oil prices and the energy sector will decrease shortly as the US Fed will tighten its monetary policy aggressively. This will increase the Dollar index, which will put negative pressure on oil quotes, as the main payment for oil supplies is made in US dollars.

Gold and silver, as well as platinum and palladium, were under price pressure late last week. That is not surprising, as any verbal intervention to raise interest rates more aggressively will cause the dollar index to spike and raise US Treasury yields, which is bad for precious metals. At this point, there are no fundamental factors indicating that precious metal prices will rise. And the general rule, “buy gold when inflation is high,” is only temporary speculative.

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) gained 1.02% over the week, Hong Kong’s Hang Seng (HK50) fell by 3.84% over the week, and Australia’s S&P/ASX 200 (AU200) closed with -0.08% over the week. Private sector output in Japan and Australia rose in April as the easing of COVID-19 supply disruptions domestically helped boost business activity. However, external events, such as the war in Ukraine and COVID-19 restrictions in China, have exacerbated supply chain problems, leading to longer lead times and increased price pressures for companies in both Japan and Australia. Companies in both countries also expressed concerns about rising inflationary pressures on business, leading to another drop in business confidence early in the second quarter. The annual inflation rate in Singapore increased from 4.7% to 5.4%. This is the highest value since 2012. The core consumer price index, excluding food and gasoline prices, increased to 2.9% in March from 2.2% in February.

In the commodities market, by the end of the week futures on lumber (+5.55%), gasoline (+5.49%), orange juice (+3.85%), WTI oil (+3.55%), Brent oil (+3.33%), natural gas (+2.98), corn (+2.47%) and wheat (+2.09%) showed the biggest gains at the end of the week. Sugar (-6.08%), platinum (-5.39%), cocoa (-4.94%), copper (-2.99%) and silver (-2.55%) futures showed the biggest drops.

Main market quotes:

S&P 500 (F) (US500) 4,271.78 −121.88 (−2.77%)

Dow Jones (US30) 33,811.40 −981.36 (−2.82%)

DAX (DE40) 14,142.09 −360.32 (−2.48%)

FTSE 100 (UK100) 7,521.68 −106.27 (−1.39%)

USD Index 101.12 +0.54 (+0.54%)

• – Singapore Consumer Price Index (m/m) at 08:00 (GMT+2);
• – Eurozone Germany Ifo Business Climate (m/m) at 11:00 (GMT+2);
• – Canada Boc Gov Macklem Speaks at 18:00 (GMT+2).

by JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By João Marinotti, Indiana University 

In 2021, an investment firm bought 2,000 acres of real estate for about US$4 million. Normally this would not make headlines, but in this case the land was virtual. It existed only in a metaverse platform called The Sandbox. By buying 792 non-fungible tokens on the Ethereum blockchain, the firm then owned the equivalent of 1,200 city blocks.

But did it? It turns out that legal ownership in the metaverse is not that simple.

The prevailing but legally problematic narrative among crypto enthusiasts is that NFTs allow true ownership of digital items in the metaverse for two reasons: decentralization and interoperability. These two technological features have led some to claim that tokens provide indisputable proof of ownership, which can be used across various metaverse apps, environments and games. Because of this decentralization, some also claim that buying and selling virtual items can be done on the blockchain itself for whatever price you want, without any person or any company’s permission.

Despite these claims, the legal status of virtual “owners” is significantly more complicated. In fact, the current ownership of metaverse assets is not governed by property law at all, but rather by contract law. As a legal scholar who studies property law, tech policy and legal ownership, I believe that what many companies are calling “ownership” in the metaverse is not the same as ownership in the physical world, and consumers are at risk of being swindled.

Purchasing in the metaverse

When you buy an item in the metaverse, your purchase is recorded in a transaction on a blockchain, which is a digital ledger under nobody’s control and in which transaction records cannot be deleted or altered. Your purchase assigns you ownership of an NFT, which is simply a unique string of bits. You store the NFT in a crypto wallet that only you can open, and which you “carry” with you wherever you go in the metaverse. Each NFT is linked to a particular virtual item.

It is easy to think that because your NFT is in your crypto wallet, no one can take your NFT-backed virtual apartment, outfit or magic wand away from you without access to your wallet’s private key. Because of this, many people think that the NFT and the digital item are one and the same. Even experts conflate NFTs with their respective digital goods, noting that because NFTs are personal property, they allow you to own digital goods in a virtual world.

However, when you join a metaverse platform you must first agree to the platform’s terms of service, terms of use or end user license agreement. These are legally binding documents that define the rights and duties of the users and the metaverse platform. Unfortunately and unsurprisingly, almost no one actually reads the terms of service. In one study, only 1.7% of users found and questioned a “child assignment clause” embedded in a terms of service document. Everyone else unwittingly gave away their first-born child to the fictional online service provider.

It is in these lengthy and sometimes incomprehensible documents where metaverse platforms spell out the legal nuances of virtual ownership. Unlike the blockchain itself, the terms of service for each metaverse platform are centralized and are under the complete control of a single company. This is extremely problematic for legal ownership.

Interoperability and portability are defining features of the metaverse, meaning you should be able to carry your non-real-estate virtual property – your avatar, your digital art, your magic wand – from one virtual world to another. But today’s virtual worlds are not connected to one another, and there is nothing in an NFT itself that labels it as, say, a magic wand. As it stands, each platform needs to link NFTs to their own proprietary digital assets.

Virtual fine print

Under the terms of service, the NFTs purchased and the digital goods received are almost never one and the same. NFTs exist on the blockchain. The land, goods and characters in the metaverse, on the other hand, exist on private servers running proprietary code with secured, inaccessible databases.

This means that all visual and functional aspects of digital assets – the very features that give them any value – are not on the blockchain at all. These features are completely controlled by the private metaverse platforms and are subject to their unilateral control.

Because of their terms of service, platforms can even legally delete or give your items away by delinking the digital assets from their original NFT identification codes. Ultimately, even though you may own the NFT that came with your digital purchase, you do not legally own or possess the digital assets themselves. Instead, the platforms merely grant you access to the digital assets and only for the length of time they want.

For example, on one day you might own a $200,000 digital painting for your apartment in the metaverse, and the next day you may find yourself banned from the metaverse platform, and your painting, which was originally stored in its proprietary databases, deleted. Strictly speaking, you would still own the NFT on the blockchain with its original identification code, but it is now functionally useless and financially worthless.

While admittedly jarring, this is not a far-fetched scenario. It might not be a wise business move for the platform company, but there’s nothing in the law to prevent it. Under the terms of use and premium NFT terms of use governing the $4 million’s worth of virtual real estate purchased on The Sandbox, the metaverse company – like many other NFT and metaverse platforms – reserves the right at its sole discretion to terminate your ability to use or even access your purchased digital assets.

If The Sandbox “reasonably believes” you engaged in any of the platform’s prohibited activities, which require subjective judgments about whether you interfered with others’ “enjoyment” of the platform, it may immediately suspend or terminate your user account and delete your NFT’s images and descriptions from its platform. It can do this without any notice or liability to you.

In fact, The Sandbox even claims the right in these cases to immediately confiscate any NFTs it deems you acquired as a result of the prohibited activities. How it would successfully confiscate blockchain-based NFTs is a technological mystery, but this raises further questions about the validity of what it calls virtual ownership.

The Conversation reached out to The Sandbox for comment but did not receive a response.

Legally binding

As if these clauses weren’t alarming enough, many metaverse platforms reserve the right to amend their terms of service at any time with little to no actual notice. This means that users would need to constantly refresh and reread the terms to ensure they do not engage in any recently banned behavior that could result in the deletion of their “purchased” assets or even their entire accounts.

Technology alone will not pave the way for true ownership of digital assets in the metaverse. NFTs cannot bypass the centralized control that metaverse platforms currently have and will continue to have under their contractual terms of service. Ultimately, legal reform alongside technological innovation is needed before the metaverse can mature into what it promises to become.

About the Author:

João Marinotti, Associate Professor of Law, Indiana University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Sayantan Ghosal, University of Glasgow and Dania Thomas, University of Glasgow 

Sri Lanka recorded the first casualties from its spiralling economic crisis several days ago, with one protester dead and 24 more injured. This was from police firing gunshots into a crowd who were demanding the removal of a government they hold responsible for the country’s predicament. At present:

• Citizens cannot access essentials such as fuel, medicines and food, with some even dying while queuing for fuel.
• Protesters of all classes are taking to the streets – members of the middle class face a potentially irreversible decline in living standards, while the masses are being pushed into absolute poverty.
• Sri Lanka has formally (apparently temporarily) defaulted on its debts. India and China, jostling for influence and power, are providing emergency funding and the IMF is considering a bailout under its Rapid Financing Initiative.

An apologist could put much of Sri Lanka’s problems down to bad luck: the pandemic and the conflict between Russia and Ukraine are partly to blame, and neither could have been anticipated. On the other hand, poor policy choices by a corrupt, authoritarian governing elite have made Sri Lanka uniquely vulnerable. This has been a disaster in slow motion, entirely predictable, a textbook case of how a government can cause a debt crisis.

Before 2019, Sri Lanka was self-sufficient in food. The government elected that year banned pesticides so that only organic farming was allowed, resulting in the shutting of tea plantations (a source of export revenue) and shrinking the country’s ability to feed itself (Sri Lanka now imports grains). Together with the damage to tourism from the COVID pandemic and rising global commodity prices, this has reduced tax revenues and put more pressure on the Sri Lankan rupee.

The public finances have been further damaged by unsustainable subsidies and unaffordable tax cuts. Equally, there have been futile attempts to maintain an unviable currency peg to the US dollar and bad decisions around debt management. Public debt has near-tripled as a percentage of GDP to 104% in three years, while the rupee has jumped from about 200 to the US dollar in early March to almost 330 today.

Deja vu

Sri Lanka’s governing elites are not alone in making these kinds of poor policy choices. For example, in the run up to the crisis that engulfed Lebanon in late 2019, the central bank swapped debt held in Lebanese pounds into debt in euros and US dollars while maintaining an unviable currency peg.

The fees from these activities generated huge profits for major banks but made the country vulnerable to negative external shocks, such as nervous foreign investors dumping government bonds. This helped to drive down the value of the currency and made debts priced in foreign currency harder to pay back. Just like Sri Lanka, there were protesters on the streets, governing elites waxing eloquently about the need to maintain national unity, and a middle class facing the prospect of being wiped out while millions were pushed into poverty.

The financial crisis in the eurozone in the 2010s was the result of a similar mix of bad policy choices and bad luck, as was the 1990s Asian financial crisis before it, and the Latin American crisis in the 1980s – not to mention Argentina’s protracted debt crisis and restructuring in the recent past.

What can be done to prevent these situations? One common thread is international bailouts from the IMF and other bodies, in which the money is conditional on reining in the state through severe cuts to public spending, privatisations and so on. After a gap of a few years, provided the state meets these conditions, borrowing in international capital markets is permitted to resume and the whole cycle can repeat. These interventions teach elites elsewhere that reckless policies will be bailed out, making it inevitable that similar debt crises will occur in apparently different circumstances in other countries.

Fairer bailouts

Perhaps it is time to consider a different approach, which puts the needs of citizens first and ensures that political elites aren’t rewarded for poor policy choices. Various academics make a distinction between two types of creditors in these situations: “formal creditors”, such as a western European pension fund buying sovereign bonds, and “informal creditors” within the state itself, such as pensioners who have contributed to the state social security fund, or workers who have paid into the public insurance system.

There’s a social contract that these informal creditors will benefit from the money they pay in, yet in a bailout situation, they bear the brunt of austerity, including cuts to social security programmes. Meanwhile, foreign creditors get their money back – albeit with a “haircut” where they lose a proportion (though this risk is usually already reflected in the interest rate at which their money is lent in the first place).

We argue in an upcoming paper that when informal creditors have an explicit say in how a debt crisis is resolved, as in Iceland in the early 2010s, both austerity and the power of governing elites will be limited. Instead, policy choices are tailored to ensuring that the economy recovers faster and a future debt crisis becomes less likely.

The UN Conference on Trade and Development (UNCTAD) published a debt workout guide in 2015 that offers a road map for such a process. It proposes referendums at key points in the lead-up to a bailout to ensure that the public see the options and get a chance to vote on them.

Sri Lanka presents an ideal opportunity to put this into practice. The suffering of ordinary citizens, pensioners, students and the impact on future generations is neither inevitable nor bad luck. Citizens’ views must be taken into account in determining how the crisis is resolved.

This would be a blueprint for future economic crises – and these could well be looming in view of slow post-COVID recovery, the strong US dollar and high commodity prices. In south Asia alone, Pakistan is similarly vulnerable to not having adequate foreign exchange reserves to service its sovereign debts, and despite strenuous official denials, so is Nepal.

The political elites in these countries may already have made the poor financial decisions that have created these vulnerabilities. But there is a good opportunity to send a message that the consequences will be different when politicians and bankers take similar decisions in future.

About the Author:

Sayantan Ghosal, Professor of Economics, University of Glasgow and Dania Thomas, Lecturer in Business Law, University of Glasgow

This article is republished from The Conversation under a Creative Commons license. Read the original article.