Passage of the GENIUS Act is a major landmark that not only keeps the US at the forefront in digital currencies, but potentially creates a new source of demand for treasuries, reinforcing the dollar’s currently unassailable status. Potential for financial inclusion as well as faster settlements are added positives. While one of the risks is loss of monetary policy flexibility, this is neither the “gold standard” of the past, nor will it do away with fiat currencies. Most importantly, calls for the end of the dollar’s dominance are diluted further.
In a relatively light macro data week ahead (mainly housing, expected to rebound),focus will be on earnings, especially tech and especially Wednesday when Tesla and Alphabet report. With the markets continuing to power ahead, will it be a case of “bought expectation, sell fact”?
GENIUS Act
GENIUS (Guiding and Establishing National Innovation for US Stablecoins) Act was signed by the US President on 18th July, a landmark moment, allowing issuance of stablecoins, pegged 1:1 to the US Dollar and backed by cash and treasuries.
- There is a long lead time between legislation and implementation - detailed guidelines could take a year.
- Issuers will be US based regulated entities (major banks are already considering this) and will need to back the stablecoins with bankruptcy remote, segregated structures.
- Stablecoins cannot carry an yield.
The ActsThat Haven’t passed yet - What perhaps received less attention were two additional bills –Clarity Act and Anti CBDC Act – the latter designed to avoid competition from the FED.
Benefits
- Demand for Treasuries = Lower Mortgage Rates – creating anew source for treasury demand, as much as an incremental $1 trn by some estimates over the next 5 years, has the potential to lower long dated yield and hence mortgage rates.
- Faster Transactions – With a decentralized and “instant” settlement system, increased efficiency in managing liquidity can be a potential positive outcome.
- Financial Inclusion – banking for the unbanked made possible through stablecoins.
…and Risks
- Weaker Monetary Flexibility – In creating in effect parallel currencies and hence a proliferation of stablecoins, FED’s control over monetary policy would be weakened, especially in managing interest rates. How this plays out remains to be seen.
- Treasury Market Turmoil – Tenor mismatch, possible redemptions, akin to a “run on a bank” leading to disruptions in the treasury market would be a real risk.
- Funding Cost of Banks/ Credit Creation – An alternate asset in effect dampens demand for bank deposits, potentially raising funding costs and limiting credit creation, which is currently facilitated by a fractional reserve system.
- Which Stablecoin to choose – While the detailed framework is yet to be laid out, the likelihood of multiple stablecoin issuers is high – how each of these are perceived and used is an unknown. Should the Anti-CBDC Act get passed, at least the FED will not be a competitor.
Is This The Gold Standard Revisited?
In many senses, with currency (stablecoins) backed by cash/ treasuries, evokes memories of the gold standard (currency was backed by physical gold reserves). While the similarity of limiting central bank’s role exists, the one major difference is the more than finite supply of treasuries. In that sense, while there are similarities, this “treasury standard” is much different from the old gold standard.
Week Ahead in Markets
MacroData
- Relatively light data week withHousing main focus.
- Existing home sales (Wednesday, 23rd),expected to be weaker m/m.
- New home sales (Thursday, 24th),expected to rebound 10% m/m after a sharp decline in May.
Earnings
- Earnings season picks up with Tech names reporting
- Focus on Wednesday (23rd)with both Tesla and Alphabet reporting post market. Tesla expected to report 48cents vs. 52cents a year ago – more interestingly will be guidance on Robotaxis and the company’s plans to revive sales, especially with continuing and rising threat from Chinese automakers. For Alphabet, consensus expects $2.19vs. $1.89 a year ago – watch for capex guidance as also emerging threat (and responses)from AI search engines.
- Blackstone earnings on Thursday (24th)will be important for guidance on expected flows following recent approval for401K investments in private markets.
- Other major names to watch –Intuitive Surgical and General Motors (Tuesday), IBM, Chipotle (Wednesday) andIntel (Thursday).
Markets
Markets continued to grind higher without any specific sell signals and equities remain in an uptrend. However, a stretched RSI positioning does warrant a pause at the minimum. With volatility at depressed levels, the one risk to be cognizant of is profit taking - “bought the expectation, will sell the fact”. Aside from equities, and even if implementation of the GENIUS Act is still some time away, downward pressure on yields and a further strengthening of the dollar is a likely outcome.
Nasdaq - Uptrend in Place - But Stretched
source: Trading View
