Weekly Market Digest: Breaking Down Facebook’s Libra

U.S. stocks finished the week at new all-time highs on the heels of Fed Chairman Jerome Powell’s testimony and release of the FOMC minutes. After a stronger-than-expected jobs report and a pickup in inflation, all eyes were on the Fed to reiterate expectations for a rate cut in their July meeting. Powell delivered, acknowledging that the risks to the U.S. economy have grown. Uncertainties around trade tensions and concern around a weaker global economy were highlighted as the key risks to the U.S. economic outlook, despite relative strength at home. In an interesting twist, Powell also conceded that they may have made a policy mistake by tightening too quickly, saying the relationship between unemployment and inflation “has gone away.” This potentially opens the door to further accommodative policy.

Testimony was only supposed to focus on monetary policy, but attention quickly shifted during the Q&A to concerns over the announcement of Facebook’s Libra cryptocurrency set to launch in 2020. Powell fielded several questions on the topic where he expressed concerns and confirmed it is actively being investigated.

Weekly Returns

S&P 500: 3013.8 (+0.78%)
FTSE All-World ex-US (VEU): (-0.50%)
US 10 Year Treasury Yield: 2.12% (+0.08)
Gold: $1,414.5 (+1.13%)
EUR/USD: 1.1269 (+.38%)

Major Events

  • Monday – Hong Kong leader Carrie Lam announced the controversial extradition bill is dead in response to massive protests.
  • Tuesday – There was little change in equity markets in anticipation of the FOMC minutes and Powell’s testimony before Congress and the Senate this week.
  • Wednesday – The S&P 500 hit all-time highs breaking 3000 following Powell’s dovish comments.
  • Thursday – The Dow Jones Industrial Average followed suit breaking above 27,000.
  • Friday – Johnson & Johnson stock dropped over 5% after news hit that the DOJ was perusing a criminal investigation on if they lied about cancer risks related to talcum powder.

Our Take: Facebook’s Libra

There is a lot of hype around Facebook’s Libra, raising several questions about what this means for the future of financial innovation. Facebook is already well on the way with development, and regulators have been quick to step in, realizing there are potentially massive implications for the entire global financial system. We obviously don’t know how this will unfold, but let’s explore some key questions.

What is Libra and how will it work?

In their recent white paper, The Libra Association claims that Libra will be a new stable digital currency built on the Libra Blockchain. It will be backed by a reserve of fiat currencies and other assets designed to give it intrinsic value. Users will store Libra in a digital wallet called Calibra, which can be used to transact by anyone on their platform. Calibra is a regulated subsidiary, “meant to ensure separation between social and financial data”. The Libra Association was created by Facebook and its partners — it’s a membership organization of several large institutions in various industries, and it was instituted to decentralize and govern the project.

What are some of the potential benefits?

The potential benefits cited in the white paper argue that this innovation will give access to financial services and cheap capital to many people around the world who do not currently have access to financial institutions. They also say that they will bring down the cost of fees to transact creating “immense economic opportunity and more commerce across the world.”

What are some of the potential concerns?

There is a fine line between unnecessarily restricting technological innovation and safeguarding the stability of our systems. Late last week, legislators requested Facebook halt development of Libra so that lawmakers could assess the risks and ramifications of their actions. Things are beginning to heat up as those concerns were echoed by central banks around the world. There is quite an extensive list of concerns due to the level of uncertainty, but some of the top concerns are around financial stability risk such as systemic risk during times of stress. Other concerns are around privacy, security, bad actors such as money laundering and terrorism, and antitrust.

It will be interesting to see the answers to these questions unfold further in the coming days, and to see how regulation responds. The stakes are extremely high, so it’s positive to see regulators already working with Facebook and perhaps slowing down the launch until the project has been thoroughly vetted.

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