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Good morning. Yesterday President Donald Trump threatened Brazil, which the US ran a trade surplus of $24bn with in 2023, with 50 per cent tariffs. The grounds for the threat are that Brazil’s former president Jair Bolsonaro is being unfairly prosecuted for, um, attempting to stay in office after losing an election. Unhedged feels this is a little too on the nose and will be having a quiet word with the screenwriters. Email us: unhedged@ft.com.
Tokenised money-market funds
Our Financial Times colleagues Alan Livsey and Philip Stafford published a fine piece on Monday about tokenised money market funds. These are money market funds that can be held on a blockchain ledger, making them useful as collateral in crypto asset transactions and, in theory, making MMFs easier to trade or use as a form of payment.
Tokenised MMFs sound a lot like stablecoins. Are they distinct? They are, but it is a distinction without much of a difference.
The most cited distinguishing characteristic is that, unlike stablecoins, tokenised MMFs pay a yield. The stablecoin legislation working its way through Congress forbids stablecoins from doing so (in part a concession, I am told, to the bank lobby).
A related and more substantial difference is that a tokenised money market fund share is, like any MMF share, an investment security under the law. That means it has to be compliant with know-your-customer and anti-money laundering regulations, and can come with a big fund manager’s brand — BlackRock, Franklin Templeton or Janus Henderson, for example — standing behind it.
Being an investment security brings further differences in its train. A tokenised MMF, like any MMF, “aims for” but does not guarantee redemption at par, whereas the Genius Act says a stablecoin issuer “is obliged to convert, redeem, or repurchase [the stablecoin] for a fixed amount of monetary value”. And a stablecoin owner is a creditor of the stablecoin issuer (that’s the main reason I think those issuers are banks). The owner of a tokenised MMF, by contrast, is an equity holder in the fund.
But I doubt these distinctions will prove to be important in practice. I’d guess that stablecoin yield might not remain forbidden by regulation for long, and even if it is, I’d predict that some way to wriggle around the prohibition will be found. A deposit-like product backed by yielding assets that does not itself pay a yield just doesn’t make sense. And, as Livsey and Stafford point out, the main-use case for stablecoins and tokenised MMFs is facilitating trading in crypto assets. The use cases in payments (stablecoins) or in fund trading (tokenised MMFs) are much talked about and little proven.
Most importantly, the whole point of the tokenisation of money market funds is to make the funds more money-like, which pushes against the distinction with stablecoins. All the talk about access, liquidity, collateralisation and so on is just money talk. Franklin Templeton, for example, says tokenised MMFs allow “securities to move at the speed and with the ease of money and be used as a form of payment or funding”.
Money market funds have always tried, only half covertly, to be a better form of money or bank deposits — redeemable on demand and at par (mostly!) but with a yield that beats a currency account (recall that money market fund assets are included in the definition of M3 broad money). This sleight of hand has periodically led to trouble; look no further than MMFs’ need for government liquidity support in both 2008 and 2020.
Tokenisation will blur the money/investment distinction even more than MMFs already have. And as a former US bank regulator put it to me, “money and investments don’t mix well, especially in a downturn”.
(Armstrong)
Bad breadth revisited
Nvidia became the first company to hit $4tn in market capitalisation yesterday, after surging by more than 40 per cent since the first of May. It has accounted for more than a fifth of the S&P 500’s total gains over that period. Owners of the shares are happy. Everyone else is fretting about how narrowly distributed the market’s gains are. From Bloomberg:
Fewer stocks are setting new highs alongside the S&P 500 index, an unwelcome sign for traders worried about the market’s increasing concentration . . . Shares of Big Tech have been the main drivers of the rebound, suggesting that investors are playing it safe in the face of uncertain US trade policy and fiscal worries . . .
“Broader participation is important,” said Ari Wald, senior analyst at Oppenheimer . . . “Rallies with most stocks participating, both large and small, are the rallies that typically continue.”
Is the market so narrow? And does it matter?
The Bloomberg Magnificent 7 Price Return index is up 36 per cent from its April 8 lows, whereas the S&P 500 has only gained 25 per cent since. But on a year-to-date basis, the broader S&P 500 is up 6 per cent against the Mag 7’s 1.1 per cent. That makes the recent “narrowing” look more like a recovery for the Mag 7:
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Now consider the number of stocks hitting new 52-week highs minus new 52-week lows each day. By that metric, the market is widening:
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Interestingly, not everyone is buying Big Tech. Joe Mazzola, head trading and derivatives strategist at Charles Schwab, told us that over the past five months, tech was the top “net-sell” sector in Schwab client accounts, and Nvidia has also fallen into net-sell territory for the second month in a row. He noted that outflows from technology had been heading into consumer discretionary and industrials; clients seem to be moving to lower-beta sectors.
Schwab clients are seeking diversification, too. Single stocks are seeing dollar outflows from client accounts, while ETFs and mutual funds are seeing dollar inflows.
There are also other signs of broadening. A wide range of equities are outperforming: 74 per cent of the S&P 500 is trading above its 50-day moving average, and 62 per cent of the stocks are higher than its 200-day average. That is reassuring.
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Unhedged has argued before that relatively narrow market breadth does not always presage weak index performance. It matters why the market is narrow, not just that it is narrow.
There is another, quite different, sense in which the current rally feels thin that does worry us a bit, however. Deutsche Bank’s Jim Reid looked at trading activity during US trading hours versus overnight hours, and found that the post-liberation day gains have been mostly a domestic phenomenon, whereas the sell-off earlier this year took place across time zones:
S&P 500 YTD intraday returns (reindexed Dec 31 2024 = 1)
This suggests international investors were a driver of the sell-off, and they haven’t returned in force since. With foreign holdings of US equities at a record-high level of 18 per cent, they are still an important support for American markets. But foreign investors’ hesitation to get back into US equities after ‘liberation day’ does make the market feel a bit fragile.
(Kim)
One good read
Microplastics.
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