Centerfin Collective Weekly

Weekly Update September 8, 2023

OPEC extends production cuts, VISA expands use of stablecoins, Corporate bankruptcies surge

OPEC extends production cuts

Saudi Arabia and Russia announced that they would extend voluntary oil supply cuts this week. The original cuts were announced over the summer and began in July, amounting to 1mm barrels from Saudi Arabia and 300,000 barrels from Russia. This comes when oil prices have rebounded dramatically since April, with Brent Crude surpassing $90/barrel on Tuesday for the first time this year.

  • Cutting oil production is bullish for oil prices and bearish for inflation
  • The news comes at a time when oil has risen significantly off the lows of the year despite continued weak economic data from China
  • In 2021, the Biden administration attempted to address the high price of oil by releasing oil from our Strategic Petroleum Reserve (SPR)
  • The same action would be difficult today, given the SPR is currently at 40-year lows
  • This further complicates the interest rate picture as rising oil prices will surely affect inflation figures in the future, making it even more difficult for the Fed to change course

VISA expands use of stablecoins

VISA announced it would expand its stablecoin settlement capabilities by allowing payment companies Worldpay and Nuvei to settle transactions using Circle’s USDC. The transactions will take place on the Solana blockchain, known for its speed and low cost of execution. VISA announced a partnership with Circle in 2021 and began testing it internally.

  • Stablecoins are digital tokens that are pegged to a unit of currency
  • Circle’s USDC is pegged to the US Dollar (USD)
  • Early cryptocurrency adopters use stablecoins to convert crypto holdings into USD, thus avoiding the volatility of crypto but maintaining their funds in the ecosystem
  • Payments, especially cross-border payments, have always been a great use case for stablecoins
  • VISA, being one of the few dominant global payment players furthering the use of stablecoins, is a huge deal
  • When consumers use their VISA cards for purchases, they only know that their transaction goes through instantly, and they settle with VISA via their next bill
  • What happens below the surface is a series of settlement transactions, with VISA needing to settle with the merchant (usually through a payment processor like Worldpay and Nuvei) via traditional payment methods (ACH, Wire, etc)
  • These traditional payment methods take days and are expensive
  • Using stablecoins is instant and cheap
  • Overtime the value should accrue to the consumer

Corporate bankruptcies surge

Through August, there have been 409 corporate bankruptcies announced this year, already surpassing all of 2022. This is the highest year-to-date number since 2020 and before that 2010. The fallout has been widespread, with companies in the consumer discretionary, industrial, healthcare, and financial sectors dominating.

  • This is striking as it comes at a time when the economy is holding up quite well
  • The common thread is too much debt and a rising interest rate environment
  • Many companies locked in low-yielding debt in 2020 and 2021 and have not had to deal with the higher interest rate regime
  • However, with ~$2 trillion of corporate debt maturing between now and the end of 2025, many more will find themselves needing to refinance at much higher rates
  • Companies with weaker businesses will be unlikely to refinance and will have to file for bankruptcy and/or restructure

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