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Dollar US bond yields and earnings in focus

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In Asia, futures pointed to a subdued open for Japanese stocks after the benchmark index fell more than 1 percent in the last session. Nikkei futures traded in Chicago were off by 0.21 percent at 21,880 compared to the index’s previous close. Osaka futures were lower by 0.43 percent.

Down Under, the S&P/ASX 200 slipped 0.26 percent in early trade. The heavily weighted financials and materials subindexes traded lower by 0.17 percent and 2.17 percent, respectively, dragging the benchmark lower.

Australian corporates take center stage on the earnings front on Wednesday, with Wesfarmers, Santos and Scentre Group among the companies reporting results during the day.

Markets in China will remain closed for the Lunar New Year holiday.

The dollar firmed as markets consider the overnight U.S. Treasury auction. The dollar index, which tracks the U.S. currency against a basket of six rivals, last traded at 89.714. Against the yen, the dollar firmed to trade at 107.28.

On the commodities front, U.S. crude futures rose 0.4 percent to settle at $61.90 per barrel. Brent crude futures settled 0.6 percent lower at $65.25 per barrel as the dollar firmed.

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What is it and how does it work?

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A man counts 100 RMB notes with the Chinese flag in the background.

Sheldon Cooper | SOPA Images | LightRocket via Getty Images

GUANGZHOU, China — China is arguably leading the world in developing a national digital currency, a project it has been working on since 2014.

The People’s Bank of China (PBOC) has been spearheading work on the digital yuan, a so-called central bank digital currency (CBDC) that aims to replace some of the cash in circulation.

Real world trials are already underway in the world’s second-largest economy. Here’s what we know so far about the digital yuan or its official name — the Digital Currency Electronic Payment (DCEP).

What is the digital yuan?

It’s effectively a way for the central bank to digitalize bank notes and coins in circulation. The Chinese market is already very advanced in cashless payments. The digital yuan would be a way to speed that process up.

It will be legal tender in China and no interest will be paid on it.

“The use of cash is decreasing. Eventually cash will be replaced by something in digital format. That is one of the big drivers behind this,” Yan Xiao, project lead for digital trade at the World Economic Forum, told CNBC.

Why is it being introduced?

The PBOC sees a number of other benefits to the digital yuan.

In a separate article, Fan outlined how a CBDC could make payments more efficient and improve the transmission of monetary policy. Fan also argues that a digital yuan could help with financial stability through a system of “controllable anonymity.” This is where the payments would be anonymous to some degree, but data analysis tools could help the central bank catch illegal activities.

Another reason behind the PBOC’s efforts could be to increase competition in the payments space and reduce systemic risk. China’s digital payments arena is dominated by Alipay, which is run by Alibaba affiliate Ant Group, as well as WeChat Pay, run by internet giant Tencent.

“The existing system is owned by private companies. Should Alipay or WeChat pay goes bankrupt, which is extremely unlikely, it creates systematic risk,” Linghao Bao, analyst at Trivium China, told CNBC. “The biggest reason for them (the PBOC) to do this is to level the playing field. Another reason is maybe create a new platform payments system that will increase efficiency.”

How will the digital yuan work?

There are two aspects to the question: distribution and then eventually how it will be spent.

Distribution will be conducted via a so-called two-tier system. That means the PBOC will distribute the digital yuan to commercial banks. The commercial banks will be responsible for getting the currency into the hands of consumers. This could include services to allow consumers to exchange their coins and cash for digital yuan.

China has already given away millions of dollars worth of the digital currency in real-world trials in a number of cities including Shenzhen, Chengdu and Suzhou. These involve the local government handing out a certain amount of yuan via a lottery. Users usually have to download a separate app to receive the currency. JD.com, one of China’s biggest e-commerce players, was involved in the trial and allowed customers to purchase items with the digital yuan.

At this point, it’s unclear how users might actually hold and spend digital yuan when it is rolled out nationwide. The most popular form of mobile payment in China relies on so-called quick response (QR) codes. Users can display this barcode in their Alipay or WeChat app in a store and the merchant will scan it.

WEF’s Xiao says it’s likely commercial banks could integrate similar functionality into their apps. And that Alipay and WeChat Pay could have a section of their apps dedicated to digital yuan. Meanwhile, smartphone makers could also create digital yuan wallets for their devices.

“It will be interesting to see how phone companies seize the opportunity to become payments player in the market,” Xiao said.

The PBOC’s Fan also said that commercial banks already have the infrastructure to distribute the digital yuan and it’s better that they do it rather than the central bank.

“To build a separate system would be a tremendous waste of such existing resources,” he said.

So is this designed to compete with the tech giants?

In some regard, it’s designed to increase competition with Alipay and WeChat Pay but not to totally replace them.

“The way I see it is digital yuan is not direct competitor to Alipay or WeChat Pay but a new platform that allows other players to come in and compete with WeChat and Alipay,” Trivium China’s Bao said. “Those could be commercial banks or other payment companies.”

The PBOC’s Fan also said the proposed two-tier model can help to “avert disintermediation in the financial sector” because the central bank will not be competing with the commercial banks.

Is the digital yuan like bitcoin?

The PBOC’s Fan said the digital yuan would have “controllable anonymity.” This would involve those operating digital yuan wallets to disclose transactions to the PBOC as the “sole third party.” Users would have a “loose coupling of accounts” which means that their current bank account may not necessarily be closely linked to their digital yuan account.

It could be based on a phone number, according to WEF’s Xiao.

The PBOC says agencies operating digital yuan services should “submit transaction data to the central bank via asynchronous transmission on a timely basis.” That would allow the PBOC to “keep track of necessary data” in order to crack down on money laundering and criminal offenses.

Some commentators have raised concerns however that the digital yuan could be used to increase surveillance on citizens.

Renminbi internationalization

China has been pushing the internationalization of the yuan and some commentators have seen the digital yuan as a way to do that.

But currently, the digital currency has a domestic focus and international use is “not the immediate priority,” according to Trivium China’s Bao.

But the PBOC has begun laying the ground work for digital currency to be used in cross-border transactions. Last month, the PBOC joined central banks from Thailand, United Arab Emirates and Hong Kong to explore a digital currency cross-border payment project together.

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US oil production won’t return to pre-pandemic levels: Occidental CEO

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The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas.

Angus Mordant | Reuters

Occidental CEO Vicki Hollub said Thursday that she doesn’t envision U.S. oil production returning to pre-pandemic highs.

“I do believe that most companies have committed to value growth, rather than production growth,” she said during a CNBC Evolve conversation with Brian Sullivan. “And so I do believe that that’s going to be part of the reason that oil production in the United States does not get back to 13 million barrels a day.”

She believes companies will focus on optimizing current operations and facilities, rather than seeking growth at all costs. But she added that oil demand is recovering faster-than-expected, driven primarily by China, India and the United States.

“The recovery looks more V-shaped than we had originally thought it would be,” she said. The company’s initial forecast had demand returning to pre-pandemic levels by the middle of 2022. Now, Hollub believes demand will return by the end of this year or the first few months of 2022.

“I do believe we’re headed for a much healthier supply and demand environment” she said.

Her comments came after West Texas International crude futures, the U.S. oil benchmark, jumped more than 4% on Thursday to trade as high as $64.86 per barrel, a level last seen in January 2020.

She expects crude prices will be “a little better than where they are today” if her demand forecast for next year is correct, but she does not expect prices to go up “excessively” other than the short spikes that can occur from time to time.

OPEC and its oil-producing allies on Thursday decided to keep production levels largely steady into April, with Saudi Arabia also announcing that it would extend its voluntary one million barrels per day production cut.

The group first implemented unprecedented supply cuts in 2020 in an effort to provide a floor as oil prices tumbled to historic lows.

The energy sector has rebounded this year and is the top-performing S&P group by a long shot, but stock prices continue to hover well below prior highs as the focus on ESG investing, among other things, weighs.

Hollub reiterated Thursday that the company is working toward net zero carbon oil production through its heavy investments into carbon capture.

“We need to change the narrative .. it’s not fossil fuels that’s really the problem, it’s the emissions,” she said. “What we have to do is we need to get everybody focused on instead of trying to kill fossil fuels, we need to get everybody’s attention on how do we use oil and gas reservoirs to our advantage.”

“How do we use that to lower emissions all around the world, and that’s exactly our goal. Our goal is to be the company that provides the solution,” she said.

Shares of Occidental have surged more than 70% this year. The stock is still negative over the last year, however.

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Fed Chairman Powell says economic reopening could cause inflation to pick up temporarily

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Federal Reserve Chairman Jerome Powell said Thursday that he expects some inflationary pressures in the time ahead but they likely won’t be enough to spur the central bank to hike interest rates.

“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” Powell said during a Wall Street Journal conference. “That could create some upward pressure on prices.”

Markets reacted negatively to Powell’s comments, with stocks sliding and Treasury yields jumping. Some investors and economists had been looking for him to address the recent surge in rates, with a possible nod toward adjusting the Fed’s asset purchase program.

The Fed currently is buying $120 billion a month in Treasurys and mortgage-backed securities. Recent market chatter has revolved around the central bank potentially implementing a new version of “Operation Twist,” in which it sells short-term notes and buys longer-dated bonds.

According to Fed officials, the central bank is far from any action to try to influence the long end of yields, despite expectations from economists and Wall Street strategists, CNBC’s Steve Liesman reported.

Powell instead reiterated past statements he has made on inflation in saying that he doesn’t expect the move up in prices to be long lasting or enough to change the Fed from its accommodative monetary policy. He did note that the rise in yields did catch his attention, as have improving economic conditions.

“There’s good reason to think that the outlook is becoming more positive at the margins,” he said.

The Fed likes inflation to run around 2%, a rate it believes signals a healthy economy and provides some room to cut interest rates during times of crisis. However, the rate has run below that for most of the past decade and inflation has been particularly weak during the coronavirus pandemic.

With the economy increasingly back on its feet, some price pressures are likely to emerge, said Powell, but he added they likely will be transitory and look higher because of “base effects,” or the difference against last year’s deeply depressed levels just as the Covid-19 crisis began.

Raising interest rates, he added, would require the economy to get back to full employment and inflation to hit a sustainable level above 2%. He doesn’t expect either to happen this year.

“There’s just a lot of ground to cover before we get to that,” he said. Even if the economy sees “transitory increases in inflation … I expect that we will be patient.”

The Fed has repeatedly said that it will keep short-term rates anchored near zero and continue its monthly bond-buying program until it sees not only a low unemployment rate but also a jobs recovery that is “inclusive” across income, gender and racial lines.

However, some economists have worried that the Fed’s commitment to low rates will foster inflation. Powell said he’s “very mindful” of the lessons from runaway inflation in the 1960s and ’70s, but believes this situation is different.

“We’re very mindful and I think it’s a constructive thing for people to point out potential risks. I always want to hear that,” he said. “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

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