Trail 138 — Breathing Room
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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This week we had the U.S. consumer prices data release, which increased less than expected in April. This put further wind in the sails of the bulls. Mr. Markets cheered on as inflation resumed its downward trend at the start of the second quarter. Coupled with a separate report showing weak retail sales in April, boosting expectations for a September interest rate cut, ending with two cuts by year end. It capped a big week for global stock markets. Not only did the Dow Jones close above the 40,000 marks for the first time, the S&P 500 and the NASDAQ also reached record highs.
Globally, there are many more such benchmarks that are now at or near lifetime highs. With the mood so bullish, VIX closed Friday at the lowest level since November 2019. Aside from an April pop, the VIX has been muted for much of 2024 as shares climbed. So have interest rate and FX options implied volatility measures. Treasury yields and US dollar slipped, boosting the appeal of Gold which also surged to a lifetime high vs the dollar.
Next week we have NVIDIA results which will set the markets up for the next leg up, should they continue to surpass expectations as they have done consistently for the last three quarters. Focus will then shift back to the economic data in the run up to the Feds meeting on the 12th Jun. In my view, the CPI coming in softer is not a game changer for the Fed in its battle against inflation but does give it more breathing room. It can manage the pressure of cutting rates in advance of the US elections without much political controversy should the inflation print continue to subside.
Elsewhere, we saw China offer support to its ailing real estate sector in a very meaningful way, with the PBOC setting up a $300bn yuan facility to support affordable housing. This was alongside the start of a 1 trillion yuan ($138 billion) sale of long-term special government bonds which can be used for any purpose. This won’t add to the fiscal deficit but will be driven by balance sheet expansion, adding China to the mix of money printing economies which is great for hard assets like gold and Bitcoin. Just don’t sit on cash.
Record-Hitting Spree
From New York to London to Tokyo, if there’s one similarity among the world’s equity markets it’s this: record highs.
Of the world’s 20 largest stock markets, 14 have hit all-time highs recently. The MSCI ACWI Index, which tracks developed and emerging markets, has been on a record-breaking run, setting another new high on Friday. In the US, the S&P 500 and NASDAQ 100 indexes hit records this week, while the Dow Jones Industrial Average crossed 40,000 for the first time. Meanwhile, the biggest bourses in Europe, Canada, Brazil, India, Japan and Australia are currently at or near their peaks.
US Inflation Eases
A measure of underlying US inflation cooled in April for the first time in six months, a small step in the right direction for Federal Reserve officials looking to start cutting interest rates this year. Other data like retail sales, new home construction and manufacturing came in softer than expected, adding evidence that demand is cooling in the world’s largest economy.
China’s Broad Rescue Package
Xi Jinping’s government announced its most forceful attempt yet to rescue the beleaguered Chinese property market, relaxing mortgage rules and urging local governments to buy unsold homes as authorities become increasingly concerned about the sector’s drag on economic growth. The support package also includes lower down-payment requirements for home buyers and 300 billion ($42 billion) of central bank funding to help government-backed firms buy excess inventory from developers. Those properties would then be converted into affordable housing.
In The World of Business
This week, the Justice Department has arrested three individuals involved in a complex scheme where North Korean IT workers use stolen American identities to secure remote jobs at U.S. companies, generating significant revenue for the North Korea’s government. Emirates Group reported a 71% increase in annual profit, rewarding employees with significant bonuses and forecasting strong future demand despite industry challenges. And YouTube now accounts for 10% of Americans’ TV viewing time, surpassing all streaming services and challenging traditional TV networks, which face declining revenues and viewership.
Identity Theft Scheme
The Justice Department has arrested three individuals involved in a sophisticated identity theft scheme that generates significant revenue for North Korea, including its weapons program. This operation involves North Korean IT workers using stolen American identities to secure remote jobs with U.S.-based Fortune 500 companies, gaining access to sensitive corporate data and earning substantial pay checks. The Justice Department is not only prosecuting those directly involved but also partnering with other countries and warning private-sector companies to remain vigilant in their hiring practices to protect national security.
The conspiracy has impacted over 300 companies, generating more than $6.8 million for North Korean workers based in countries like China and Russia. Among those arrested are Christina Marie Chapman from Arizona, who allegedly facilitated the scheme by running “laptop farms” where U.S. companies unknowingly sent computers and pay checks to overseas workers, and two other individuals who helped create fake job search accounts and fraudulently obtained jobs at U.S. companies. The State Department has offered rewards for information on North Korean IT workers involved in the scheme, while the FBI has issued a public service announcement to help companies guard against such fraudulent activities.
Emirates Group Soars
Despite widespread turmoil in the airline industry, Emirates and Dubai National Air Travel Agency (dnata) have reported significant financial success. The Emirates Group announced a 71% increase in annual profit, amounting to $5 billion, with $4.7 billion generated by Emirates alone, marking a 63% year-over-year jump. As a result, employees are set to receive a substantial bonus worth 20 weeks of their salaries, reflecting the company’s “best-ever financial performance” and a workforce growth of 10% to over 112,406 employees.
Sheikh Ahmed bin Saeed Al Maktoum, chairman and CEO of Emirates, expressed optimism about the business outlook, anticipating strong customer demand for air travel despite potential challenges like oil price fluctuations and socio-political changes. Emirates has not only recovered from pandemic-related losses but also increased airline capacity by 20%, benefiting from a surge in high-end travel demand, which aligns with the airline’s luxury service model. This robust performance contrasts with other airlines struggling with delayed Boeing jet deliveries and staffing issues, highlighting Emirates’ resilience and profitability in a challenging market.
YouTube’s Growing Dominance
Television networks face increasing competition not just from streaming services but also from YouTube, which now accounts for roughly 10% of Americans’ television viewing time, according to Nielsen. This shift in viewer habits has weakened the traditional television market, causing network and cable revenues to slow significantly; at one point, Disney even considered selling off ABC and its other linear holdings.
While broadcast programming still occupies 22% of monthly TV viewing, YouTube outperforms all streaming services, with only Netflix coming close at 7.6%. YouTube’s expanded content offerings, including full-length movies, live sports, and entertainment from influencers like MrBeast, have made it a formidable competitor, especially among younger audiences.
The rise of YouTube has notably impacted traditional media giants, with Disney being the only single media company surpassing YouTube’s TV audience share. NBCUniversal and Paramount, which previously outperformed YouTube, have since fallen behind, reflecting a significant change in the TV landscape.
Until next week.
