Trail 143 — Bubbling On
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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Another leg up by the S&P 500 this week to close just shy of the 5,500 handle. It seems one cannot revise the year end target for the Index fast enough, with calls now in for 6,000 and even 6,300. The index is already trading quite expensively at a P/E of 25 versus a long term average of 20. Calls from “bubble” to “retail mania” are starting to pour out, but the AI Frenzy is driving tech stocks ever higher. Three stocks — Nvidia, Microsoft and Apple are valued above $3 trillion and seem set to go from strength to strength. The bullishness pared back ever so slightly towards the end of the week, but at this stage its more like buyers fatigue.
US treasury yields also closed the week higher, supporting the dollar rally which has now strengthened versus its G10 peers for a 5th consecutive week. This is hurting every country that imports in Dollars or is servicing Dollar denominated debt which is why we have seen several central banks intervene to stem the decline of their currencies. The US Treasury department in its half yearly review stopped short of labelling any trade partner as a currency manipulator but added Japan to its “monitoring list” for foreign-exchange practices. This puts further pressure on the currencies as it will limit the intervention to a degree going forwards.
Gold prices were flat for the week amidst the Dollars strength. Oil prices reached seven-week highs mid week, driven by optimism about summer demand and concerns over escalating conflicts, despite an industry report indicating an unexpected rise in U.S. crude inventories. Cross asset volatility remains subdued. Bitcoin continued its decline over the last month — a trend that maybe a foreboding for overall risk sentiment. It is the only outlier in what is otherwise continued bullish sentiment.
King Dollar
A key gauge of the Dollar strengthened for a fifth week as the timing for the Federal Reserve’s first interest-rate cut remains cloudy. The Bloomberg Dollar Spot Index edged 0.1% higher in the past five days, marking the longest stretch of weekly advances since February. The gauge ended the day at the highest level on a closing basis since early November.
Three Trillion
Nvidia Corp.’s run as the world’s most valuable company didn’t last long. Shares of the semiconductor giant have fallen 6.7% in the last two days, erasing over $220 billion in market capitalisation and dragging the company from its place as the world’s top stock. Nvidia’s market cap was about $3.1 trillion on Friday, lower than Apple Inc. at $3.2 trillion and Microsoft Corp. at $3.3 trillion.
Tightening credit spreads
Some money managers that buy junk bonds have been pouring money into investment-grade notes instead because the yields can be almost as high now.
The difference between yields on the highest-rated junk debt, in the BB tier, and the weakest investment-grade debt, with a BBB rating, has narrowed to relatively thin levels as many investors grow increasingly optimistic about the economic outlook and buy riskier securities. It’s the latest sign of how Federal Reserve rate hikes that started in 2022 aren’t cooling down some markets.
Now some money managers are taking the opposite side of the trade, and buying high-grade bonds instead: at about 1 percentage point as of Thursday, the gap between average BB and BBB yields is narrow compared with its peak of more than 4 percentage points during the pandemic. The difference has been trending downward since October.
In The World of Business
This week, Tesla shareholders approved Elon Musk’s $44.9 billion pay package and the company’s headquarters move to Texas, marking a significant victory for Musk despite prior legal challenges and institutional investor concerns.
Islamic finance, which prohibits interest and focuses on asset-based transactions, is experiencing significant growth in Southeast Asia, driven largley by innovative and ethical product offerings. Institutions like Maybank Islamic are leading the expansion.
Shopify, originally focused on empowering small businesses, is now targeting larger retailers like Mattel and Steve Madden, while also navigating competition and collaboration with giants like Salesforce, Adobe, and Amazon.
Musk’s Pay Package
In a pivotal move, Tesla shareholders have approved CEO Elon Musk’s reinstated pay package, initially nullified by a Delaware judge, and backed the company’s relocation of its corporate headquarters from Delaware to Texas. The decisions were made at Tesla’s annual meeting, marking a significant victory for Musk. Following the announcement in Austin, Musk celebrated the outcome, emphasising the start of a transformative era for Tesla.
The pay package, valued at approximately $44.9 billion, was originally thrown out in January by Delaware Chancellor Kathaleen St. Jude McCormick, who ruled that Tesla had misled shareholders during its approval in 2018. Despite institutional investors’ concerns over its magnitude and potential shareholder dilution, Tesla’s aggressive lobbying helped secure the necessary votes. The package aims to ensure Musk’s continued leadership, which is crucial as Tesla ventures further into AI and robotics.
Islamic Finance in Southeast Asia
Conventional finance, characterised by loans, mortgages, and interest payments, is the lifeblood of modern business. Yet, in the Muslim world, where certain interpretations of Islamic law prohibit interest, banks are innovating with alternative financial products. This shift is gaining momentum in Southeast Asia, not just among practising Muslims but also within the broader market.
Dato Muzaffar Hisham, CEO of Maybank Islamic, is spearheading this transformation. While reinforcing their stronghold in Malaysia, Maybank Islamic is eyeing significant expansion in Indonesia, the country with the largest Muslim population globally. Islamic banking already accounts for 28% of Maybank Group’s pre-tax profits, making it the largest Islamic banking operation in the Asia Pacific and the fifth largest worldwide.
The appeal of Islamic finance extends beyond religious beliefs. It offers a compelling alternative to conventional banking by focusing on tangible assets and profit-sharing rather than interest. This model has proven resilient, particularly during financial crises, and is attracting a diverse clientele, including non-Muslims who are drawn by the robust returns and ethical investment opportunities.
Shopify’s Next Frontier
Since its 2006 launch, Shopify has steadily built an $83 billion software empire by “arming the rebels” — mom-and-pop shops and digital-native consumer brands selling everything from floral arrangements to workout clothes online. But the e-commerce giant’s next big opportunity might be in empowering some of retail’s larger incumbents, such as global toy brand Mattel and shoe retailer Steve Madden. This strategic shift represents a substantial portion of the nearly $850 billion market opportunity that Shopify stands to capture.
According to Wall Street tech analyst Mark Mahaney and his team at Evercore ISI, Shopify’s expansion into the enterprise market is a key driver behind their upgraded “outperform” rating for the stock, with a price target of $75 per share (up from around $64). Shopify’s foray into the enterprise space puts it in direct competition with software giants like Salesforce and Adobe. Meanwhile, Shopify’s complex relationship with Amazon continues to evolve. Shopify merchants can integrate Amazon’s “Buy with Prime” feature, and as Shopify seeks bigger merchants while Amazon’s AWS aims to sell AI and cloud products to large consumer brands, a new competitive landscape is emerging. The stage is set for an intriguing showdown between these e-commerce titans.
Until next week.
