Trail 148 — Is the Party over?
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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An eventful week after Biden stepped out of the 2024 election race and handed the baton to Harris, turning the US presidential election on its head and causing much re-thinking on the Markets outlook by investors. Within the week, Harris has effectively secured the Democratic nomination and has also amassed a sizeable war chest to campaign for the next 100 days. Her candidature brings two key pivotal issues to put the pressure back on Trump — focus moves to his age and mental acuity to lead the nation and on his legal issues, the likes of which Harris has prosecuted. It may not be enough to stop Trump from a re-election but will limit the Republicans from gaining control of both the House and Senate.
While that was on the political front, the economic side continues to slow down. Consumer sentiment has hit an 8-month low. Earnings reports were softer than expected, highlighting the dampening consumer sentiment further. Jobs data out next week, is expected to soften as well. Most importantly the AI craze got a reality check as investors are now realising that the huge investments made by the Tech majors may take time (or years to pay off).
This led to the S&P 500 sliding and VIX spiking. Cross asset volatility was not meaningfully higher, with interest rate and FX volatility continuing to remain subdued. The Dollar index was flat and gold too. Bitcoin continues to hold at the $67k handle. But most interestingly the US 2s10s spread is close to reversing its inversion.
This is the true recession signal as opposed to a curve inversion. My view is the wall of debt repricing in mid-2025 will inevitably bring about the recession. The question now is will it happen sooner. The market is still rallying with interest rate cuts expected in Sep. Cutting interest rates while inflation are still curtailing can mean only one thing — the party is over.
Markets Rethink Trades
The assumptions that have driven this year’s global financial markets are being rapidly rethought. In bond and currency markets, investors are racing to redeploy money amid mounting doubt over the outlook for the US economy, which has led to speculation that the Federal Reserve may end up cutting interest rates faster or deeper than planned. Helping to drive the shift: A weakening American consumer, which is showing up in a rash of disappointing corporate earnings.
Yen Surges
Signs of an inflection point for the yen are mounting amid growing expectations that the interest rate gap between Japan and the US is finally set to shrink. The currency rallied 1% on Thursday as it extended its sharp rebound over the last two weeks from its lowest level against the dollar since the 1980s. The advance has been spurred on by Japan’s apparent intervention to support the yen, a slashing of bets against the currency by hedge funds and the unwinding of global carry trades that have been weighing it down.
Fed Is About to Cut
Federal Reserve officials are on the verge of lowering borrowing costs within months, a move Chair Jerome Powell may signal in the coming week as the risks grow of an imperilling but moderating job market.
US central bankers, who’ve kept interest rates at a more than two-decade high for a full year, are widely expected to leave them there again when their two-day meeting ends on Wednesday. Instead, investors see Fed officials lowering their benchmark rate in September.
In The World of Business
This week Wiz, a $12 billion cloud security startup, decided to remain independent and pursue an IPO rather than continue acquisition talks with Google parent Alphabet, citing strong investor support and confidence in its growth potential.
Apple has reached a tentative three-year collective bargaining agreement with its first unionized store in Towson, Maryland, which includes a 10% pay increase and additional benefits for employees, pending approval in an August 6 vote.
OpenAI launched SearchGPT challenging Google’s search dominance by leveraging media partnerships and real-time capabilities to compete in the evolving AI search market.
Wiz IPO
Wiz, the $12 billion cloud security startup, has decided to remain independent and halt acquisition discussions with Google parent Alphabet, as revealed in an internal note sent to its 1,200 employees. CEO Assaf Rappaport stated the company’s focus remains on achieving a $1 billion annual recurring revenue and pursuing an IPO. The decision was backed by Wiz’s investors, who believe the startup is already positioned strongly for an IPO.
The choice to walk away from a potential deal with Alphabet, which would have been Google’s largest acquisition, was influenced by expected regulatory scrutiny and Wiz’s confidence in its own growth trajectory. The startup, with offices in New York and Tel Aviv, recently raised $1 billion in venture funding at a $12 billion valuation. They plan to use the capital to expand and pursue further acquisitions. Last December, Wiz made its first acquisition of developer-focused cloud platform Rafft, followed by the purchase of Gem Security for $350 million in April.
Apple Union
In a historic move, Apple has reached a tentative collective bargaining contract with the first unionized company store in the United States. Employees at the Towson, Maryland location, announced that it has secured a three-year deal that includes a 10% pay increase and additional benefits for the workers.
This agreement, pending approval from the store’s 85 employees and a vote scheduled for August 6, is a significant victory for the union. The deal follows a year of negotiations and a strike authorization by workers in May, highlighting the growing momentum of union efforts within major corporations. While many unions have faced challenges securing contracts, the tentative agreement with Apple marks a pivotal step in advancing workers’ rights and benefits within the tech giant.
SearchGPT
In a bold move to challenge Google’s search dominance, OpenAI launched its prototype AI search engine, SearchGPT, on Thursday. Designed to deliver “fast and timely answers with clear and relevant sources,” this new entry into the AI search market is currently available to 10,000 users, signalling the start of an intense battle for AI search supremacy.
The AI search landscape has been tumultuous. Microsoft’s Bing, powered by OpenAI’s ChatGPT, and Google’s Gemini have struggled with accuracy and user trust, with Google significantly dialling back its AI-driven responses due to widespread criticism. Meanwhile, startups like Perplexity face legal challenges over content scraping, despite their ambitious goals. OpenAI’s strategy of partnering with media companies for content licensing sets it apart by respecting and valuing journalism and publishers.
Google’s stronghold on the global search market remains unshaken, holding over 90% share, while competitors like Microsoft and Perplexity lag far behind. For OpenAI to make significant inroads, it must navigate these competitive trenches meticulously, leveraging its innovative partnerships and real-time capabilities to gain user trust and market share.
Until next week.
