Trail 120 — Steadying
Written by Aashish Singh
Edited by Sylvia Lo
After a wobbly start, risk on / bullish conviction amongst investors resumed, with the S&P 500 closing out a 1.8% weekly gain. Cross asset volatility and treasury yields dropped. This was amongst mixed takeaways from the oil market and US economic data out this week.
U.S. consumer prices rose more than expected in December, increasing by 0.3% month-on-month and 3.4% year-on-year, driven in part by rising rents. The Producer Price Index (PPI) however for final demand in the US rose 1% on a yearly basis in December, lower than the market expectation of 1.3%. In a separate report, the Labor Department said initial claims for state unemployment benefits fell to a seasonally adjusted 202k (vs 210k forecast) this week.
Treasuries rallied with the market discounting the CPI increase and focusing on the low PPI reading to bolster rate cut bets. Outside of economic data, US/UK strikes on Houthis was a further escalation on geopolitical tensions in the Middle East. Oil reacted and erased losses from earlier in the week when sharp price cuts by top exporter Saudi Arabia and a new build in US crude stockpiles spurred supply worries. Gold and the Dollar also ended the week flat amidst mixed data.
Lastly but notably, Taiwan re-elected the DPP for an unprecedented third term in a widely followed election — a result that will continue to keep tensions escalated in the region. Multiple fault lines have emerged (Ukraine Russia, middle east tensions, Taiwan strait, unusually high stock bond correlations) amidst a sizzling Q4 rally. Mr. Market has chosen, yet again, to ignore these.
Bond Traders Reload Fed-Cut Wagers
Treasury two-year yields dropped to the lowest level since May as a surprise decline in producer prices reinforced bets on Federal Reserve rate cuts this year. Traders are pricing in an 80% chance of a Fed reduction in March — up from a little over 50% a week ago.
Stocks and Bonds in Tandem
At the heart of the matter for equities are valuations, whose expansion last year has left them especially vulnerable to unforeseen outcomes in the path of Fed policy. Wall Street bulls who powered a massive rally to close out 2023 have little room for error should inflation prevent Powell from easing policy significantly in the coming months.
“Without bond yields going down a large chunk of the market has a significant valuation headwind,” said Andrew Lapthorne, SocGen’s head of quantitative research. “We have a lot of market capitalisation that is expensive, and this is creating a positive correlation to bonds.”
Taiwan Elects US-Friendly President
Taiwan elected current vice president Lai Ching-teas, leader of the global chip hub at the centre of US-China tensions, putting in power a man Beijing has branded an “instigator of war.”
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Lai, of the ruling Democratic Progressive Party, sealed victory in the island’s most hotly contested election in decades with 40.1% of the counted vote — the lowest winning percentage since another three-way race in 2000.
In The World of Business
Saudi Expansion
Major technology corporations, including Amazon, Google, and Microsoft, are increasing their presence in Saudi Arabia after receiving licenses to establish regional headquarters in Riyadh. This move follows the Saudi government’s announcement in February 2021 that it would cease awarding contracts to companies without a substantial regional presence. The government aims to curb “economic leakage,” referring to state spending that benefits firms without a significant local footprint.
To attract global investment, Saudi Arabia is working to become a tourism and commercial hub, competing with Dubai. While Dubai has been the preferred business hub in the Middle East due to lifestyle, low taxation, and connectivity, Saudi Arabia’s economic plans are reshaping multinational companies’ operations in the region. Incentives offered include tax breaks and exemptions from hiring rules for Saudis. Some firms, including Bechtel, PwC, and PepsiCo, have already declared Riyadh as their regional headquarters.
Bullish Bitcoin
In a significant move, the U.S. Securities and Exchange Commission (SEC) has granted approval to 11 companies to package Bitcoin as shares, allowing investors to buy stock in the cryptocurrency. This decision comes after years of scepticism and represents a shift in mainstream acceptance of Bitcoin. Companies such as BlackRock and Fidelity are expected to use these ETFs to distribute Bitcoin to their clients, potentially integrating it into retail investors’ pension and retirement funds.
The long-term case for Bitcoin is believed to be bullish, with financial giants entering the space. However, the short-term market reaction remains uncertain. While the market has already factored in the price jump from the ETF approval, the actual demand for new Bitcoin ETF shares and the impact of the upcoming Bitcoin “halving” are points of interest. Looking ahead, attention is turning to the potential approval of an Ethereum ETF and whether other cryptocurrencies like XRP and Dogecoin will also gain legitimacy through ETFs.
Betting Payoff
Denise Coates, the CEO and founder of Bet365, based in Stoke-on-Trent, has emerged as Britain’s wealthiest woman, earning a staggering £220.6 million ($280 million) in 2023, according to recently disclosed company accounts. Despite the sports and gaming division operating at a loss of over £60 million ($76 million), Coates’s paycheck saw an increase from the previous year’s nine-figure sum of $271.7 million.
As the majority shareholder with a 58.3% stake, Coates also received £100 million ($127.4 million) in dividends, potentially bringing her total compensation to around £270 million ($344 million). Over the past decade, Coates has reportedly received approximately £1.5 billion in salary and dividends.
This substantial earnings figure places Coates ahead of the British Prime Minister Rishi Sunak, whose maximum annual salary is £198,661 ($252,700), and some notable Big Tech CEOs. For instance, Sundar Pichai, Google’s CEO, had a recent compensation package of $226 million, while Mark Zuckerberg, Meta’s CEO, earns a symbolic $1 in salary.
Despite her significant earnings, Bloomberg predicts a potential 40% drop in Coates’s fortune to around $4 billion due to Bet365’s recent losses. This raises questions about the sustainability of Coates’s position as one of the highest earners in comparison to her Silicon Valley counterparts.
Until next week.
Financial markets are fascinating, and I see them amalgamating the subjective and objective worlds. They are constantly evolving, follow no predetermined path and much like humans and society in general, their behaviour at most times is irrational. Yet, their day to day functioning is seemingly driven by facts and reasoning. They are filled with plenty of stories of triumph, tragedy and comedy. Every day they are thoroughly analysed and tried to make sense of. Yet, their future steps or directions cannot be predicted based on history. They follow a random walk. Therein lies their beauty.
If enjoying making sense of their randomness is as appealing to you as it is to me, each week, I briefly recap a few stories that captured my interest, with embedded source links available for those who wish to read more.
