Last week, investors breathed a sigh of relief as the US managed to avoid default. However, Democrats had to make significant concessions to Republicans for this to happen. As a result, global markets and American stock futures resumed their growth. The analysis of the situation became the number one topic, not only in American media.
On the markets, everything is calm. China's downturn is dragging commodity prices down
The New York Times noted that despite the dramatic events in Washington, the markets remained calm. The S&P 500 index slightly rose in May, indicating that investors never priced in a doomsday default scenario. It is unlike the frenzied trade that shook the market during the last major debt ceiling stand-off in 2011 when stocks and the dollar plummeted. Instead, shares of technology companies, fuelled by investor enthusiasm for artificial intelligence, took the lead. The FANG+ index, which includes stocks of AI-related companies such as Nvidia, Meta, and Google, rose by almost 15%. Meanwhile, commodity prices fell due to concerns that the global economy, especially China, is heading towards a downturn. Prices of West Texas Intermediate and Brent crude oil have been declining over the past five months.
In this regard, the Wall Street Journal points out that hedge funds and other speculative investors have made significant bets on the decline of the S&P 500, which is the most bearish position since 2007. At the same time, they are preparing for a rally in the Nasdaq-100 technology index, with net bullish bets in recent weeks reaching their highest levels since the end of last year. "Shares of large technology companies have some of the highest short positions in the market. Last month, investors added $3.57 billion to their short positions on Tesla, $2.5 billion on Nvidia, and $7.26 billion on Facebook's parent company, Meta Platforms. All of them increased in May, resulting in short sellers losing over $7 billion," the outlet reports.
The New York Times provides a broader analysis of the situation in China, where shares of local companies being traded in Hong Kong that had soared after the nearly three-year pause due to the pandemic, briefly entered bear territory last week, losing over 20% of their value from the January peak. Mainland Chinese stocks have also been in the negative for the year.
While Western countries are grappling with inflation, China is facing the opposite and potentially more harmful force of deflation or consistently low prices that drag down the economy, reducing company profits and wages, as mentioned by the NYT. Moreover, recent decisions by the Chinese Communist Party have negatively impacted sentiment in the stock market. Repressions on consulting and advisory firms with foreign ties have frightened some foreign companies and investors, once again questioning the viability of international companies doing business in China. However, some observers argue that investors simply underestimated China's economic recovery – an unprecedented event in history. And they missed the shift in how the government prioritised national security over economic interests.
The Economist also dedicated an article to the theme of China's long-term economic slowdown. "After the initial release of pent-up demand, economic data for April fell short of expectations. In response China’s stocks faltered, yields on government bonds fell and the currency declined. The country’s trade-weighted exchange rate is now as weak as it was in November, when officials were locking down cities," the outlet writes. However, it does not provide specific assessments of whether the Chinese government will be able to cope with the challenges.
Turkey is facing challenging times, while the United States is recovering
Things are not looking good in Turkey, where Erdoğan is forming a new government. The Economist highlights investors' concerns about his election victory, which has deepened the country's economic problems. Over the past two weeks, the lira has depreciated by 5%, and the central bank's net foreign currency reserves are currently in the negative, as they have been drained due to the outflow of depositors and investors. The persistence of low interest rates and high inflation indicates that the real interest rate in Turkey has been deeply negative for some time.
The outlet doubts that Erdoğan will change the situation, despite the fact that it allows speculators to enrich themselves by borrowing in lira and investing in stable assets such as real estate or other currencies, which further devalues the lira and accelerates inflation. "Mr. Erdoğan has been able to keep the lira afloat through one-off currency deals with friends, including russia and Saudi Arabia. However, in the autumn, he may have to abandon his promise to continue the policy of low rates… Warm weather and friendly services do not last forever," the outlet notes.
Other problems in America. The Wall Street Journal openly wonders why the US is still far from a recession. Employers are actively hiring workers, consumers are freely spending money, the stock market is recovering, and the housing market appears to be stabilising – the latest evidence that the efforts of the Federal Reserve have not led to a significant weakening of the economy, according to the outlet. "Government policies in response to the pandemic – low interest rates and trillions of dollars in financial aid – have left consumers and businesses with a lot of money and cheap debt. The same inflation that worries the Federal Reserve leads to wage and income growth, which stimulates spending," the WSJ states.
However, leading economist David Rosenberg is convinced that a recession is inevitable. "Don't believe the hype! This economy is a dead man walking," Business Insider quotes his tweet. According to Rosenberg, the United States is heading for a 'hard landing' in the second half of the year.
OPEC+: Long, closed, but productive. Only Saudi Arabia will limit oil production
The entire weekend, business media's attention was focused on the oil negotiations of OPEC+, to which journalists from Reuters and Bloomberg were not allowed. This is the first instance where OPEC has excluded news organisations in decades of wars, price spikes, and crashes. Eventually, sources within the delegations reported that production would indeed be reduced. However, it will be done solely by Saudi Arabia, which announced an additional voluntary monthly cut of 1 million barrels per day starting from July of this year, and it may be extended.
Riyadh seeks to have the OPEC+ alliance once again reduce production to support oil prices, which have fallen to $70 per barrel in recent weeks from over $120 a year ago. In its statement, OPEC+ also announced that the total oil production will be limited to 40.463 million barrels per day from January to December 2024.
As reported by the Financial Times, discussions among members continued until late at night following the meeting of key OPEC countries on Saturday, June 3. On Sunday, broader OPEC+ negotiations took place with the participation of russia, Kazakhstan, and Mexico. A source close to the Saudi delegation revealed that most issues were resolved before the Sunday meeting, although approximately two hours after the start of the negotiations, Angola's Minister of Mineral Resources, Petroleum and Gas Diamantino Pedro Azevedo left the OPEC headquarters without giving any explanation. OPEC Secretary General Haitham al-Ghais, the official leader of the group, accompanied Azevedo to his ministerial car and bid him farewell.
A railway tragedy in India also shook the world where on Friday, June 2, 15 coaches of two passenger trains derailed, resulting in the death of over 280 passengers and hundreds of injuries. This is one of the deadliest rail accidents in the country in recent decades. It occurred at a time when Prime Minister Narendra Modi focused on modernising India's railway network of the British colonial era. India is the world's most populous country with 1.42 billion inhabitants, according to Time.
Despite the government's efforts to enhance safety on the railways, several hundred accidents occur every year on the largest railway network under one management. This particular accident seems to have been caused by an error in the electronic signalling system.
The Nvidia Phenomenon. Currently, the future looks promising, but…
Most media reported about the frenzy surrounding the American company Nvidia last week, which began last year after the release of ChatGPT and continues unabated. Since the beginning of the year, Nvidia's stock price, which manufactures specialised AI microchips, has more than doubled. Recently, Nvidia joined the exclusive trillion-dollar market capitalisation club, according to Time. Its shares rose 5% in Tuesday's trading, surpassing the $408 mark per share. Since its initial public offering in 1999, the shares have grown at an annual rate of approximately 33%, compared to the S&P 500 index's average annual growth of 7% over the same period.
However, The Economist believes that Nvidia's prolonged dominance is not guaranteed. Competition is growing from startups and major chip manufacturers such as AMD and Intel. Amazon and Alphabet's cloud computing divisions are developing their own chips for artificial intelligence. Another risk comes from governments: regulators, concerned about the dangers AI poses to society and national security, are seeking ways to control this technology. Last year, the United States restricted the sale of high-performance chips and tools for their production to certain Chinese firms, leading to a decline in Nvidia's sales in the third quarter.
Nevertheless, for now, the future looks bright. Even if AI mania subsides, the technology will be more useful than cryptocurrency, another area in which Nvidia has profited, the outlet notes. Regulation may slow down growth, but it is unlikely to kill it. And none of Nvidia's competitors currently offer AI products that combine software, chips, and a network. "Nvidia’s chief advantage lies in its ability to package these up and create an attractive ecosystem. That sounds a lot like Microsoft and Apple," the outlet concludes.
This view is countered by Business Insider, which, citing macroeconomic forecasting consulting company TS Lombard, predicts that the AI boom could turn into 'absolute madness' if a stock market bubble forms. In its opinion, AI has exhibited all the signs of a potential bubble in the past few weeks, but the stock market is not currently in one.
Meanwhile, Twitter continues to plummet into an economic abyss, and that is cause for celebration. Today it is worth only a third of what Elon Musk paid for it, according to Fidelity, which recently lowered the value of its stake in the company. Time notes that with Musk's arrival, Twitter has faced financial difficulties. After burdening itself with $13 billion in debt, unstable decision-making and content moderation issues have led to a 50% decline in advertising revenue.
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