Free markets unless it’s bad for US

Thoughts of the Day

Elon Musk, in Tesla’s disappointing earnings call, warned that Chinese EV companies, if unhindered by trade barriers, could outperform and potentially overshadow global competitors. The erosion of Western carmakers’ profits may lead to increased calls for restrictions on Chinese car exports because clearly, free markets are only ever supposed to be free if US and its allies have an edge.

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Day Ahead

The US PCE Price Index is expected to show that prices rose +2.6% Year-on-Year in December as it did in November. 

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What Happened Yesterday

Market Movements as of New York Close 25 Jan 24
  • The advanced estimate for GDP growth showed that the US economy grew at an annualised rate of 3.3% in the Q4 of 2023, surpassing expectations of a 2% increase. This follows a 4.9% growth rate in the third quarter. The US personal consumption expenditure (PCE)price index saw a growth of 1.7% quarter-on-quarter, slowing down from a 2.6% increase in the third quarter. It was the weakest growth since the Q2 of 2020.
  • The Initial Jobless Claims for the week ending on Jan 20 came in at 214k (vs 200k expected) down from 189k (revised from 187k) the week before. The Continuing Jobless Claims for the week ending on Jan 13 rose to 1,833k (vs 1,828k expected) from 1,806k the week prior. 
  • Despite the stronger than expected GDP growth data (which decreased the likelihood of the Fed cutting interest rates), the subdued price increases (as shown by the PCE price changes) and the weaker jobs data (higher unemployment claims) caused bond yields to fall on the day. As a result, risk sentiment was boosted because the economy remains strong, but inflation seems to be subdued (goldilocks situation). 
  • The European Central Bank (ECB) decided to keep its interest rates unchanged at 4.5%. This decision is part of their commitment to keep rates at restrictive levels as long as necessary to achieve their 2% inflation target promptly. This stance is maintained despite looming recession fears and signs of easing inflationary pressures. ECB President Lagarde, in a press conference, emphasised that all officials agreed that it was too early to consider cutting interest rates. Despite the hawkish tone by the ECB, the EURUSD failed to react due to the stronger than expected US GDP.
  • The US Treasury Yield curve inversion narrowed to 0.14% as the US 2-year bond yield fell -0.06% to 4.28% while the 10-year yield slipped -0.04% to 4.14%. 
  • The US stock futures were almost flat through the Asian and London trading session until the release of the US GDP data which sent the S&P 500 futures up by +0.29%. The S&P 500 futures were up +0.40% just before the New York session began.
  • The US stock market opened higher from Wednesday. It then remained at elevated levels due to the improved sentiment from the stronger than expected GDP print. Consequently, stock markets powered higher. However, weakness in Tesla (-12.1% due to yesterday’s bad earnings report) weighed on tech stocks and Nasdaq backed off from the day’s highs as the trading session wore on. Consequently, the S&P 500 rose +0.53% on the day (high: +0.61%, low: +0.02%), the Dow Jones spiked +0.64% (high: +0.66%, low: -0.03%) while the Nasdaq just inched higher by +0.10% (high: +0.75%, low: -0.39%). 
  • IBM (Nasdaq: ASML) rose +9.49% on the day after the company reported a rosy outlook on its revenue fuelled by strong demand for its AI services.
  • Intel (Nasdaq: INTC) fell -10.40% in after market trading as the chipmaker issued an outlook for the first quarter of 2024 that failed to meet analysts forecasts (Core businesses — PC and server chips — would be at the low end of the company’s seasonal range in the current quarter. Overall sales is also expected to take a hit because of weakness in subsidiaries including Mobileye and its programmable chip unit.) The Nasdaq futures fell -0.66% in after hours trading as a result.
  • The crypto market continues to suffer as net inflows for Bitcoin ETFs have started to slow. (https://www.coindesk.com/markets/2024/01/25/bitcoin-etf-flows-show-negative-trend-for-first-time-since-launch/)
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Headlines & Market Impact

Elon Musk says Chinese EV makers will ‘pretty much demolish’ most competitors without trade barriers

Notable Snippet: Elon Musk said Chinese electric automakers will find “significant” success outside of China, even as his firm Tesla faces intense competition from these same companies.

“The Chinese car companies are the most competitive car companies in the world. So, I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established,” Musk said on Tesla’s earnings call on Wednesday.

“Frankly, I think, if there are no trade barriers established, they will pretty much demolish most other companies in the world.”

BYD, which sold more battery-powered cars than Tesla in the fourth quarter, has expanded sales to markets in Europe, the Middle East and Southeast Asia. Chinese start-ups including Nio and Xpeng, have also launched their cars in Europe.

Chinese EV makers showed off their wares at one of Europe’s biggest auto shows last year. At the time, analysts said that these companies could pose a challenge to traditional auto firms.

It’s not the first time Musk has heaped praise on Chinese EV makers. Last year, the billionaire called Chinese EV firms “the most competitive in the world” and said they are likely to be among the world’s top auto companies.

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Bruised by stock market, Chinese rush into banned bitcoin

Notable Snippet: Dylan Run, a Shanghai-based finance sector executive, started moving a bit of his money into cryptocurrencies in early 2023, when he realised that the Chinese economy and its stock markets were going downhill.

Crypto trading and mining has been banned in China since 2021. Run used bank cards issued by small rural commercial banks to buy cryptocurrencies through grey-market dealers, and capped each transaction at 50,000 yuan ($6,978) to escape scrutiny. “Bitcoin is a safe haven, like gold,” says Run.

He now owns roughly 1 million yuan worth of cryptocurrencies, accounting for half of his investment portfolio, compared with just 40% in Chinese equities. His crypto investments are up 45%. China’s stock market, meanwhile, has been sinking for 3 years.

Like Run, more and more Chinese investors are using creative ways to own bitcoin and other crypto assets that they believe are safer than investing in crumbling stock and property markets at home.

They operate in a grey area. While cryptocurrency is banned in mainland China and there are strict controls on capital movement across the border, people are still able to trade tokens such as bitcoin on crypto exchanges such as OKX and Binance, or through other over-the-counter channels.

Mainland investors can also open overseas bank accounts to buy crypto assets. After Hong Kong’s open endorsement of digital assets last year, Chinese citizens are also using their $50,000 annual forex purchase quotas to move money into cryptocurrency accounts in the territory. Under Chinese rules, the money can only be used for purposes such as overseas travel or education.

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Uranium prices could rally past 16-year highs as the world’s largest producer runs short

Notable Snippet: The uranium renaissance has a slight hitch: the world’s largest producer of the yellowcake is staring at a production snag over the next two years.

And that’s about to send uranium prices, already at 16-year highs, on another rally.

Kazakh mining company Kazatomprom recently cautioned that it is likely to fall short of production targets through 2025 due to construction delays and “challenges related to the availability of sulfuric acid.” Sulfuric acid is critical in the extraction process as it is used to leach and recover uranium from raw ore.

Kazatomprom is the world’s leading uranium miner, accounting for over one-fifth of the world’s production. Kazakhstan also produces 43% of the world’s uranium supply, the largest slice of the global market for the heavy metal. Kazatomprom’s announcement comes as other major producers struggle. Canada-based Cameco has flagged lower production, while France-owned Orano has shut its Niger operation.

“We’re coming from a decade of under supply,” said Guy Keller, portfolio manager at investment and advisory firm Tribeca. He added that the deficit will continue as “we’re in the middle of the biggest reactor build program in decades.”

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord