Battle of the Bots
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Hello Everyone,
It’s great to be back for the first market wrap of 2023! In this edition, we’ll be taking a look at an Indian corporate giant that is facing scrutiny from investors in the United States, the latest economic developments in the US and UK, more energy issues arising from Russia, and a rough start for Google’s AI Chatbot, ‘Bard’. Hope you enjoy it!
The Adani Empire strikes back
Gautam Adani, a prominent Indian business magnate, and his family have put forward funds to repay a loan of $1.1 billion that was backed by shares in several of his companies. This move comes as the billionaire attempts to alleviate the crisis that has caused over $100 billion in losses for his business empire.
The loan, which was due in September 2024, was from a consortium of banks including JPMorgan, Deutsche Bank, Barclays, Citibank, and SMBC Group. The Adani Group stated that the early repayment of the loan will result in the release of shares in Adani Ports, Adani Green Energy, and Adani Transmission, accounting for 12%, 3%, and 1.4% of Adani's holdings in these companies, respectively.
The move is seen as an effort to show the financial stability of Adani's empire, despite the recent allegations of stock price manipulation and accounting fraud by US short-seller Hindenburg, which Adani denies. The share prices of Adani Enterprises have fallen by 54% since the allegations were made. Adani is facing growing political pressure and a call for government intervention. The Indian regulator, the Securities and Exchange Board of India, has also pledged to examine the situation and take appropriate action if necessary.
This situation will come as a warning to other companies with underlying problems that could be seen as targets to be exposed by short-selling research firms like Hindenburg.
Adani Enterprises share price, Source: stockcharts.com
Powell keeps his foot on the pedal
The Federal Reserve Chair, Jay Powell, has warned that the US central bank may have to increase interest rates more than what investors anticipate. This is due to the strong labour market data which suggests that it will take a "significant period of time" to control inflation. Despite Powell's emphasis that the central bank is prepared to be more aggressive if necessary, his comments were not as aggressive as some economists and market strategists had expected.
The financial markets were initially impacted by Powell's comments, causing choppy trading. Powell stated that the Fed would react to the data and it is possible that they may have to raise rates more than what is currently priced in by the financial markets. Other Fed officials have also cited the strength of the labour market as a reason for the bank to continue tightening. On the other hand, two senior European Central Bank policymakers have pushed back against the idea of stopping interest rate hikes soon. They have emphasized that monetary tightening is still needed to control inflation.
Source: National Bureau of Labor Statistics
UK is technically safe for now
The Office for National Statistics released data on Friday showing that the Gross Domestic Product (GDP) remained unchanged from Q3 to Q4 2022, following a decline in the previous three months. This was in line with analysts' predictions but fell short of the 0.1% growth forecasted by the Bank of England. Nevertheless, the flat GDP reading prevented the UK from officially entering into a technical recession, which is typically defined as two consecutive quarters of declining output.
Chancellor Jeremy Hunt commented that the avoidance of a technical recession demonstrates the strength and resilience of the UK economy, but added that there are still challenges ahead, particularly in regard to inflation. The fourth quarter GDP was influenced by growth in October and November, however, a decrease in the economy was observed between November and December, worse than expected by economists.
In the fourth quarter, the UK economy remained 0.8% lower than in the same period in 2019 before the pandemic, while the US economy rose 5.1% and the eurozone grew 2.4% over the same period. The data for the final quarter of 2022 also showed that households and businesses are proving resilient, with a marginal increase in real consumer spending and a 4.8% rise in business investment.
Source: Office for National Satistics
Putin tightens the tap
Alexander Novak, Russia's top energy official, announced that the country will decrease oil production starting next month in response to a price cap imposed by Western nations. The cut, which is equivalent to 5% of Russia's production and 0.5% of the world supply, is the first sign that Moscow might be using oil supplies as a weapon, following its reduction of natural gas exports to Europe last year.
The recent attack on Ukraine by Russia and the resignation of Moldova's Prime Minister, Natalia Gavrilita, add to the growing concerns. The price of Brent crude, an international benchmark, increased by 2.3% to $86.43 a barrel after Novak's announcement, due to the oil production cut. The EU extended a ban on Russian crude imports, which now includes refined fuels like diesel and petrol, and the G7 imposed a price cap on those fuels. The G7 price cap aims to keep Russian oil in the market but at a lower price that will impact Moscow's budget.
In January, Russia's government revenue from oil and gas was down by 46% compared to the previous year, contributing to a growing budget deficit. Pierre Andurand, one of the world's top energy traders, has claimed that Putin has already "lost the energy war". The Opec+ group of oil producers, of which Russia is a part, is yet to respond to the announcement.
First blood Microsoft
On Wednesday, shares of Alphabet Inc., the parent company of Google, saw a decrease of nearly 8% which resulted in billions of dollars being lost from its market value. This was due to Wall Street's concerns about the potential harm to Google's search dominance and profits as a result of a new artificial intelligence (AI) competition with Microsoft. The drop in stock price was triggered by a mistake in a Google AI demonstration, highlighting the difficulties the company faces in introducing a new form of chat-based search to a broader audience.
The day before, Microsoft unveiled a new version of its Bing search engine that incorporates AI advancements, such as summarizing answers to search queries and creating emails and lists. In response, Google announced the launch of its own chatbot named Bard, but the company has not yet indicated when the service will be made publicly available. However, experts pointed out that Bard made a factual error in the first video demonstration of the product.
Google has been trying to catch up with its competitors by integrating AI technologies into its consumer products since the launch of ChatGPT, which provides direct text answers to complex questions, instead of relying on traditional search engines. Google also reported a 4% drop in advertising revenue in the final quarter of last year, marking only the second contraction in its history.
Alphabet Inc share price, Source: stockcharts.com
Thanks for reading! Have a good week.
Patrick
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.