OpenAI's Leadership Shuffle Drama

Here are some of the biggest stories from last week:

• Traders are betting on earlier interest rate cuts in the eurozone and UK.
• Japanese stocks hit a fresh 33-year intraday high this week.
• Foreign investors are fleeing Chinese stocks.
• Nvidia delivered yet another impressive earnings update.
• The CEO of OpenAI was briefly ousted from the firm but returned a few days later.

Dig deeper into these stories in this week’s review.

Macro

Emboldened by slowing inflation, both the European Central Bank and Bank of England opted to leave interest rates unchanged at their latest meetings. But policymakers were quick to emphasize that the fight against consumer price gains is far from over, and warned that it’s very premature to consider rate cuts. Instead, both central banks are trying to hammer home the message that interest rates will have to remain higher for longer, but those warnings seem to be falling on deaf ears.

In fact, traders have brought forward the date at which they expect the ECB and BoE to begin cutting interest rates, after recent data suggested that the eurozone and UK economies are headed for a period of near-stagnation. More specifically, weaker than expected UK retail sales data and poor industrial production figures from the eurozone have added to market conviction that the two central banks will implement a minimum of three rate cuts next year, with the initial reductions anticipated in June. That marks a big shift from the start of October, when traders did not expect the BoE and the ECB to implement their first cuts until early 2025 and September 2024, respectively.

Both central banks spent this week trying to push back against traders’ rosy outlooks. The ECB, for example, warned that market expectations for a less restrictive monetary policy could lead to easier financial conditions, increasing the likelihood of it needing to raise interest rates again. The BoE, meanwhile, said that the market’s expected path for interest rates is too loose to get inflation back to its 2% target sustainably. It even warned of another possible rate hike due to upside risks to inflation stemming from rising food and energy prices. Food inflation rocketed to its highest level in more than four decades earlier this year after a surge in costs for fuel, fertilizer, and feed. Although it has since decreased, it’s still in the double digits and, according to the BoE, could spike again.

Stocks

Japanese investors must be celebrating after the Nikkei 225 Index hit a fresh 33-year intraday high this week. That comes on the back of a roughly 28% gain in the index this year, buoyed by solid company earnings, corporate governance reforms championed by the Tokyo Stock Exchange, and an extended period of weakness in the yen (boosting exporters’ earnings). The Japanese currency, after all, has tumbled more than 12% against the dollar this year and is just shy of its weakest level in three decades, which was set in October 2022. That’s bewildered many analysts who predicted the yen would rally this year as a hawkish Fed and dovish Bank of Japan swapped their monetary policy stances.

Japanese value stocks – shares priced low compared to their fundamentals – have performed particularly well this year. And UBS Global Wealth Management said this week that it anticipates these stocks to continue their outperformance into 2024, driven by a resurgence in domestic economic growth and gradual monetary policy tightening. The firm highlighted that financial stocks, comprising nearly a quarter of the MSCI Japan Value Index, are especially poised to gain from a gradual increase in interest rates by the Bank of Japan, potentially beginning in the first quarter of the next year.

Elsewhere in Asia, the sentiment in China is quite the opposite. Global investors began 2023 buying Chinese stocks at a record pace in anticipation of a strong economic rebound after the country abandoned its restrictive zero-Covid policies. But foreign funds have significantly reduced their positions in recent months due to growing worries about a liquidity crisis in the property sector and lackluster economic growth figures.

In fact, more than three-quarters of the foreign money that flowed into China’s stock market in the first seven months of the year has now left, despite the government’s efforts to restore confidence in the world’s second-biggest economy. The sharp selling puts net purchases by offshore investors on course for the smallest annual total since 2015 – the first full year of the Stock Connect program that linked up markets in Hong Kong and mainland China.

This selling of Chinese shares by foreign investors has helped contribute to a decline of over 11% in the CSI 300 index of Shanghai- and Shenzhen-listed stocks this year (when measured in dollar terms). This contrasts with the 8-10% gains seen in equity benchmarks in Japan, South Korea, and India. In fact, the strong economies of other Asian countries are a key factor in investors' preference to steer clear of China, choosing instead to invest in better-performing markets. Case in point: India and South Korea have seen net inflows by financial institutions of $12.3 billion and $6.4 billion, respectively.

Over in the US, all eyes were on Nvidia’s results update this week. The chipmaker, after all, is at the very heart of the AI-frenzy that’s powered most of the US stock market’s gains this year. Its share price has more than tripled over the course of the past year, making it one of the best-performing stocks on Wall Street and lifting its market capitalization above $1.2 trillion. And so investors were relieved to see Nvidia’s revenue more than tripled to $18.1 billion in the fiscal third quarter from the same time last year – $2 billion higher than analysts had expected. Additionally, the firm projected sales of around $20 billion for the current quarter, also higher than analysts had expected, as robust growth in most regions offsets a substantial decline in sales to China following the US government's recent tightening of AI chip export regulations.

Speaking of AI, Sam Altman, the cofounder and CEO of ChatGPT-owner OpenAI, was briefly ousted from the firm but returned a few days later. Many speculate that Altman clashed with the board over wanting to transform OpenAI from a nonprofit organization focused on the scientific exploration of AI into a business that builds and monetizes paid products, allowing it to attract the heavy funding needed to power its AI tools. That’s important considering ChatGPT uses up huge amounts of expensive computing power every time a customer asks it a question – so much that the firm is having trouble keeping up with the explosive demand from users, forcing it to place limits on the number of times they can query its most powerful AI models in a day.

Members of the (former) board, however, had concerns about the potential harms of powerful AI if left unchecked, and were worried that OpenAI’s expansion was getting out of control, maybe even dangerous. But their move to oust Altman ultimately backfired, with nearly all of the firm’s employees threatening to quit if he was not reinstated. Throw in pressure from Microsoft (OpenAI’s biggest investor) to bring him back, and the drama culminated on Wednesday when Altman returned as CEO under a newly formed board's oversight.

Next week

• Monday: US new home sales (October).
• Tuesday: US consumer confidence (November). Earnings: Intuit.
• Wednesday: Eurozone economic confidence (November).
• Thursday: Japan industrial production and retail sales (October), eurozone inflation (November) and unemployment rate (October), China PMIs (November). Earnings: Salesforce.
• Friday: Japan unemployment rate (October).