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AI-Frenzy Takes a Break

June 29, 2024
5 min read

Here are some of the biggest stories from last week:

  • Most of the stocks caught up in last year’s AI hype have fallen this year.
  • Indian government bonds were added to a key global emerging markets index.
  • Denmark approved the world’s first carbon tax on agriculture.
  • The yen fell to its weakest level against the dollar in four decades.

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

Stocks

The AI-frenzy has helped pull the S&P 500 up by roughly 15% since the start of the year, enough to see the index hit more than 30 record highs during this period. But look beneath the hood, and you’ll see that many of the stocks that had benefited from the early enthusiasm for AI have actually declined this year, suggesting that investors are increasingly distinguishing between the good and the bad among companies claiming to be big winners from the AI trend.

Approximately 60% of the stocks in the S&P 500 have risen this year, yet over half of the shares in Citi's "AI Winners Basket" have declined (the index is made up of perceived AI beneficiaries, and the basket generated a lot of excitement among the bank's clients last year). That’s a sharp turnaround from 2023, when more than three-quarters of the firms in the AI basket saw their stock prices rise. The reversal comes as investors start to look past optimistic management commentary on AI, focusing instead on whether companies can substantiate their claims with actual revenue from the technology. In other words, merely mentioning "AI" repeatedly during earnings calls is no longer sufficient for a firm's management team to impress investors.

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The number of S&P 500 firms mentioning "AI" during their earnings calls hit a record in 1Q24. Source: FactSet, Sherwood

That means, for now, investors are increasingly zeroing in on the one company that’s seeing the biggest tangible benefits from AI: Nvidia. The firm is dominating the market with its highly sought-after chips that help power data centers running complex computing tasks required by AI applications. So much so that it’s expected to make more revenue this quarter than over the entire year of 2023. That success has caused Nvidia’s share price to more than double this year, after more than tripling in 2023. And the firm hit another milestone last week: it overtook Microsoft as the world’s most valuable company by market capitalization.

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Nvidia recently overtook Microsoft as the world’s most valuable company by market capitalization. Source: Bloomberg

Bonds

Indian stocks have been part of major emerging markets indexes for some time, but the country's sovereign debt has never received the same recognition. After all, the government doesn’t issue any bonds denominated in foreign currencies, and its local rupee ones have historically been inaccessible to international investors.

But that changed in early 2020. As the pandemic was ravaging India’s economy and the government was borrowing at record levels to fund a huge stimulus package, it opened a wide swath of its sovereign bond market to overseas investors. That newfound access, combined with surging interest to invest in the world’s fastest-growing major economy, prompted JPMorgan to announce in September that it’ll be adding Indian government debt to its biggest emerging markets bond index. And the move, which officially took effect on Friday, was the country’s first-ever admittance in a global bond index. Inclusion will be staggered over ten months at roughly 1% weight per month, up to a maximum weight of 10%.

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India will get the highest possible weight in the JPMorgan emerging markets bond index. Source: Bloomberg

The milestone is a win-win for investors and India. For investors in the hundreds of billions of dollars of funds that track or are benchmarked to the JPMorgan emerging market bond index, they’ll gain access to India’s $1.3 trillion sovereign debt market, which has been offering some of the highest returns among its peers lately. The inclusion will also make the index more diversified and attractive, especially after the exclusion of Russian bonds following the invasion of Ukraine and as China’s economic challenges diminish the attractiveness of its sovereign debt.

For India, the move heralds greater connectivity between its domestic financial markets and foreign ones, and will help it expand the investor base for its sovereign debt, raise more funds, and lower borrowing costs. Goldman Sachs, for example, predicts that the inclusion could boost global investment in Indian government debt by as much as $40 billion, which would put downward pressure on yields. The influx of money could also help give the rupee a much-needed boost after it hit a record low against the US dollar last week. But on the flip side, increased foreign flows will also make the country’s bond and currency markets more volatile, and could push the government and central bank to intervene more actively.

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The Indian rupee hit a record low against the US dollar last week. Source: Bloomberg

Commodities

Agriculture accounts for a fifth of global greenhouse gas (GHG) emissions, and a huge portion of these come from ruminant animals like cows and sheep, whose digestive systems produce methane – a GHG significantly more potent than carbon dioxide in its heat-trapping ability. Denmark, a major pork and dairy exporter, knows this too well: farming is the country's biggest source of GHG emissions. So in an effort to make the sector greener and inspire other nations to do the same, the Danish government approved the world’s first carbon tax on agriculture this week. The measure, which could see farmers charged roughly $100 a year for each of their cows, is set to come into force in 2030, helping the country to reach a legally binding target that year of cutting total GHG emissions by 70% from 1990 levels.

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Agriculture accounts for a fifth of global greenhouse gas emissions. Source: Rhodium Group

While Denmark accounts for a tiny fraction of global emissions, its newly approved measure marks a huge milestone – especially if it pushes the eurozone and other regions to follow suit. See, just four sectors are responsible for nearly all of global GHG emissions: electricity, transport, industry, and agriculture. And while a lot is currently being done to make the first three greener (think: renewable energy, EVs, and hydrogen), not much is being done globally to tackle emissions from the agriculture sector.

Currencies

It would have been reasonable to assume that the Bank of Japan's move to scrap the world's only remaining negative interest rate earlier this year would lead to a stronger yen. Higher interest rates, after all, make the currency more attractive to international savers and investors. However, the real world doesn't always align with expectations, and a grim reality is setting in for Japanese authorities as the yen continues its rapid plunge. The yen hit a 38-year low against the dollar this week, slipping past the level it reached in late April before Japan’s finance ministry spent a record $62 billion to boost the currency. Analysts reckon that authorities may be reluctant to intervene again, given the limited impact of previous efforts.

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The Japanese yen fell to its weakest level against the US dollar since 1986. Source: Bloomberg

The yen’s weakness and traders’ growing bets against it come down to two main things. First, the BoJ’s indication that financial conditions will remain accommodative clearly showed that its first rate hike in 17 years isn’t the start of an aggressive monetary tightening cycle of the sort seen recently in the US and Europe. Second, a surprisingly strong US economy and sticky inflation has driven investors to dial back their bets on rate cuts by the Fed. So despite Japan bringing interest rates up from their sub-zero spot, those rates still look squat compared to the US and will probably stay that way for a while.

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US interest rates (measured in one-week deposit rates) are the highest among G-10 peers, with Japan's the lowest. Source: Bloomberg

Next week

  • Monday: UK M4 money supply (May).
  • Tuesday: Eurozone inflation (June), eurozone unemployment (May), US job openings and labor turnover survey (May).
  • Wednesday: US trade balance (May), minutes of the Fed’s latest meeting. Earnings: Constellation Brands.
  • Thursday: Minutes of the ECB’s latest meeting, UK general elections, US markets are shut for the Fourth of July holiday.
  • Friday: Japan household spending (May), eurozone retail sales (May), US labor market report (June).
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General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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