Golden-Week Rush

Here are some of the biggest stories from last week:

• Eurozone inflation dipped below the ECB’s target for the first time since 2021.
• Chinese stocks posted their best day since 2008.
• Bain predicted that the global AI market could reach $1 trillion by 2027.
• OpenAI’s latest funding round valued the company at $157 billion.

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

Eurozone

The European Central Bank had reason to celebrate this week, after new data showed inflation in the region dipped below its 2% target for the first time in over three years. Consumer prices in the eurozone rose by 1.8% in September from a year ago, matching economist estimates and marking a big step down from August’s 2.2% pace. The decline was mainly driven by energy prices, which dropped by 6% after falling 3% in August. Stripping out energy and other volatile items like food, core inflation slowed marginally from 2.8% in August to 2.7% in September, also matching economist forecasts. However, services inflation, a key indicator of domestic price pressures, remained elevated at 4% – only slightly less than August’s 4.1%.

The figures will reinforce the growing conviction among investors that the ECB needs to cut rates more aggressively to support the bloc’s struggling economy. Data a week ago, for example, showed business activity in the eurozone unexpectedly contracted in September. That’s why traders now see a more than 90% chance that this month’s ECB meeting will result in another quarter-point interest rate cut, following reductions in June and September. They also see a high chance of another cut of that size in December, meaning traders expect the central bank’s main deposit rate to end the year at 3%, down from 3.5% currently.

China

What a difference a week can make. The Chinese stock market has fallen for three consecutive years, as investors fleex amid concerns about a slowing economy and a crisis in the real estate sector. But it came roaring back last week after authorities unveiled a broad package of stimulus measures aimed at boosting the economy and ending the stock market rout. And just this Monday, China’s blue-chip CSI 300 index of Shanghai- and Shenzhen-listed companies soared 8.5% – its best day since the 2008 global financial crisis – as investors piled in ahead of the Golden Week public holiday. (As a result of the holiday, the Chinese market was shut from Tuesday onwards).

Monday’s big move means that the CSI 300 index has now risen by 25% since the stimulus package was announced last Tuesday (24-September), bringing it back into positive territory for the year. The measures included a cut to a key short-term interest rate and a reduction in the amount of money that banks must hold in reserve – a bid to encourage them to hand out more loans. Measures were also announced to shore up the nation’s troubled property sector, including lowering borrowing costs on outstanding mortgages and easing the minimum down-payment ratio for second-home purchases. Finally, a $113 billion fund was set up to help certain companies buy stocks and others afford share buybacks.

AI

Needless to say, the global AI market is booming. Tech firms are building data centers to train and run AI models like there’s no tomorrow, while software-as-a-service providers are racing to integrate as much of the super-smart technology into their products as possible. So despite being in its early stages, the market for AI-related services and hardware was already valued at $185 billion last year. And in a new report, consultancy firm Bain forecast that the global AI market will expand by 40% to 55% annually between 2023 and 2027, potentially reaching $1 trillion.

The growth will be fueled by increasingly sophisticated AI systems and bigger data centers to train and run them, according to Bain. In fact, the consultancy firm believes the cost of larger data centers could jump from between $1 billion and $4 billion today to between $10 billion and $25 billion in five years, as their power demands expand to more than a gigawatt from 50-200 megawatts currently.

Those surging costs will do little to alleviate investor fears that Big Tech firms are spending too much on AI data centers for what they’re getting out of it. So, understandably, investors have found other ways to play the AI mega trend. One is copper: already in high demand for its role in many green industries, the metal is needed to build, power, and cool data centers. So much so that mining giant BHP expects data centers to account for up to 7% of total copper demand by 2050, up from under 1% today. Another is utilities: electricity usage from data centers (along with cryptocurrencies) is predicted to double by 2026 from 2022’s levels, boosting utility firms’ sales and, in turn, their profits.

Coming hot on the heels of Bain’s report about the booming global AI market, OpenAI completed a huge funding round this week at an eye-popping valuation. The ChatGPT-creator secured $6.6 billion in new funding in a deal that valued the world’s leading generative AI firm at $157 billion – the highest in Silicon Valley’s history. That’s nearly double what it was worth less than a year ago, and is five times the $29 billion level it fetched in April 2023. The deal is one of the biggest-ever private investments, and makes OpenAI one of the three largest venture-backed startups, alongside SpaceX and TikTok-owner ByteDance. OpenAI anticipates bringing in $11.6 billion in sales next year, up from $3.7 billion expected in 2024.

The mammoth deal bodes well for the US venture capital (VC) industry. A separate report by Pitchbook this week estimated that there were 3,777 VC deals in the US for $37.9 billion in the third quarter – an 8% increase in transaction value compared to the same period last year. And, as you can imagine, AI firms are stealing most of VC investors’ attention. Case in point: in the first nine months of 2024, AI accounted for 36% of the total US deal value, and 27% of the US deal count. And this is without including OpenAI’s latest fundraising round, which technically took place in the fourth quarter.

Next week

• Monday: Eurozone retail sales (August), eurozone economic sentiment (October).
• Tuesday: Japan household spending (August), US trade balance, China loan growth (September). Earnings: PepsiCo.
• Wednesday: Minutes of the Fed’s latest meeting.
• Thursday: Minutes of the ECB’s latest meeting, US inflation (September). Earnings: Delta Air Lines.
• Friday: UK GDP (August), US consumer sentiment (October). Earnings: BlackRock, JPMorgan, Wells Fargo.
• Sunday: China inflation (September).