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November 23
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Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:
Dig deeper into these stories in this week’s review.
The hotly anticipated US election took place on Tuesday, and by Wednesday, it was confirmed that former President Donald Trump would return to the White House. What’s more, the Republicans gained control of the Senate and were poised to hold onto their narrow majority in the House. The news sent ripples through markets – here’s a roundup of some of the biggest moves on Wednesday:
Stocks: The S&P 500 climbed higher, while the Russell 2000 fared even better (smaller companies with typically domestic operations are seen as potential gainers under the Republicans, given the party’s protectionist stance). Shares in Hong Kong fell, while Japanese equities rose, helped by a weaker yen.
Bonds: Treasuries fell, reflecting market concerns over the potential for higher inflation (mainly due to tariffs) and larger fiscal deficits under Republican leadership.
Currencies: The US dollar climbed to its highest level since the start of the summer, with the greenback strengthening against the euro, Chinese yuan, Japanese yen, British pound, and most other currencies. The Mexican peso, which is seen as particularly vulnerable to the Republicans’ plans to slap tariffs on imports into the US, was hit particularly hard.
Commodities: Most commodities fell on Wednesday, which is expected considering that they’re priced in dollars, and the greenback’s surge makes them more expensive for international buyers.
Crypto: Bitcoin surged to a new record high. The crypto sector is seen as benefiting from relaxed regulation and Trump’s public support for digital currencies.
In a move widely expected by traders, the Fed delivered its second interest rate cut of the year, taking the federal funds rate down a quarter of a percentage point to a range of 4.5% to 4.75%. That marked a slower pace compared to September's half-point cut, which aimed to address weakness in the job market. Commenting about the US election, Fed Chair Jerome Powell said the outcome will have no impact on the central bank’s policy decisions in the near-term, noting that it’s too early to know the timing or details of any potential fiscal policy changes. Finally, the Fed said that the US economy’s strength meant that the central bank is under no pressure to cut rates aggressively. Traders certainly seem to agree: they see the federal funds rate declining by just one percentage point from current levels by the end of 2025.
Across the pond, the Bank of England also cut borrowing costs for the second time this year, taking its key interest rate down a quarter of a percentage point to 4.75%. The move comes after UK inflation fell to a three-year low in September. However, the bank warned that the recently announced Autumn Budget could increase consumer price inflation by up to 0.5 percentage points at its peak compared to previous projections. On the flip side, the Budget could boost economic output by 0.75% in a year’s time, according to the BoE. That prospect of higher inflation alongside a stronger economy has left the central bank cautious about cutting rates too aggressively, which is why it also signaled that a further reduction is unlikely before early 2025.
OPEC+ has delayed a plan to begin raising oil production until the end of the year, as the group of the world’s biggest oil-producing countries tries to revive crude prices that have continued to struggle amid a fragile economic outlook. The planned increases would have lifted the group’s production by 180,000 barrels a day by December, as part of a gradual unwinding of 2.2 million of barrels a day of cuts over 12 months. But OPEC+ has now agreed to delay the move by another month – marking the second time it has postponed its plans to increase supply. This comes as weakening fundamentals hinder the group's efforts to tighten the market, with demand in China experiencing a four-month decline and supplies rising in the US, Brazil, Canada, and Guyana. Case in point: new data this week showed US oil production jumped to a fresh monthly record of 13.4 million barrels a day in August.
In their rush to invest billions into new data centers, tech firms are making an expensive gamble on generative AI. If it doesn’t pay off, the increased investment could weigh on their profit margins for years to come.
The AI boom has forced companies to replace their post-pandemic cost-cutting programs with huge, investor-approved spending on data centers. And the latest set of earnings from Big Tech last week showed that their infrastructure investments continued to surge in the third quarter. Capital expenditures at the four biggest “hyperscalers” (Microsoft, Meta, Amazon, and Alphabet) grew more than 62% last quarter compared to the same time last year, hitting $60 billion. Analysts at Citi forecast that the four firms’ total capital spending will hit $209 billion this year, up 42% from 2023. The investment bank estimates that data centers account for about 80% of that total.
However, there’s a significant implication to all this spending: when a business buys a big-ticket item, the depreciation – the value the item loses each year – counts as an annual expense in subsequent years. That means Big Tech’s massive splurge on data centers will show up in rising depreciation expenses down the road, which could dent profit margins unless revenue increases by an equal amount.
Aware of this, Big Tech firms have been sneakily extending the estimated life of their servers to five or six years – an accounting change that’s added almost $10 billion to Microsoft, Google, Meta, and Amazon’s profits over 2022 and 2023. But there’s a limit to how far this can go. While there’s no industry standard for server lifespans, a 2017 survey by the International Data Corporation found that most companies expected to replace servers after five years. In other words, Big Tech can’t rely too heavily on more accounting shenanigans to offset the impact of those rising depreciation expenses.
General Disclaimer
This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.
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