News of the week summary - 02/25/2024
Nvidia becomes 3rd most valuable public US company
Nvidia, the world leading chip designer, witnessed a remarkable 265% surge in quarterly revenues, fueled by a booming demand for artificial intelligence technologies. This surge propelled the company's shares to a record high, surpassing tech giants like Amazon and Google's parent company, Alphabet, and securing its position as the third-most valuable US-listed company, only behind Microsoft and Apple.The surge in Nvidia's revenues was primarily driven by accelerated development of generative AI, which have reached a tipping point in terms of demand worldwide. This surge in demand spans across various industries and nations, indicating a global trend towards investing in AI technologies.
Initially known for providing graphics cards for computer games, Nvidia has evolved into a key player in the AI space, with its chips becoming the industry standard for AI developers. These chips are essential for crunching data used in large language models, powering applications such as chatbots (notably ChatGPT) and software capable of generating text, images, and video content.
The success of Nvidia's chips has been further accentuated by the rapid adoption of AI technologies by major tech companies like Meta (formerly Facebook), which plans to significantly increase its stock of chips in 2024. As a result, Nvidia's chips have become a crucial component for companies across various sectors, including automotive, financial services, and healthcare.
The positive performance of Nvidia has had a ripple effect on stock markets worldwide, contributing to record highs in indices such as the S&P 500, Nasdaq Composite, Nikkei 225, and Stoxx Europe 600. However, challenges lie ahead, including increasing competition from other chip manufacturers and geopolitical tensions influencing the semiconductor industry. Nonetheless, Nvidia's recent success underscores the growing significance of AI technologies in shaping the future of various industries and economies globally.
Japanese Nikkei 225 Index reaches all-time high
After a 34-year wait, Japan's main stock market index, the Nikkei 225, has surpassed its previous all-time high, exceeding the record level reached during the country's late-1980s asset bubble. During trading on Thursday, the Nikkei 225 index of the largest Japanese companies closed above 39,000 points for the first time ever, marking a significant milestone.
The record-breaking performance was fueled by a powerful rally throughout 2024, primarily driven by increases in chip-related stocks.
The final surge over the record line was attributed to strong earnings results from US chipmaker Nvidia, which instilled a sense of confidence among investors in Tokyo.
One of the factors contributing to Japan's stock market rally is the weakening yen, which has attracted foreign investors as it boosts the profits of export-focused companies, because when the yen weakens, revenue generated in foreign currencies translates into more yen when converted back, and japanese good become relatively cheaper for foreign buyers leading to more demand. Additionally, investors have shifted their focus away from China's markets due to its slowing economy and geopolitical tensions, further driving money into Japanese stocks.
The recent peak in Japan's stock market represents a significant breakthrough, especially considering the country's three-and-a-half decades of economic stagnation since the 1989 bubble era. The achievement has been hailed as breaking through an important barrier, symbolizing Japan's resilience and potential for growth.
Japanese corporate earnings, which have nearly tripled since the bubble era, have provided further support to the stock market rally. Governance reforms and improvements in balance sheets and operating margins have contributed to this positive trend.
Eurozone economic downturn shows signs of easing
The latest business survey indicates a slight improvement in the struggling eurozone economy, with a stabilization of activity in services companies offsetting a significant decline in manufacturing, particularly in Germany.
While German business activity experienced a deeper contraction, there were indications of a milder downturn in France, with orders falling at the slowest pace since last May. The rest of the eurozone continued to see modest growth, offering a glimmer of hope for recovery.
Purchasing managers for large european companies reported a fourth consecutive monthly easing in the decline of new orders, along with an increase in hiring and an improved outlook for the year ahead. However, with the index remaining below the 50 mark that separates contraction from expansion for the ninth consecutive reading, it suggests that the eurozone economy is likely to grow only modestly at the beginning of this year after stagnating for much of 2023.
The survey also revealed the steepest rise in selling prices since last May, primarily due to higher labor costs as wages increase, raising concerns for European Central Bank officials about persistent inflation. This could delay potential interest rate cuts, as indicated by a rise in the interest rate-sensitive two-year German government bond yield.
Despite risks of cutting rates too early, ECB rate-setters have emphasized the importance of maintaining cautious optimism due to downside risks to growth. Eurozone inflation has been decreasing but remains fragile, with the economy flatlining in the final quarter of last year. While a weak performance is expected at the beginning of this year, many economists anticipate growth to pick up later in the year as inflation falls and interest rates are lowered.
The latest business survey indicates a slight improvement in the struggling eurozone economy, with a stabilization of activity in services companies offsetting a significant decline in manufacturing, particularly in Germany.
While German business activity experienced a deeper contraction, there were indications of a milder downturn in France, with orders falling at the slowest pace since last May. The rest of the eurozone continued to see modest growth, offering a glimmer of hope for recovery.
Purchasing managers for large european companies reported a fourth consecutive monthly easing in the decline of new orders, along with an increase in hiring and an improved outlook for the year ahead. However, with the index remaining below the 50 mark that separates contraction from expansion for the ninth consecutive reading, it suggests that the eurozone economy is likely to grow only modestly at the beginning of this year after stagnating for much of 2023.
The survey also revealed the steepest rise in selling prices since last May, primarily due to higher labor costs as wages increase, raising concerns for European Central Bank officials about persistent inflation. This could delay potential interest rate cuts, as indicated by a rise in the interest rate-sensitive two-year German government bond yield.
Despite risks of cutting rates too early, ECB rate-setters have emphasized the importance of maintaining cautious optimism due to downside risks to growth. Eurozone inflation has been decreasing but remains fragile, with the economy flatlining in the final quarter of last year. While a weak performance is expected at the beginning of this year, many economists anticipate growth to pick up later in the year as inflation falls and interest rates are lowered.
The ECB reports its first annual loss in 20 years
The European Central Bank (ECB) has announced its first annual loss in almost two decades, amounting to €1.3 billion for 2023. This loss reflects the impact of higher interest rates paid to national central banks, which the ECB raised to a record level in response to soaring inflation, the highest in its history.
The increase in interest rates led to a significant rise in the ECB's net interest expense, particularly due to higher payments to other national central banks that share the euro. However, the interest earned on the ECB's extensive portfolio of bonds, accumulated over the past decade, did not increase proportionately, as many of these bonds are long-term government securities with low or negative rates.
Critics of the ECB's bond purchases may seize upon these losses, with some cases still pending in the German constitutional court. Additionally, the end of substantial dividends received by finance ministers from central banks could impact public finances.
Despite the loss, most analysts believe it should not affect policy decisions, as the ECB remains focused on its primary mandate of maintaining price stability. Concerns about potential bailouts for central banks with the highest losses have somewhat diminished, with plans in place for rebuilding capital from future profits.
The ECB stated that it is likely to incur losses in the coming years but expects to return to sustained profits afterward. It emphasized that its balance sheet is supported by substantial capital and revaluation accounts, totaling €46 billion at the end of last year.
This marks the first annual loss for the ECB since 2004, when it absorbed foreign exchange losses due to the rapid appreciation of the euro. Last year, the ECB reported zero profits, using provisions to offset a deficit of €1.6 billion.
In response to these financial challenges, the ECB has begun reducing its bond portfolio and allowing ultra-cheap loans provided to commercial banks during the pandemic to expire. These measures have contributed to a reduction in the eurosystem's balance sheet, down to €6.94 trillion at the end of last year from a peak above €8.8 trillion in mid-2022.
Real Estate market shows signs of rebound
A Financial Times analysis of OECD data reveals that the widespread decline in global house prices, which affected advanced economies, has largely tapered off. Economists suggest that the deepest property downturn in a decade may have reached a turning point, with nominal house prices growing by 2.1% in the third quarter of 2023 compared to the previous three months.
The analysis indicates that only about one-third of OECD countries reported a quarter-on-quarter decline in house prices, down from over half at the beginning of the year. House price falls have probably bottomed out in most countries, indicating that the correction may have reached its limit.
The decline in housing prices in late 2022, prompted by central banks raising interest rates to curb inflation, has eased or reversed in many economies. Expectations of interest rate cuts this year have contributed to declining mortgage rates, while a shortage of properties for sale has supported valuations and led to growth in real prices across the OECD.
While some countries like Germany, Denmark, and Sweden may see further price falls due to larger rental markets, economists believe that the worst may be behind us. Although households may face higher mortgage costs as fixed-rate deals expire, rates remain favorable compared to previous years. In the US, solid economic and job growth has contributed to a 5.2% annual rise in nominal house prices. However, countries like Germany experienced a 10.2% annual contraction in house prices due to economic woes and property overvaluations.
While Europe may still see a correction in housing prices, economists expect it to be moderate. Despite the generally milder-than-expected global house price decline, some countries like China continue to experience a housing downturn, with forecasts suggesting further price falls over the next two years.
Foreign direct investments in China at their lowest level in history
Foreign direct investment: when a company establishes or expands operations in another country by acquiring assets or establishing business activities, typically with a significant level of control or ownership.
China reported its smallest annual foreign direct investment (FDI) since the 1990s in 2023, amounting to about $33 billion, according to data released by a government administration. This represents an 82% decline from the previous year and marks the lowest annual figure since 1993. The decline in FDI comes as China's economy grapples with the aftermath of the pandemic, sluggish domestic demand, and a property crisis, leading to low investor confidence.
Prime minister Li Qiang emphasized the importance of boosting confidence and addressing practical concerns affecting both the masses and enterprises during a recent cabinet meeting after the lunar new year holiday. Geopolitical uncertainty and Beijing's crackdown on foreign consultancies, driven by concerns over national security threats, have contributed to the decline in foreign investment.
Additionally, higher interest rates in other markets have prompted foreign businesses to withdraw funds from China in search of higher yields elsewhere. The benchmark CSI 300 stock index fell by 11% in 2023 amid slowing growth, prompting policymakers to implement measures to stabilize market confidence.
However, there are some signs of optimism as data shows a $17.4 billion increase in investments in the fourth quarter of 2023 following a deficit in the third quarter. Despite the overall decline in FDI, direct investment in China by German companies reached a record $13 billion last year, according to a report by the German Economic Institute.