A daily market update from FS Insight — what you need to know ahead of opening bell

“If you’re weak on the facts and strong on the law, pound the law. If you’re weak on the law and strong on the facts, pound the facts. If you’re weak on both, pound the table.” — Oliver Wendell Holmes

Overnight

No joke: April 1 airstrike takes out Iranian IRGC general in Damascus (JP)

Ukrainian-built unmanned aircraft hits a Shahed drone factory almost 1,000 miles inside Russia (Semafor)

Turkey’s Erdogan dealt major election blow in the most decisive opposition victory of the last quarter-century (CNN)

Bloomberg estimate pegs the cost of a war over the Chinese invasion or blockade of Taiwan at $10 trillion (Semafor)

Lou Conter, last survivor of Pearl Harbor’s USS Arizona, dies at 102 (WSJ)

Argentina wins hedge fund suits over GDP-linked securities (BBG)

March bond issuance at $36.405 billion, above the $34.579 billion 10-year average (BB)

Fidelity to charge $100 servicing fee on some ETFs (MW)

Lawmakers call on Labor Department to finalize a proposed rule imposing fiduciary obligations on more financial professionals working with retirement clients (Barron’s)

BofA sees yen plunging to 160 per dollar if Fed delays cuts (BBG)

SNB study shows billions needed to keep Swiss currency in check (BBG)

Postal Service picks UPS to move air cargo, replacing FedEx (WSJ)

Person tests positive for bird flu in Texas after exposure to cattle (WSJ)

Microsoft to separate Teams and Office offerings in bid to avoid antitrust issues (RT)

Citigroup to lay off 430 New York employees across units (RT)

Dominion Energy receives approval for Virginia solar projects (RT)

Trump Media & Technology drops sharply after reporting $58M loss for 2023 (CNBC)

United Airlines requests pilots take unpaid time off amid Boeing delays (CNBC)

Home insurance rates expected to hit record highs this year (BBG)

Bank of Canada survey finds business sentiment improving, fewer expecting a recession (BBG)

Oil rises to highest since October on stronger demand, geopolitical tensions (BBG)

Russia denies that it’s behind ‘Havana Syndrome’ despite presence of GRU Unit 29155 operatives at the scenes of reported health incidents involving U.S. personnel (RT)

U.S. manufacturing grew for the first time in 1.5 years (RT)

U.S. and global equity funds see fifth straight week of inflows (RT)

India is second-busiest market for ECM deals after US (RT)

Banks face $2T of maturing U.S. property debt over next 3 years (FT)

OpenAI removes Sam Altman from VC fund ownership (RT)

BlackRock launches its first active equity ETFs in Europe (FT)

S&P revises JPMorgan’s ratings outlook to ‘positive’ (RT)

Japan service sector optimism hits 33-year high (RT)

UBS is still reviewing risk of misstatement in Credit Suisse books (RT)

Bitcoin boom overshadows broadening of U.S. ETF landscape (RT)

BlackRock backs Disney’s board in blow to activist funds (WSJ)

Two Warner Bros. Discovery board members resign after antitrust probe (CNBC)

AI revolution may be boon for natural gas (FT)

Gen Z is embracing skilled trades (WSJ)

Advent International taking Canadian payments processor Nuvei private in a $6.3B all-cash deal deal (WSJ)

F1 owner Liberty Media buying motorcycle racing league MotoGP from Bridgepoint and CPP Investments in a $3.8B deal (BBG)

Abu Dhabi-backed investment firm CYVN considering a stake in McLaren (BBG)

Microsoft-backed cloud and data security startup Rubrik’s files for an IPO, revealing a $354M loss; Goldman Sachs, Barclays, Citigroup and Wells Fargo are leading the offering (BBG)

Japanese tech firm Rakuten raises $1.25B through a U.S. junk bond issuance (BBG)

Chilean PE-backed telecom provider WOM, formerly known as Nextel Chile, files for Chapter 11 bankruptcy (WSJ)

Tupperware could run out of business as it faces a liquidity and demand crunch (RT)

Tiger Global raised $2.2B for its latest VC fund, ~one-third below its $6B target announced in 2022 (FT)

GoldenTree Asset Management raises $1.3B to invest in first-loss equity tranches of CLOs (BBG)

Commonfund closes its latest and largest secondaries fund at $1.2B (WSJ)

First news

• Study finds that daylight savings time introduces a (later-correctable) under-reaction to earnings by investors
• AI: News on how to fund and feed data centers, how to cut through the promotional hype and see the truly valuable AI technologies, and how to approach investment in AI.

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

In the past two trading days, four key inflation data points have been released, with only one of them hawkish.

At the same time, markets are slashing the odds of a June cut. 

Hence, we lean higher vs consensus on odds of a June cut.

Click HERE for more.

TECHNICAL

While many investors remain understandably focused on Technology stocks, it’s been Energy and Materials which have stolen the thunder over the past month. This push into commodity-related stocks looks to be just getting underway, as the recent breakouts in Energy and Materials sectors might suggest.

Despite a higher than anticipated supply figure from Treasuries, coupled with better PMI data having lowered the likelihood of three interest rate cuts by the FOMC (as per Fed-funds futures positioning data), the rebound in China, along with WTI Crude oil, seems to have squelched the fears of any decline in demand for raw materials.

For now, many continue to be focused on the parabolic gains of the S&P 500, which looks to harbor more upside when eyeing the S&P’s breakout to new all-time highs in Equal-weighted terms.

Click HERE for more.

CRYPTO

• Stablecoin issuer Tether has announced a significant security update, completing the System Organization Control (SOC) 2 Audit Type 1. SOC 2 Type 1 is the gold standard of security compliance developed by the American Institute of Certified Public Accountants. The standard includes pillars around security, availability, processing integrity, confidentiality, and privacy, ensuring Tether has robust IT controls. Tether has committed to undergoing annual SOC 2 examinations to provide the highest standards and demonstrate its commitment to transparency and building trust in the community. In addition to Tether’s security update, Tether acquired 8,888 BTC throughout the first quarter, raising its holdings to approximately 75.3k Bitcoin, worth about $5.2 billion. This is the first time Tether has eclipsed $5 billion in Bitcoin holdings, making it the seventh-largest holder of Bitcoin.
• Over the weekend, Telegram enabled purchases of in-platform advertisements using Toncoin (TON). Users purchasing ads can choose which channels they would like their ads to be shown in, and channel owners allowing ads are entitled to 50% of revenue, paid in TON. Telegram channels generate over 1 trillion views per month, but only 10% of them are currently monetized. The integration of blockchain payments should boost that number. Telegram has become a part of crypto culture, with trading bots and influencer groups, and it is a medium for project updates. Many projects or large trading groups may choose to enable ads to gain a revenue stream that’s easily withdrawable to their wallets and can be used on-chain. TON (-1.82%) gained over the weekend following the announcement, but is declining with the broader market today.

Click HERE for more.

FIRST NEWS

Buy the Dip: Daylight Savings Time Darkens Reaction to Earnings. A fascinating study conducted by researchers at the University of Edinburgh has uncovered a peculiar phenomenon – the biannual transition to Daylight Saving Time can temporarily impair investors’ ability to accurately assess and respond to corporate earnings reports. The culprit? Disrupted sleep patterns triggered by the clock change.

After meticulously analyzing a vast trove of earnings announcements spanning over two decades from 1993 to 2018, the researchers discovered a striking pattern. Companies reporting higher-than-anticipated earnings during the spring clock shift experienced a muted reaction from investors, with stock prices underreacting by a staggering 36% compared to a control group unaffected by the time change.

Underreaction begets correction

The consequences of what may be called an initial underreaction are far from trivial. In the weeks following the earnings surprises, the affected companies enjoyed returns nearly double those of their counterparts in the control group, as investors revisited – and reversed – their initial underreaction to earnings surprises, with the market gradually accounting for the better-than-expected financial performance. The study’s findings underscore the profound impact that even seemingly innocuous factors, such as a modest hour’s shift in sleep schedules, can exert on the intricate decision-making processes of investors. This puts in mind of the gold standard for strategies employed by quant funds, which seek out non-obvious, unexpected, complex patterns and correlations that seem anomalous but prove to be statistically significant (i.e. are backed by repeated signals, such as clock changes). Jim Simons’ Renaissance Technologies and Medallion Fund famously looked at such seemingly trivial patterns as fluctuations in women’s hair and skirt length in their search for signal. Clock changes are much less esoteric and more predictable, with arguably better historical data behind them. Bloomberg, The Independent

AI Beat

Yes to NAFTA, No to Nvidia. U.S. tech titans are pivoting to Mexican production for AI hardware, spurning China. Major American AI companies are pressing their Taiwanese manufacturing partners to ramp up production of AI-related hardware in Mexico. This strategic move forms part of a broader U.S. effort to reduce reliance on China for advanced technology manufacturing.

Mexico is rapidly emerging as a significant hub for cutting-edge production, buoyed by geographical proximity and favorable trade pacts with the U.S. While challenges such as local crime and infrastructure gaps persist, Taiwanese firms and other international companies are increasingly investing in Mexican facilities and operations.

The pivot highlights growing tensions between Washington and Beijing over technology supremacy. U.S. companies aim to insulate their supply chains from potential disruptions stemming from the strained U.S.-China relationship, and Mexico’s combination of regional integration and lower operating costs is proving appealing amid this reshuffling of global production networks.

Microsoft, OpenAI plan $100B Stargate AI data center, spurning Nvidia

Tech giants Microsoft and OpenAI are embarking on an ambitious venture to construct a cutting-edge AI supercomputer data center, codenamed Stargate. This colossal project is expected to incur staggering costs exceeding $100 billion and is slated to commence operations in 2028. U.S.-headquartered, the Stargate data center will meet the burgeoning demand for high-performance computing (HPC) capabilities, a crucial requirement for supporting the resource-intensive workloads and applications associated with generative AI.

Microsoft is likely to shoulder the financial burden of the project that’s anticipated to be a staggering 100 times more expensive than today’s largest data centers, underscoring the immense scale and ambition of this endeavor. Divided into five distinct design phases for this series of supercomputers, Stargate will represent an investment more than three times the amount Microsoft spent on data center servers, buildings, infrastructure, and equipment in 2023, highlighting the unprecedented nature of this undertaking.

What will not be a part of this investment? Nvidia InfiniBand cables, which OpenAI, Microsoft’s AI partner, hopes to avoid using in the Stargate project, using Ethernet cables instead. Microsoft currently uses Infiniband technology in its data centers. SDX, WSJ

Fossil Fuel Bigs: AI Revolution To Rev Up Natural Gas. In the meantime, the rise of AI and data centers is driving up electricity demand, creating a potential boon for natural gas producers. Fossil fuel executives argue that renewable energy and batteries alone can’t reliably meet the massive power needs of AI and data centers, which means there’ll be more natural gas usage. 

While the U.S. government offers incentives for clean energy to decarbonize the electricity grid, fossil fuel companies insist gas-fired power is crucial for providing the reliable 24/7 electricity required by major AI firms. Data centers’ insatiable appetite for electricity is set to skyrocket, making up ~10% of total U.S. power demand by 2035, up from 4.5% in 2025 according to S&P Global. The International Energy Agency estimates global data center power demand could exceed 1,000 terawatt-hours by 2026, doubling 2022 levels.

The likes of Google and Microsoft have set ambitious targets to power their operations entirely with certified green electricity in the coming years, potentially threatening fossil fuel producers’ forecasts for increased gas usage. Analysts expect most new electricity demand will ultimately be met by carbon-free sources as renewable generation soars, contradicting industry claims that fossil fuels are indispensable. The frenetic pace of the AI revolution has clouded projections, with some wondering if the anticipated eventual downturn in gas use may be delayed due to the sector’s skyrocketing energy appetites. FT

Hype and ‘Grifting’ Go Hand in Hand with Gargantuan AI Budgets. The surge of investment into artificial intelligence has led to some overhyped claims reminiscent of the cryptocurrency craze, says DeepMind co-founder Demis Hassabis. While recognizing AI’s immense potential, Hassabis cautioned that the hype around generative AI startups and products risks overshadowing the remarkable scientific progress occurring in the field.

Despite the hype, Hassabis remains convinced that AI will prove to be one of humanity’s most transformative inventions. He cited DeepMind’s AlphaFold protein structure prediction model as a prime example of how AI can accelerate scientific discovery across biology, drug development, materials science, mathematics, weather forecasting, and nuclear fusion research.

Hassabis believes achieving artificial general intelligence (AGI) that matches human cognitive abilities may be possible within the next decade, though one or two critical breakthroughs are still needed. While acknowledging the need for continued international dialogue on AI safety, Hassabis stressed the urgency of making more progress as “the technology is exponentially improving.” 

To address issues like factual errors in large language models, DeepMind researchers have proposed a new SAFE methodology. By cross-checking responses against sources like Google Search and Google Scholar, SAFE agreed with human fact-checkers 72% of the time while being 20 times cheaper. FT

Impact of AI Still Greek to Investors. A popular meme circulating on social media depicts Atlas holding up not the globe, but the entire stock market, with the figure of Atlas replaced by the currently hot stock or theme, such as AI. For bullish investors, the meme represents a victory lap and hopes of more gains. For bearish investors, it warns of excessive market concentration in a handful of stocks and frothy speculation on themes.

Companies enabling AI, e.g. chip producers, have seen stellar share price performance over the past 18 months, yet debates continue about potential echoes of the dotcom era bubble. Getting bogged down in these debates potentially misses the point of Amara’s Law, which states that we tend to overestimate a technology’s short-term impact while underestimating its long-term impact.

Financial analysts routinely underestimate adoption of general-purpose technologies such as AI. Estimates of the market sizes for the internet, cloud computing, smartphones, and PCs were off by ~40% after 10 years. AI will likely be no different, except that estimates are likely to be even wider off the mark.

Both AI bulls and bears face the same challenge: there is no simple way to track AI adoption or implementation success rates. While we lack a comprehensive adoption metric, examples are emerging. L’Oreal reported a 63 percentage point increase in converting inquiries to sales using an AI recommendation app. A leading coding program saved R&D departments up to 55% of their time. A fintech firm saw an 82% improvement in customer service resolution speed in the first month of using AI.

With inexpensive generative AI, companies can do live translations with lip-syncing for seamless multilingual presentations. One logistics firm translated its earnings release into five languages simultaneously – potentially game-changing for serving a global customer base. The inclusive benefits of AI are underappreciated.

Currently, the market treats only AI enabler companies as the play, perpetuating Atlas memes. But short-term skepticism about their valuations early in this transformative theme risks missing the forest for the trees. Since 1990, missing the S&P 500’s 30 best days halves compounded returns. The best long-term strategy is to stay invested, whether through leading enablers or future standout adopters.

Markets will swiftly judge any theme’s missteps, and this is inevitable. Yet for long-term investors, the theme is best summed up by: “Pessimists sound smart; optimists make money”. FT