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

“Some rise by sin, and some by virtue fall.” — William Shakespeare

Overnight

Daniel Kahneman, Nobel-winning pioneer of behavioral economics, dies at 90 (WSJ)

Joe Lieberman, longtime U.S. Senator and Vice-Presidential candidate, dies at 82 (WSJ)

Court rules Coinbase engaged in unregistered sales of securities; win for SEC (CNBC)

Amazon plows $2.75B into AI startup Anthropic in its largest venture investment yet (BBG)

S&P 500 on track to have fifth straight month of gains (YF)

Yen hits 34-year low during Wednesday trading (BBG)

Lower-income consumers ordering less fast food, making fewer restaurant trips (RT)

Study finds Novo’s Ozempic diabetes drug can be made for under $5 (BBG)

Crude stockpiles build more than expected at 3.2M barrels (RT)

Redwheel Global Horizon undergoes overhaul following $2.7bn in outflows, retirement of founding portfolio manager Louise Keeling (IW)

Saudi Arabia controversially elected chair of U.N. forum for women’s rights (Semafor)

Papercup, an AI dubbing company, inks a deal with World Poker to replace human dubbing (BroadcastNow)

Home Depot buys roofing distributor in deal valued at $18 billion including debt (WSJ)

Reddit shares fall after Hedgeye names it a short idea with 50% downside (BBG)

Carnival says it will avoid Red Sea for rest of 2024 and early next year (RT)

Baltimore Bridge accident expected to cost multiple insurers billions of dollars (RT)

Retailer H&M delayed some sales campaign amid Red Sea crisis (RT)

That’s what Xi said: China is working to improve its business environment; in the meantime, U.S. firms grapple with falling revenues, security concerns(WSJ)

UBS has agreed to sell $8bn worth of loans to private capital group Apollo as part of a renegotiated deal to sell off a Credit Suisse business that securitized loans for assets (FT)

Law firm conflicts ‘permeated FTX’s bankruptcy’, professors allege in a paper; Sam Bankman-Fried is due to be sentenced today (FT)

Online resale platform Mercari announces it will no longer take a 10% cut of sales (MR)

Jefferies missed Q1 profit estimates on losses from an investment in HF Weiss Multi-Strategy Advisers but nonetheless posted gains in IB and asset management (RT) 

H&M shares jumped 16% after smashing Q1 profit estimates on improved margins, lower inventory and strong cash flow (CNBC) 

Q1 share sales outpaced IPOs as global ECM rallies (RT)

Russell 2000 is underperforming the S&P 500 by most in over 20 years (FT)

BoE warned of risks to U.K. businesses from PE bubble (FT)

McKinsey raises ‘up or out’ stakes on U.S. consultants (BBG)

Fee cuts fail to make significant impact on European ETF flows (FT)

Lucrative FX carry trade sustained by low volatility (RT)

U.S. banks face loss risk from multi-family property loan exposure (RT)

Robinhood launches a credit card (AX)

S&P affirms U.S. ratings as stable (RT)

Housing-bond sales hit a 10-year high (BBG)

DraftKings shares slump on news NCAA wants to ban college prop bets (BBG)

Egan-Jones back activist Nelson Peltz in Disney proxy fight (RT)

Deutsche Bank shares climb to a six year high (RT)

S&P downgrades Paramount debt to junk (BBG)

JPMorgan bets on new wealth planning tool to draw investments (RT)

Bain Capital promotes top Asia dealmaker David Gross to co-managing partner (FT)

Chemours received information requests from prosecutors and SEC (WSJ)

Amazon’s senior employees may not see cash pay raise this year (RT)

More Chinese companies to be added to U.S. import ban list (WSJ)

Trafigura to pay $126M and plead guilty to U.S. charges (BBG)

Russia doubles down on blaming concert massacre on Ukraine and the West (WSJ)

Read-a-thon to mark one year since Evan Gershkovich’s detainment (WSJ)

First news

• ESG, net-zero, tokenization, AI, and the people who love them.

MARKET LEVELS

MORNING INSIGHT

Good morning!

GS fund flow data shows investors pulled $22b from equities last week, hardly a sign of a top.

The $6T in cash on the sidelines remains a tremendous support for stocks.

Small-caps strengthen as markets believe Fed cuts are coming.

Click HERE for more.

TECHNICAL

Please click HERE to view Mark Newton’s appearance on Fox Business News yesterday.

U.S. Equity markets have exhibited a bit of a slowdown in recent days, but both QQQ and SPX have successfully held up quite well on their respective retracements as compared to the former upswing from 3/15 into 3/21 – a sharp four day gain. As mentioned Tuesday, which yet holds true, the minor pullback has given back less than 50% of the prior gain in the same period of time. Bottom line: this lack of material weakness is bullish and should translate into sharp gains as the month of April gets underway.

Heading into end of quarter, with one full trading day left in the month and quarter, SPX is higher by 3% over the last month, which follows a recent string of four consecutive straight months of gains.

This past quarter could very well represent the twelfth-best 1^st Quarter since 1950. Looking back, since 1950, the top 24 instances of the best 1^st quarter returns have never led to a down year. Only 1987 (of the top 15 first-quarter returns) proved negative from March into year-end. However, as we remember, the year as a whole still turned in positive gains.

As discussed last month, the median return after a positive string of four straight winter months of November-February has been 15% from March into year-end. This string has happened 16 times in the last 90 years and has an uninterrupted track record of gains from March into year-end.

Click HERE for more.

CRYPTO

• The SEC brought a lawsuit against Coinbase last summer, alleging the platform was operating an unregistered exchange, broker, and clearinghouse under federal securities laws, and through its staking platform, Coinbase was engaging in the unregistered offering and sale of securities. The lawsuit additionally made claims that through Coinbase’s Wallet product, it was acting as an unregistered broker. Coinbase had filed a motion to dismiss the case, but Judge Katherine Polk Failla ruled against the dismissal, with the exception of the allegations pertaining to Coinbase Wallet. The dismissal was more of a long-shot motion from Coinbase, and now the case will proceed to the courts, where Coinbase will present its case similarly to how Ripple did (and won). Coinbase and the SEC will have until April 19th to agree on a case scheduling plan. Coinbase’s stock (COIN) fell following the headline and is currently down 2.51%.
• The U.S. Department of Justice (DOJ) has filed charges against crypto exchange Kucoin and two of its founders, Chun Gan and Ke Tang. The DOJ alleges that Kucoin has operated as an unlicensed money-transmitting business, violated the Bank Secrecy Act, and charged Gan and Tang with related conspiracy charges. Both charges against Gan and Tang carry a maximum sentence of five years in prison. The DOJ says that Kucoin has failed to implement reasonable anti-money laundering and know-your-customer (KYC) procedures. The indictment claims Kucoin has deliberately avoided U.S. AML and KYC regulations and that its platform has been used to launder over $9 billion. Kucoin released a statement telling customers that their assets are safe and that they are investigating the details. This has not stopped users from withdrawing assets as total exchange assets have dropped from $6 billion to $5.2 billion since yesterday, while Kucoin’s native token KCS has dropped over 20%. In conjunction with the criminal charges, the CFTC has filed a civil action against Kucoin, seeking disgorgement, civil monetary penalties, and permanent trading and registration bans.  

Click HERE for more.

FIRST NEWS

The Times They Are AI-ing. Newly available to a few hundred paid subscribers in the FT Professional tier, aimed at business professionals and institutions, The Financial Times now sports a new Claude/Anthropic-powered generative AI chatbot called Ask FT that attempts to answer questions its subscribers ask. Ask FT says it’s ‘model agnostic’ and may switch to another provider in the future. For the moment, it’s in beta and not available to most subscribers. The Verge

“Promotions aren’t just about the likes, they’re about the law.” Kim Kardashian has been fined $1.26 million for promoting crypto on social media – last summer – without disclosing she was being paid. In related news, the U.K.’s Financial Conduct Authority (FCA) has announced that it’s cracking down on social media ads, warning firms and so-called ‘finfluencers’ to keep their social media ads lawful. Amid a ramp-up in scrutiny of financial promotions, over 10,000 misleading adverts (up from ~8,500 in 2022) were removed last year. Lucy Castledine, Director of Consumer Investments at the FCA and the source of the pithy quote above, also had this to say: “Any marketing for financial products must be fair, clear, and not misleading, so consumers can invest, save, or borrow with confidence. We will take action against those touting financial products illegally.” TiM, FCA

By Any Other Name. The opposition to ESG investing principles is far from over. According to Pleiades Strategy, a policy research group, 38 laws targeting ESG principles have been enacted across 17 states as of the end of January. It’s understandable why the Wall Street Journal questioned this week whether the ESG moniker has run its course.

That the name itself matters more than the underlying concept is an insightful observation. While concerns over climate change haven’t disappeared, of course, as Larry Fink stated recently, the ESG name has become weaponized. Since the ESG label has driven powerful investment inflows, it’s natural to wonder: what faddish terms will take its place? Here are two possibilities.

Net Zero

The ‘net-zero’ term has been prominently featured recently. Morningstar launched a series of indices to identify companies leading the low-carbon transition, described as follows: “Each is designed to help investors target companies across sectors that are leading their peers in moving towards net-zero.” Aon introduced a new responsible investment tool offering institutional investors portfolio insights: “The solution also includes effective risk management as well as alignment with goals and ambitions such as net-zero.”

Investment providers are embracing the term as well. BNP Paribas unveiled a new fund claimed to be the first equity strategy with net-zero alignment as its primary goal, narrowing its investible universe via ‘net-zero screening’. Their press release noted this fits their ‘wider net-zero efforts’.

Clients are following suit. Two U.K. pension funds had previously set net-zero targets, prompting the advice: “It’s probably a good time to call other pension funds and remind them of your climate-related products.” It seems wise these days to prominently feature ‘net-zero’ in product names. One wonders what the half-life of this term is, given how closely it’s related to ESG. It may be that net-zero’s abstraction of vaguely officious, long words (en-vi-ron-ment, so-ci-al, go-ver-nan-ce) and their replacement with a catchy, punchy, amphibrachic three-syllable term that can conveniently mean slightly different things to different people while still remaining broadly positive (think Coke Zero, ‘zero regrets’, etc.) will ensure a long reign for the moniker.

Tokenization

BlackRock debuted a tokenized fund on Ethereum this week, partnering with Securitize to offer the BlackRock USD Institutional Digital Liquidity Fund, requiring a $100,000 minimum investment. The asset management giant wasn’t alone in tokenizing assets. Citi has partnered with Wellington and WisdomTree to tokenize private funds, as described:

“With ABN AMRO simulating the role of a traditional investor, the proof of concept tested the tokenization of a Wellington-issued private equity fund by bringing it onto a distributed ledger technology (DLT) network. The underlying fund distribution rules were encoded into the smart contract and embedded in the token transferred to hypothetical WisdomTree clients.”

While the specifics are complex, the enthusiasm suggests firms are becoming accustomed to tokenization terminology.

On a related note, Mercer, the investment consultants, have published AI Integration in Investment Management, a report based on a survey that collected responses from investment management, technology, and business-development teams at asset management companies. The survey included 150 managers across various asset classes and is notable for insights into the following, among other things:

AI is anything that doesn’t yet work. This phrase may serve as a useful touchstone and is evident in the report. The survey asked which technologies are considered “AI.” 93% said generative AI is “AI,” and 85% said machine-learning models are AI. However, factor models were definitely not considered AI: only 12% said linear factor models were AI.

The more AI, the less likely I am to use it. The striking aspect of the above responses was that the more managers considered a technology to be “AI,” the less they were actually using it. The order was literally flipped: 62% use quantitative screening, but only 9% consider it AI; and only 26% said they were currently using generative AI.

When asked how companies integrate AI into the investment process, it’s evident that much of the integration is done via suppliers. The top use cases are ‘Incorporating alternative data sets,’ ‘Developing forward-looking indicators,’ and ‘Analyzing market indicators.’ This makes sense, as few asset managers are internally staffed to carry out such technical research.

At times, the integration disintegrates

Ten days ago, the SEC issued a stern warning against ‘AI washing’ – the practice of falsely claiming to use artificial intelligence in investment strategies. In a settlement announced on March 18, the SEC charged two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making misleading statements about their purported use of AI. The firms agreed to pay $400,000 in total civil penalties to resolve the charges, in the usual manner – i.e. without admitting or denying the SEC’s findings. Delphia paid $225,000, while Global Predictions paid $175,000.*

The SEC action follows an Investor Alert issued in January, warning of bad actors exploiting AI’s popularity and complexity to lure victims into scams. The regulator appears determined to crack down on firms making false or misleading claims about their use of AI in investment processes.

Putting AI and ESG together

ESG ratings have faced criticism for inconsistency, unreliability, and complex terminology. Yet the combination of AI with expanded data sources can offer transformative potential for assessing companies’ ESG credentials. Can AI and data be leveraged for enhanced ESG evaluation?

Leading firms on the order of Axa Investment Managers have developed natural-language-processing tools to analyze vast volumes of corporate documents, including sustainability reports, in order to evaluate how well business activities align with the UN’s Sustainable Development Goals. According to Théo Kotula, an ESG analyst at Axa, “AI can bring super-useful solutions in digesting huge quantities of data. That’s not to say it will replace ESG analysts. But it could make our jobs easier and quicker.”** Mercer, Fund Marketer, FT

^{* SEC Chair Gary Gensler said, “We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not. Investment advisers should not mislead the public by saying they are using an AI model when they are not.” Gurbir S. Grewal, Director of the SEC’s Enforcement Division, elaborated, “As more and more investors consider using AI tools or investing in companies claiming to harness AI’s power, we are committed to protecting them against those engaged in ‘AI washing.'”}

^{** It’s true that identifying the ability to measure and track positive or negative social and environmental impact is likely the biggest benefit of AI for an organization’s sustainability goals. AI can also enhance ESG decision-making for asset managers by incorporating a much broader set of data points than otherwise, including news reports, blogs, social media, satellite data, and sensor data that can monitor pollution, deforestation, and water scarcity in real-time.}

^{At Amundi Investment Institute, Marie Brière notes that AI harnesses these new forms of data to assess companies’ environmental impact, physical risks, social controversies, and potential costs, while also uncovering greenwashing. “You could do this before,” says Brière, who is head of investor intelligence and academic partnerships at the institute. “But it’s now much quicker and uses quantitative tools.”}