The Stock Market
Global Market: S&P 500 & NASDAQ
The S&P500 and NASDAQ have seen a noticeable recovery from the SVB collapse two weeks ago. The S&P500 crawled back to a closing price of 12768.70 on 24 March, similar to its price just a month ago, while the tech-heavy NASDAQ performed much better at 12767.05 on the same date, a 5.88% increase from the previous month. One driver of the NASDAQ’s performance could be the speculations surrounding TikTok in the US. Should the platform be banned, this will open a floodgate of users into US platforms like Google’s YouTube or Meta’s Instagram, driving up their potential value.
Optimism, however, remains muted as interest rates continue to rise to curb inflation following the bank runs worth up to $500 billion in outflows on smaller banks. Previous predictions for interest rate hikes to cease are delayed a further week as it climbed another 25 basis points the past week. Despite promises by the government to bail out depositors, the CEO of hedge fund Pershing Square Capital has been openly critical, stating their efforts as insufficient. While the bank runs are relatively contained, the fundamental issue is that these problems prolong the longstanding inflation crisis. Persistent issues weigh heavily on the shoulders of smaller lenders while they will only narrow their pathways to cheaper capital, setting back the entire innovation ecosystem.
Global Market: FTSE100
The FTSE100 continue to dip as events in Europe plague the UK. As of 24 March, it has fallen 6.67% to 7405.45 from its stable prices at the end of February. The FTSE100 has a high weightage of falling banking stocks like Deutsche Bank, which have fallen off dramatically following depositor pessimism that came with the merger of Credit Suisse and UBS, which will be covered in more detail below. Additionally, the UK market was hit with more bad news as inflation unexpectedly spiked to 10.4% instead of falling to 9.9%, as the Bank of England predicted. The only thing worse than high inflation is the element of surprise, and thus, the government is now looking for reasons to justify the spike. Some analysts have attributed it to the energy crisis and food shortage, but these volatilities should peter out very soon. Curiously, the core inflation rate has also been rising from 5.8% to 6.2%, and thus, a 25 basis point increase in the inflation rate was expected to combat this.
Merger News: Credit Suisse
The banking crisis in Europe is two-fold, first a minor spillover effect following the SVB collapse, as covered two weeks ago. Still, a more significant failure recently has befallen the European market: Credit Suisse’s fall.
The pride of Switzerland has always been its financial dominance, and its duopoly of UBS and Credit Suisse has been the historical bedrock of the nation. Credit Suisse was involved in financing modernisation and infrastructure projects in Switzerland throughout the 20th Century and even later 19th Century. It has relied heavily on its investment banking arm, bringing it much success even throughout the many financial crises in the 21st Century. However, its corporate risk management tool has always been its downfall, and its historical success could be why upper management has never sought to adjust its model. In recent years, poor investments in Greensill and Archegoes Capital led to the vapourisation of $10 billion and $5.5 billion, respectively. Its weak corporate governance was publicly exposed as key stakeholders were exposed to corruption. At the same time, keen financial journalists unpacked links between their capital and kidnapping, cocaine smuggling and even assassinations.
With such a risky business model, social media again came to deal the killing blow as Chinese whispers were going around about their poor financial position, leading to depositors making withdraws valued up to 8% of its asset under management. Along with the timing of the many banks runs, and a comment from Saudi investors suggesting a seizure of furthermore investment, over $35 billion in assets were withdrawn, leading to the Swiss government stepping in.
The desperation to preserve the Swiss financial system was prevalent as UBS was forced to buy Credit Suisse for around $2 billion. This deal circumvented traditional governance structures as the government skipped over the six-week consultation period and even bypassed any voting by the UBS board members. Internally, the buy over will stagnate wages for a while due to a lack of competition. Credit Suisse’s investment banking arm is expected to shrink to 33% of its current operations. Externally, this deal sparked fears which have led to reactionary selling by Deutsche Bank clients despite them having a sound business strategy, causing their stocks to fall 14%. Most of these fears arose because the government wiped out $17 billion worth of Tier 1 bonds following the merger. Across Europe, Barclays and Natwest shares are down 6% and 4%, respectively.
The Crypto Market
Cryptocurrency Market: Bitcoin & Ethereum
The strength of cryptocurrencies remains strong as Bitcoin and Ethereum values remain close to yearly highs at 27869.90 and 1773.47. Pessimism about traditional banks has been driving the DeFi banking markets. However, many additional factors mutate cryptocurrencies’ ability to break their stagnant valuations.
Investors have been reminded that decentralised banking and digital currencies are not necessarily safer than traditional banks. Terrafrom Labs founder, Do Kwon was finally arrested in Montenegro regarding securities fraud and corruption following the collapse of his Luna Tokens in 2022.
Regulation News: Securities Exchange Commission (SEC)
Coinbase recently fell under the scrutiny of the SEC after it was issued a Wells notice for its staking rewards products, meaning that future action will be taken against them for violating securities laws. Coinbase has made many public statements that its staking services should not be considered a security, going so far as to state that security laws are unnecessary because the blockchain system has already enabled full transparency on transactions and information. Cryptonatives rally around this sentiment as there is reason to consider if definitions of securities under traditional securities laws can be applied to digital assets without diminishing their innovative benefits.
Regardless of how we choose to read IT law, the reality is that the politicisation of digital economies has been a significant barrier for digital assets to thrive. In the past week, two Republican figures, Senator Ted Cruz and Governor Ron DeSantis, have opposed the government’s call to implement a Central Bank Digital Currency, calling it an attempt to “promote government-sanctioned surveillance”.
On the flip side, crypto-natives have been calling for digital assets to be the solution for the future of banking in light of these failures. Most banks that collapsed have a close relationship with crypto companies. However, some believe the collapse is due to an overreliance on intermediaries to maintain a financial system. By switching to blockchain-built products, individuals can make their transactions immediately, directly and entirely transparently. A combination of these events caused the value of cryptocurrencies to dip by around 20%, but they have since recovered following decreased faith in traditional banks.
Product News: Vechain
Use cases of blockchain in sustainability efforts and supply chains have been at the forefront of product innovation towards the end of 2022. Vechain has developed a product that may tackle both pathways through tokenisation. Their VET tokens are the foundation of their waste management innovation which can help regulators more easily track companies’ waste management data on the chain. Besides removing any chance of data manipulation, tokenisation allows monetising incentives for companies to lower their waste or emissions throughout the supply chain.
Such enterprise-grade technologies are a rarity in the current market. If this product can gain sufficient backing from non-governmental organisations, we can expect the price of VET to soar in the coming months. Taking a peak under the hood, the management of VET looks sound, as its founder is the ex-Chief Information Officer of Louis Vuitton China. The company has already secured five strategic partnerships, including one with PwC of the Big 4. It has also co-developed a white paper with Boston Consulting Group to highlight the company’s strength in traceability and incentivisation to support sustainability strategies across different ecosystems, from fashion to energy. VET tokens are the ones to watch for 2023.
In Other News…
Digital Transformation News: Artificial Intelligence (AI)
ChatGPT has been all over the media since the end of 2022. Generative AI is the flavour of the month, with companies like Microsoft and Adobe releasing AI image creator services while Canva releases AI-supported picture editing suggestions. Consultants will tell you that AI has always been one of the core digital transformation tools in the past five years, but consumer demand for the products in light of ChatGPT or even Meta’s Make-A-Scene have pushed these efforts to the to-do list. Over 63% of companies surveyed by McKinsey state that they have prioritised AI over other digital products.
Investment in the AI sectors increased by 633.33% to $93.5 billion in 2021, and this will continue as 63% of companies have also stated they expect their investment in these technologies to rise. Bill Gates recently added more fuel to the fire by sharing his thoughts on how AI development will not only increase business efficiencies and thus profitability. It will serve to solve equality issues like education. His words will likely spawn more investments and AI products over the next few months.
With investment sentiments at an all-time high, quelling pushes for rash investment in the next big AI innovation is essential. Transparency on AI’s moral and ethical risks is vital, not just because of its use of personal data but also because of its potential effects on society. Using Google’s Bard AI as an example, its demo has failed spectacularly on a global scale. From having a 0% success rate and brainteasers which its competitors aced to relaying false information about the James Webb Scape Telescope, Google’s valuation tanked by $100 billion. Predicting the next big thing is not easy, and due diligence is more important than ever to allocate the right financial resources to the best products.
Will equality be seen as an “optimal” decision by AI? That will only depend on these early developmental stages, but from a financial perspective, investors will need to look to support businesses with a more charitable purpose. Impact investment will be another consideration for capital allocation, as Gates mentions that innovation will likely help the paying masses rather than the needy.
TikTok – CEO Shou Zi Chew underwent an interrogation over the connection between TikTok and the Chinese government. Despite Chew’s explanation of a “Project Texas” to transfer data processing activity onto American soil, officials seem adamant that the only way to proceed is if TikTok is listed publicly or bought out by an American company.