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The world is a mess and Wall Street isn’t paying attention
25 Jan 2024
2024 is less than a month old and markets have already soared to new heights.
The S&P 500 hit its first record high in more than two years last week and the Dow Jones Industrial Average crossed the 38,000 level for the first time ever on Monday.
Main Street is thriving, too. US economic data remains strong and inflation is trending down. It now seems possible that the Federal Reserve will begin cutting interest rates within the next few months and that a recession may be avoided.
But geopolitical tensions are growing and Wall Street appears to be underestimating their potential impact on the global economy and markets.
What’s happening: Russia invaded Ukraine almost two years ago. Israel’s war with Hamas threatens to spark a wider conflict in the Middle East. The United States and China are squabbling about trade, particularly high-powered AI chips that both believe carry consequences for national security. And China continues to menace Taiwan.
Now, shipping is avoiding both the Red Sea and the Suez Canal, as Iranian-backed Houthi fighters attack vessels and Pakistan and Iran have both conducted strikes on each other’s territories in an unprecedented escalation of hostilities between the neighbors.
Together, these troubles could create what BlackRock analysts call a mega force, or a structural shift in the economy.
“These developments have accelerated global fragmentation and the emergence of competing geopolitical and economic blocs,” analysts at the world’s largest asset manager wrote in a note to clients on Monday.
The openness of countries to trade with each other has stalled, they said, as countries retrench from the global marketplace, citing national security concerns. Less trade could mean lower supplies to meet demand — and that could be bad news for inflation around the world.
“Geopolitical fragmentation is one of the reasons we see persistent inflation pressures — and policy rates staying above pre-pandemic levels,” wrote the BlackRock analysts.
The World Container Index, which tracks freight rates on eight major routes to and from the United States, Europe, and Asia, increased by 23% last week, according to Drewry, a maritime research and consulting firm. It’s more than doubled since December. Shipping insurance costs are also rising.
BlackRock analysts say that they believe the risk of escalation in the Red Sea and Suez Canal is high — the US and UK attacked Houthi targets in Yemen on Monday in their second joint operation this month. As is the risk of rising tensions between the US and China as Taiwan remains a significant flashpoint.
Stocks and other assets have so far been fairly unmoved by geopolitical events, but “we worry they may not be appreciating that we have entered a new geopolitical regime. The old playbook no longer applies, in our view,” wrote the analysts.
“We expect deeper fragmentation, heightened competition and less cooperation between major nations in 2024.”
Others agree: JPMorgan CEO Jamie Dimon has also been sounding the alarm over geopolitical tensions.
“I think it’s a mistake to assume that everything is hunky dory,” he told CNBC last week in an interview from the World Economic Forum in Davos, Switzerland.
“When stock markets are up it’s kind of like this little drug we all feel,” said Dimon, but he’s still worried about escalating problems abroad and presidential elections at home throwing the economy off course.
Bank of America also gave geopolitical risk a top spot on its list of surprises that could affect markets in 2024.
According to the Center for Strategic and International Studies, so-called Magnificent Seven companies — Apple, Amazon, Google, Microsoft, Meta, Uber and Nvidia — use Taiwanese manufacturers for over 90% of their chips.
“As those same companies comprise a record-high share of the S&P 500 index, the whole US stock market is more sensitive than ever to any geopolitical escalation that disrupts the supply of semiconductors,” wrote the Bank of America analysts. “Tensions continue to mount in the region and we suspect the risks will be priced into mega-cap growth stocks in 2024.”
US stocks are soaring higher, but it’s a different story 7,000 miles east of Wall Street.
China’s stock market had a rough 2023 and the rout has accelerated in the first few weeks of the new year, report my colleagues Anna Cooban and Laura He.
Hong Kong’s benchmark Hang Seng Index fell 2.3% Monday, closing at its lowest level since October 2022. It bounced back a bit Tuesday but has still lost 10% so far this month, nearly as much as it lost in all of 2023.
Mainland China’s Shanghai Composite Index tumbled 2.7% in its biggest daily drop since April 2022. The Shenzhen Component Index, a tech-heavy benchmark, had its worst day in nearly two years, plunging 3.5%. Both indexes also recovered a little Tuesday but are still down 7% and 10% respectively in the first trading days of 2024.
It’s the worst start to a year for Chinese stocks since 2016, when investors were ditching their holdings following a market crash in 2015.
What’s happening: In recent months, a real estate crisis, the slowest growth (outside the pandemic) in decades, and a crackdown on some businesses have all combined to undermine investor confidence.
Investors, meanwhile, were left disappointed on Monday after China’s central bank decided to keep its benchmark lending rate steady. A cut to the rate would lower the cost of borrowing for people and businesses taking out loans or paying down interest, and therefore help stimulate economic activity.
Demographic data released last Wednesday confirming that China’s population is getting older and smaller hasn’t helped quell investors’ anxieties. They were also perturbed that a speech delivered by Chinese Premier Li Qiang last week at the World Economic Forum failed to mention any new government stimulus measures to help juice the country’s ailing economy.
Reduced exposure: Ken Cheung, chief Asian foreign exchange strategist for Mizuho Bank, said Monday that foreign investors were continuing to “reduce their risk exposure” to China and had “bearish expectations” for business conditions in the country.
“The Chinese government has not yet introduced effective measures to resolve the property turmoil and drive the economic recovery,” he wrote in a note.
As anxiety about artificial intelligence tools putting workers out of jobs reaches a global fever pitch, new research suggests that the economy isn’t ready for machines to replace most humans in the workplace.
The fresh research finds that the impact of AI on the labor market will likely have a much slower adoption than some had previously feared as the AI revolution continues to dominate headlines. This carries hopeful implications for policymakers currently looking at ways to offset the worst of the labor market impacts linked to the recent rise of AI, reports my colleague Catherine Thorbecke.
In a study published Monday, researchers at MIT’s Computer Science and Artificial Intelligence Lab sought to quantify the question of not just will AI automate human jobs, but when this could happen. Researchers ended up finding that a vast majority of jobs previously identified as vulnerable to AI are not economically beneficial for employers to automate at this time.
One key finding, for example, is that only about 23% of the wages paid to humans right now for jobs that could potentially be done by AI tools would be cost-effective for employers to replace with machines right now.
While this could change over time, the overall findings suggest that job disruption from AI will likely unfurl at a gradual pace.
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