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Market Pulse
Friday, June 14, 2024

Football, Inflation & Big Tech, Apple’s AI Unveiling and… a French Gamble

Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

Our three stories this week:

  1. Football, Inflation & Big Tech
  2. Apple’s AI Unveiling
  3. A French Gamble

Adrian (Portfolio Manager), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Football, Inflation & Big Tech

Gary Lineker famously described football as a simple game: “Twenty-two men chase a ball for 90 minutes and at the end, the Germans always win.[1]” It’s hard not to see the analogy with capital markets these days: there’s a lot of conflicting macro data, it pulls markets in all different directions, and in the end, Big Tech stocks win[2].

Wednesday was a double whammy day that started with the announcement of US inflation figures. They were lower than expected, sending bond yields and other securities related to them downwards along with the US Dollar. At the same time, Gold soared. A few hours later, however, a hawkish Federal Open Market Committee meeting sent everything in reverse, although yields still ended the day lower.

While recent economic data—lower inflation, strong job growth—hints at a healthy US economy, the Federal Reserve remains cautiously optimistic, acknowledging the potential for rapid shifts. 

This cautiousness contrasts with the stock market's exuberance, fuelled by a weaker dollar and renewed appetite for risk. The Nasdaq and S&P 500 soared to new records, driven primarily by the "Magnificent Seven" tech giants. This latest surge further cements their dominance, as these seven companies, representing a mere 1.4% of the S&P 500's constituents, now command a staggering 32% of its market capitalization[2].

Lower bond yields and Apple’s AI launch (see story below) are between them enough to drive the Magnificents to ever greater heights in the short term. But the market must still confront whether these companies’ massive growth is being made at the expense of all the others in the index and most importantly whether it is sustainable.

2) Apple’s AI Unveiling

Apple's venture into artificial intelligence, dubbed "Apple Intelligence," has drawn mixed reactions, with the stock initially dipping before rallying 7% on Tuesday. While the new AI features may seem similar to existing offerings from competitors like Google, their seamless integration with Apple's other products is what sets them apart.

Leading the charge was a revamped Siri, now equipped with enhanced text and image generation capabilities. These features will be exclusively available on iPhone 15 Pro and newer models, potentially incentivising users to upgrade and drive a stronger iPhone 16 cycle.

Meanwhile, the anticipated strategic partnership with OpenAI could have initial revenue implications. While the financial details remain unclear, a revenue-sharing model could lead to short-term dilution as users shift from traditional, more profitable search.

Some investors have also raised concerns about increased capital expenditure due to Apple's Private Cloud Compute (PCC) initiative. However, the company's flexibility in potentially utilising third-party data centres could mitigate this risk.

Apple's commitment to AI extends beyond the iPhone. Numerous AI-infused features have been introduced across various operating systems, including iPadOS and MacOS, with expectations that they will play a significant role in the upcoming iPhone 16 launch.

Overall, Apple's AI advancements showed their characteristically deliberate and calculated approach, prioritising integration and user experience. The company's strategic partnerships and ongoing development efforts signal a commitment to remaining adaptable in the fast-changing AI landscape.

3) A French Gamble

The funny thing about capital markets is that there’s an indicator for almost anything. We've previously discussed the VIX, or "fear index," but chances are you haven’t heard of the OATS spread. This intriguing indicator measures the difference between interest rates on French and German government bonds. Its fluctuations reveal not only the relationship between these two economic powerhouses but also, some argue, the overall stability of the European Union.

Like the VIX, the OATS spread is typically calm and uneventful. However, when it surges unexpectedly like it did this week, investors should take notice. 

An S&P Global downgrade on May 31st sparked the initial volatility in the OATS spread, which persisted despite a subsequent European Central Bank rate cut. But the situation intensified after French President Macron's unexpected call for snap legislative elections, triggered by substantial gains by the far-right Rassemblement National in European elections. By Tuesday, rumours of Macron's resignation added further fuel to market instability.

Since then, the French President has sought to calm fears and has denied rumours of his resignation. However, his unexpected call for an election is a significant political gamble, intended to expose the far-right party and the flaws in its ideas[3].

This episode is reminiscent of David Cameron's decision to hold a referendum, a gamble that also had far-reaching consequences. President Macron should be mindful that political parties often undergo significant changes once in power as they strive to maintain their grip on authority. The risk of this strategy backfiring is high, and it could ultimately strengthen the very forces he aims to weaken.


[1] https://x.com/GaryLineker/status/1598420440095289346?lang=en

[2] https://www.bloomberg.com/opinion/articles/2024-06-13/fed-rates-magnificent-seven-win-again-on-double-whammy-day?srnd=undefined

[3] https://www.ft.com/content/7f9552e3-fba5-4ef9-8858-270a9b976ac5


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