Artificial intelligence wars
One of the most interesting recent themes in tech is the step-change improvement in artificial intelligence. This week, the market started to pick winners and losers. Microsoft is investing and partnering with Open AI, to incorporate its technology into Bing and the broader ecosystem, which they presented earlier in the week. Not to be outdone, Google hosted an event to showcase its AI capabilities, where its AI chatbot, Bard, shared inaccurate information in a promotional video. These events cost Google more than $100bn in market value. The market has recently been generously awarding companies related to winners in the AI race, including C3ai, Baidu, and Nvidia. While AI is an exciting and important long-term development, it is too early to pick winners and losers. After several years of speculative bubbles in technology, it seems the market longs to rally around the latest hot trend. In reality, technology stocks remain in a downtrend, with continued risk to valuations given higher interest rates.
Russia fires back against sanctions
For the first time since the war in Ukraine began, Russia responded to sanctions by cutting oil production by 500,000 barrels per day beginning in March. While only 5% of Russia’s current production, this comes as the IEA expects global oil demand to surge to all-time highs, driven by China’s re-opening. Being the world’s 3rd largest oil producer, cutting production is one of the most effective ways for Russia to respond to Western sanctions. While a concern since sanctions were first announced, this is the first time Russia has actually acted, giving way to potentially higher oil prices. It is a powerful lever for them as the world continues to fight against inflation.
Interest rate volatility continues
After one of the worst years in a long time for fixed-income assets in 2022, interest rate volatility has persisted thus far in 2023. The yield on the 10-yr US treasury began the year close to 4%, declining to as low 3.3% before rebounding to 3.75% today. The 2-yr US treasury began the year at 4.4%, declining to 4.06% before rebounding to 4.48%. These are very large moves for bond markets. As we have written, bond markets have been at odds with the Federal Reserve, with markets pricing in lower interest rates by the end of this year, while the Fed keeps insisting on higher rates for longer. Given some of the positive economic data over the last week, bonds moved closer to embracing the Fed’s outlook, at least for now. As a reminder, the level of interest rates (which move inverse to the price of bonds) is the basis for borrowing costs across the economy, including interest rates on mortgages, car loans, and credit cards, in addition to corporate borrowing costs.