Trail 167 — Tail risk, what?

Markets Update by Aashish Singh Business Update by Sylvia Lo

Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.

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In key market news, Bitcoin surpassed the once-unimaginable $100,000 mark earlier this week in a broad rally that has also lifted coins across the digital-asset industry. Hiring in the US rebounded in November following an October disrupted by storms and strikes. Employers added 227,000 jobs, and wages exceeded expectations. The Chinese yuan, which has experienced a continuous decline since Trump’s re-election, hit its lowest price in the last 15 months with calls for further declines from here on. Putting it all together, risk on mode continues unabated. US economy is still cruising. Chinese economy had problems before Trump. They will worsen post his tariffs.

The S&P 500 closed at another record high, just shy of 6,100. This does not change my outlook on 6,300 by March. The index is already more than fully priced. It just means we could get there a lot sooner and trade sideways. Shorter term US rates dipped on anticipation of cuts later this month, though the market is pricing a small probability of a pause. Dollar traded flat to G10/EM peers maintaining its gain from the recent months run up. Gold was flat too, but notably the PBOC has started adding to its reserves again.

What is absolutely highlighting the lack of investor complacency is that option price implied volatility across asset classes was decimated. There is no protection buying for either small pullbacks or tail events. This is taking the price to perfection approach to its limits, or arguably past that. There are widening cracks as noted previously, notably on mortgages and leveraged loan portfolios that will not be able to sustain these high rates for much longer. Investors are mimicking Trump’s approach of firing the salvo and leaving the nuances as someone else’s problem. They also have excess liquidity while the dollar continues to strengthen. House rules don’t apply to the dollar. This is what has punished Bears over the past decade. Its why Trump attacked the BRICS feeble currency bloc even before getting back in office. A strong Dollar plus an ability to print unlimited currency and bail yourself out of any tail risk event, means you are the House. Tail risk protection is for the rest of the common folk. Markets remain risk on.

Momentum Mania

Bitcoin rallying to the moon, meme stocks surging for no good reason, bearish bets cratering all at once.

For observers without a sense of Wall Street’s long history, the great market mania of 2024 seems new and dangerous. To Bill Gross, who turned 80 this year, this kind of frenzy at the fringes of American markets has been a fact of life for investors since before he was born.

China Resumes Gold Purchases

China’s central bank expanded its gold reserves in November, ending a six-month pause in purchases after prices for the precious metal rose to a record. Bullion held by the People’s Bank of China climbed by 160,000 fine troy ounces last month to 72.96 million fine troy ounces, according to official data released on Saturday. The PBOC had added to its stockpiles for 18 consecutive months up until April this year, helping to underpin the strength in bullion prices.

US Hiring Rebounds

US hiring picked up in November and the unemployment rate increased, pointing to a moderating labour market rather than one that’s significantly deteriorating. Nonfarm payrolls rose 227,000 last month following an upwardly revised 36,000 gains in October — a month constrained by storms and strikes — according to Bureau of Labor Statistics figures released Friday. Smoothing out volatility, payrolls growth over the past three months averaged 173,000 — a step down from the robust pace seen earlier this year.

In The World of Business

This week, Intel’s CEO steps down amid struggles with missed AI opportunities, plummeting market value, and leadership changes highlight its urgent need for reinvention amidst fierce competition from industry giants like Nvidia and TSMC.

Tony’s Chocolonely, an impact-driven chocolate company, uses bold marketing and ethical practices to challenge exploitation in the cocoa industry while balancing rapid growth and industry pressures.

Salesforce’s ambitious pivot to its AI platform Agentforce has boosted investor confidence, but the company faces intense competition and must prove the technology’s long-term value as it ramps up adoption efforts.

Intel’s Crisis

Once the undisputed leader in the semiconductor industry, Intel now faces a precarious future after CEO Pat Gelsinger stepped down amid dwindling investor confidence and severe financial woes. During Gelsinger’s two-and-a-half-year tenure, the company struggled to regain ground in the competitive chip making industry, missing the AI boom and watching its market cap plummet below $100 billion for the first time since 2012. Despite aggressive cost-cutting measures, including a 15% workforce reduction and suspension of its long-standing dividend, Intel’s attempts to compete with industry giants like Nvidia and TSMC have fallen short. The company’s failure to capitalise on AI opportunities, alongside missed profit targets, has left its stock in free fall and its future uncertain.

With its foundry business restructured into an independent subsidiary and funding from the CHIPS Act secured, Intel hopes to mount a comeback by expanding U.S.-based semiconductor production. However, skepticism remains as competitors like Nvidia soar, fueled by explosive AI-driven growth. Interim co-CEOs David Zinsner and Michelle Johnston Holthaus face an uphill battle to restore Intel’s position in a rapidly evolving market. The company’s next leader will inherit the monumental task of revitalising the iconic chip maker and navigating the long road to recovery.

Chocolate with a Cause

Born from a journalist’s mission to expose exploitation in the cocoa industry, Tony’s Chocolonely has transformed into a bold brand blending purpose and playful marketing to challenge industry norms. From its unequally divided chocolate bars symbolising inequity to stunts like omitting chocolates from advent calendars, Tony’s has captivated consumers while driving awareness about ethical cocoa sourcing. Despite being a smaller player, its impact has been significant: Tony’s holds 20% of the Dutch chocolate market, is the fourth most popular in the U.K., and continues to expand globally, including into Walmart stores in the U.S. Its rapid growth has raised £40 million in U.K. turnover alone, supported by creative campaigns that keep social justice at the forefront.

However, Tony’s success comes with challenges. Rising cocoa prices and supply chain issues have pressured the company, which raised prices by 7% in Europe but grapples with ensuring benefits reach farmers. Its provocative campaigns, like mimicking competitors’ wrappers to spotlight child labor, have sparked legal battles and product removals but reinforced its mission to reform the cocoa industry. Tony’s dedicates 7% of its revenue to impact-related costs, championing a model that balances profit with purpose. “We aren’t a chocolate company,” says its U.K. boss, “We’re an impact company that makes chocolate.”

Salesforce’s AI Gamble

Salesforce’s ambitious pivot to its AI-powered Agentforce platform is capturing investor attention, with CEO Marc Benioff aiming for tens of thousands of customers to adopt the technology by early 2025. The platform, designed to automate tasks like customer service through decision-making AI agents, was spotlighted at Salesforce’s annual conference, and early traction includes 200 deals since its October 24 launch. This optimism helped Salesforce shares surge 11% after third-quarter earnings revealed an 8% revenue growth to $9.44 billion and a 25% increase in net income to $1.5 billion. To accelerate adoption, Salesforce is hiring up to 2,000 new salespeople to capitalise on what Benioff described as an “incredible distribution opportunity.”

Despite these promising developments, the road ahead is uncertain. Wall Street is eager to see if Salesforce’s undisclosed investment in AI will yield long-term returns, as Agentforce remains a minor contributor to the company’s $37 billion annual revenue. While the potential market for AI products is massive, competition from tech giants like Microsoft and Google is fierce. Benioff acknowledges that the journey is just beginning, with Agentforce 2.0 set to launch in December, signalling Salesforce’s commitment to dominating this critical AI frontier.

Until next week.