Weekly Market Spice 8

X’s $19 billion valuation 1 year after the $44 billion acquisition

An internal document leaked from social media platform X, formerly known as Twitter, has revealed a valuation of $19 billion, a year after being acquired by Elon Musk in a $44 billion deal, which included $13 billion in debt. In an internal communication to employees, the company revealed that it would be granting equity in the form of restricted stock units at $45 per share, resulting in the $19 billion valuation. This new valuation reflects a decline in the company's worth since the acquisition by Musk. The banks that financed the acquisition, including Morgan Stanley, Bank of America, Barclays, and others, have been grappling with the debt associated with the acquisition and nursing paper losses as the company's value has decreased. X has faced financial challenges due to a drop in advertising revenue, partly attributed to Musk's approach of relaxing content moderation. Despite substantial cost-cutting and a reduction in headcount, X reported negative cash flow. To boost its revenue, X is making efforts to regain advertisers and diversify its income streams, including exploring subscriptions. In addition, Musk and X's CEO, Linda Yaccarino, have shared plans to invest in enabling payments and offering financial services on the platform to challenge the banking sector. The company aims to return to profitability by early 2024, with 245 million daily active users.

Detroit’s rising cost pressure and production uncertainty after the strike

The big three automakers, Ford, General Motors (GM), and Stellantis and the United Auto Workers (UAW) have reached an agreement, ending an unprecedented six-week strike campaign that secured 25% pay increases over a four-year contract. The new contracts will significantly increase costs for these automakers, potentially making it harder for them to compete with electric vehicle leader Tesla and non-union foreign brands like Toyota. The contract reverses GM's efforts to establish lower-paid worker groups and puts workers in GM's battery joint-venture with LG Energy under the national agreement. It also restricts the use of lower-paid temporary workers and gives the UAW more influence over the companies' investment decisions by allowing strikes over future plant closures. The strike campaign, involving nearly 50,000 UAW members, cost GM, Ford, and Stellantis billions. The new contract is expected to cost GM $7 billion over 4.5 years in higher labour costs, with similar impacts on Ford. The UAW also gained more sway over the companies' investment decisions by securing the right to strike over future plant closures. The UAW is committed to organizing workforces at other carmakers in the future.

Muted market reaction to the end of Japan’s yield curve control

The Bank of Japan has taken significant steps toward ending its yield curve control policy, which capped 10-year Japanese government bond yields at 1%. This announcement marked the transformation of the 1% cap into a reference rate, signalling the potential end of yield curve control. Investors have responded with relative calm to this development, as the BoJ aims for a gradual normalization process to avoid market disruptions. However, it does not signify the end of quantitative easing, as the central bank will continue "fixed amount" bond purchases without a fixed 1% rate. The focus now shifts to when the BoJ will end its negative interest rate policy, currently at -0.1%. Some forecasts suggest the central bank might raise interest rates as early as April. The impact on Japanese investors is expected to be substantial, potentially motivating them to repatriate capital and invest domestically as interest rates begin to rise. This could have consequences for foreign bond markets, particularly euro and dollar bonds, should Japanese investors reduce their holdings. Ultimately, the Bank of Japan aims to shift its massive Japanese government bond holdings to the private sector, especially regional banks. The yen's reaction to these changes has been moderate, as currency traders view the situation as slightly riskier due to the Fed nearing the end of its tightening cycle and the potential for Japanese currency intervention. The Japanese government may allow the yen to weaken further, but intervention risks could limit the dollar's upside against the yen, keeping it around ￥150 unless significant changes in US economic data occur.

Crypto Industry Shaken as FTX Founder Convicted of Fraud

On the 31st of October, 2023, a landmark moment unfolded in the cryptocurrency landscape as a jury of 12 New Yorkers rendered a verdict that reverberated throughout the industry, finding Sam Bankman-Fried, often dubbed the "King of Crypto," guilty on multiple counts. His trial encompassed securities fraud, money laundering, wired fraud conspiracy and four other charges following an extensive criminal trial. This legal saga unfolded almost a year after FTX, a prominent cryptocurrency exchange, declared bankruptcy. It was revealed in the court proceedings that the funds received by FTX customers were being diverted to pay off the debts of FTX's affiliated hedge fund, Alameda, following the tumultuous crypto market crash in 2022. FTX, previously valued at $32 billion, disclosed a significant $8 billion deficit on its balance sheet, rendering it incapable of meeting withdrawal requests during market downturns. The arrest of Sam Bankman-Fried had a profound impact, leading to a notable decline in consumer confidence and catalysing discussions about heightened regulatory measures for cryptocurrencies in the United States. The cryptocurrency market experienced a sustained period of turbulence, reaching a two-year valuation low of $796 billion. Similarly, U.S. venture capital crypto investments plummeted from $6.12 billion in the first quarter of 2022 to just $704 million in the third quarter, underscoring the sector's current volatility and regulatory uncertainties.

Record Gains in US Stocks Amid Low Treasury Yields

Last week, the U.S. stock market witnessed its most significant one-day gains in the previous six months, coinciding with a notable decline in the treasury yield to 4.63%. This shift can be attributed to the Federal Reserve's decision to limit the benchmark fund rate to 5.25-5.50%. Several reasons influenced this decision. Over the past two years, high interest rates increased borrowing activity among households and businesses in the country. Data also revealed a substantial slowdown in U.S. job growth for October, which was more than predicted. The recent adjustment in the benchmark rate aims to mitigate the increased costs that borrowing stakeholders face due to the consistently high interest rates and increase the U.S. job growth rate. The S&P 500 stock index, in response to these developments, achieved a robust 1.9% increase, marking its most impressive one-day performance to date. These record gains in the U.S. stock market have reverberated globally, affecting international markets such as the European bond markets. The UK gilt rate hit its lowest point since June, decreasing to 4.70%. Future market expectations reflect only a 5% likelihood of a Fed rate hike, down from 20% for the upcoming month's policy, indicating a favourable climate for further growth in U.S. stocks. This shift should serve as a positive signal for investors, suggesting a bullish market where stock investment should be looked upon favourably.