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Ormiga Capital Admin

Ormiga Weekly Market Update: 15th September 2023

Updated: Apr 3

Mexico

The Mexican Peso staged a modest recovery from losses observed in the previous week, driven by the Bank of Mexico's (BoM) announcement that it will phase out its dollar hedging program. Last week the Peso sank against USD after the Mexican central bank said that it would reduce a hedge program designed to tame volatility, signaling to traders that the rally that coined the name “super peso” may already have gone too far. Additionally, the central bank has raised the benchmark interest rate 15 times since June 2021 at 11.25%. BoM has also indicated its intention to maintain these elevated interest rates for an extended period. While inflation has come down to below 5%, it still remains well above the central bank's target of 3%. This challenging economic environment reflects the central bank's efforts to balance the need to control inflation with the potential impact on economic growth.


In another intriguing development, the state of Nuevo León found itself in the global spotlight as Governor Samuel García announced a monumental investment from Tesla and its suppliers. A jaw-dropping $15 billion will be funneled into a gigafactory project located in the northern border state, a figure three times higher than what was initially projected by the federal government. Elon Musk, the enigmatic CEO of Tesla, had disclosed in March his plans to construct a new gigafactory in Santa Catarina, situated just west of Monterrey, bordering Coahuila. However, Governor García's announcement at a recent event in Santa Catarina took everyone by surprise, revealing that this Tesla factory would far exceed its original scale. He boldly stated, "The plant that we announced in March—erase it from the map. It looks like it will be twice as big."

Switching gears to the realm of brewing, the Dutch beer giant Heineken has set its sights on Mexico with an ambitious investment of 8.7 billion pesos. This substantial capital infusion will fuel the construction of Heineken's eighth manufacturing facility in the country, strategically located in Yucatán. The aim is to cater to the southeastern region and harness the state's infrastructure advantages, including access to the Port of Progreso and the Mayan Train. Guillaume Duverdier, the company's General Director in Mexico, revealed that construction is slated to commence early in 2024 in the municipality of Kanasín, near Mérida. This initiative is expected to generate a substantial 2,000 jobs, further solidifying Heineken's commitment to both the Mexican market and the local economy.

US

August's consumer inflation report may have generated much anticipation, but it ultimately left markets relatively unfazed. Economists' consensus was that this modest uptick in inflation wouldn't suffice to prompt any substantial changes in the Federal Reserve's policy. On a related note, Thursday's retail sales data for the same month managed to steal some spotlight by exhibiting a stronger performance than the previous month, especially when compared to July's figures. This robust showing underscores the remarkable resilience of the US consumer in the face of escalating interest rates. Retail sales surged by 0.6% during the month, comfortably surpassing the modest 0.1% increase that had been expected. This uptick in consumer spending was further propelled by the higher costs associated with gasoline.


Furthermore, last week delivered a surprising twist with data from the Labor Department, revealing that initial unemployment claims had risen to 220,000 for the week ending September 8th, up from 216,000 the previous week. The uptick in unemployment claims lends support to the notion that the US labor market is entering a cooling phase, fueling predictions that the Federal Reserve might hold off on further interest rate hikes for the foreseeable future. Strangely, in the current economic climate, what would typically be considered bad news seems to be good news for investors. This dynamic has been met with open arms by market participants.


Shifting gears to the tech sector, Nvidia has emerged as a behemoth in the world of Big Tech, thanks to record-breaking sales of AI chips. However, this dominance has cast a shadow on the prospects of semiconductor startups, leaving investors with cold feet. Nvidia's supremacy in crafting computer chips tailored for artificial intelligence applications has created a daunting barrier for potential competitors. Consequently, the number of venture funding deals for such startups in the US has plummeted by a staggering 80% in comparison to the same period last year.


For these burgeoning semiconductor companies, the challenges are multifaceted. Nvidia's stronghold in processing vast volumes of language data has made it increasingly challenging for aspiring rivals to gain traction. Recognizing the elevated risk associated with these startups, venture financiers have grown wary of extending substantial financial support. The high costs involved in advancing a chip design to a functional prototype, often exceeding $500 million, have made the recent pullback in funding particularly perilous for the prospects of these innovative startups.


Europe

In a significant move, the European Central Bank (ECB) made its 10th consecutive interest rate hike, pushing the key rate to 4% from the previous 3.75%. This decision was made in response to growing concerns among ECB officials regarding the persistence of elevated inflation levels. Their projections for 2023 indicated that inflation was likely to remain stubbornly high, exceeding 5.5%. However, despite this rate hike and the stark warnings about inflation, the ECB also emphasized that 4% was a level they believed, if maintained over an extended period, could play a pivotal role in cooling inflation within the eurozone. Projections suggested that inflation levels could potentially decrease to around 2.2% with such a strategy.


Meanwhile, across the English Channel, the United Kingdom faced economic challenges as the Office for National Statistics (ONS) reported a more substantial contraction of the economy in July than expected, marking a continuation of weak economic growth in the UK. Factors contributing to this 0.5% economic decline included strikes, industrial disputes, and adverse weather conditions. On a somewhat brighter note, the services and construction sectors exhibited signs of growth. Official figures also revealed a dip in July's inflation from 7.9% to 6.8%. However, the persistent high inflation rate on food items, standing at 14.9%, presented a conundrum for policymakers. They found themselves in the unenviable position of attempting to stimulate the UK economy while grappling with inflationary pressures.


To complicate matters further, major British retailers voiced concerns about a growing issue that threatens their profits – a spike in shoplifting. As British consumers wrestled with high interest rates and soaring prices, retailers warned that this 'epidemic' of theft was not only impacting their revenues but also endangering their staff. In an interview with BBC Radio, the chair of the John Lewis Partnership expressed deep concerns about the escalating problem of low-level retail crime, describing it as an epidemic that was showing signs of spiraling out of control.


In the realm of technology and finance, British chipmaker Arm made a spectacular debut on the Nasdaq, surging by more than 25%. This came following Arm's highly anticipated IPO, which was backed by SoftBank. The IPO was priced at the top end of the range, with shares offered at $51 each, valuing the company at $54.5 billion. The stock made a remarkable start, quickly surpassing $57 per share within the first 15 minutes of trading and ultimately closing the day at $63.59. This impressive performance underscored the enthusiasm of investors for Arm's future prospects.


Asia

In Japan, there is optimism that the country may finally be overcoming its decades-long battle with deflation. The government suggests that Japan could be at an inflection point as both prices and wages show signs of broadening growth. This outlook aligns with views from the Bank of Japan (BOJ), which has also noted changes in corporate pricing and wage-setting behavior. If this trend continues, it could pave the way for gradually phasing out the massive fiscal and monetary support that Japan has relied on. Japan's economy demonstrated promising signs with 6% annualized growth in the second quarter of the year and a quarterly gain of 1.5%, pushing its gross domestic product (GDP) to a record high.


China's rapid borrowing spree, particularly among property developers and local governments, is pushing global debt levels back toward unsustainable territory, warns the International Monetary Fund (IMF). In an "unparalleled" borrowing binge, debt in the world's second-largest economy surged by 7.3% in 2022, reaching 272% of its GDP. This significant increase encompasses both public and private debt, a stark contrast to the 10 percentage point decline in global debt levels, which fell to 238% of world GDP. Global debt had previously been decreasing as economies recovered from the pandemic, and governments reduced spending on wage subsidies. The IMF emphasizes that the decrease in global debt in 2022 might be just a temporary effect of the pandemic, and there's an urgent need to restore fiscal sustainability.


Meanwhile, Western companies are redirecting their investments away from China to other emerging markets, with India emerging as the top destination, according to a report by the Rhodium Group. The majority of this redirected foreign capital is flowing to India, followed by Mexico, Vietnam, and Malaysia. This trend highlights growing concerns among foreign investors about China's business environment, economic recovery, and political factors, even as China's share of global growth continues to rise. The report reveals a substantial increase in announced US and European greenfield investment in India, while investment in China has dwindled to less than $20 billion in the past year, down from its peak of $120 billion in 2018.


[Disclaimer: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial advice. Consult with a qualified financial professional before making any investment decisions.]








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