Potential Saudi Expansion Hurts Oil Prices

Welcome to BRC’s Breakdown.

This past week, the markets were very topsy-turvy following the renewed conflict between Israel and Palestine. Amid this backdrop, the US payroll data brought a surprise as bond rates held up.

First, let’s see how the markets fared this week:

Here’s a preview of what we’ll cover:

• Macro: Middle East Flare-Up and Oil

• Markets: Gold Hits A New 2023 Low

• Crypto: ETH ETFs Fail To Make A Bang

• Chips: OpenAI To Make Its Own Chips

Macro: All Eyes On Oil As Geopolitical Risks Flare Up

While the Hamas attack on Israel and the Israeli response to the attack are underway, key aspects to watch out for include:

• Will the conflict expand with Hezbollah/Lebanon getting involved

• What role will Iran play and will there be open hostilities between Israel & Iran (instead of proxies)

• What is the reaction of the rest of the Arab world, where the relationship with Israel seems to have been normalizing recently?

• What does this all mean for crude oil supply & hence, crude oil prices?

Before the Middle East flare-up, prior themes of a resilient US economy with higher global interest rates persisted. US non-farm payrolls report capped a week of higher bond yields with the US 10-year bond yield touching 4.72%, its highest since mid-2007.

The difference between 2-year and 10-year yields, used by some as an indication of recession risk (negative means recession is coming), became less negative over the week.

MARKET: Oil Prices Decline On Potential Saudi Expansion, Bitcoin Rises

RBI held rates steady but said they could sell bonds pushing Indian bond yields higher with Friday’s move being the highest in over a year. Indian 10-year bond yields are now at their highest level since March of this year.

Oil prices declined slightly due to expectations of Saudi Arabia increasing supply - but the weekend’s events are likely to be the dominant factor affecting prices in the coming weeks. Equity markets traded to the top end of their recent range as they took in stride higher bond yields amidst resilient economic activity data.

Gold prices have been a casualty of rising global interest rates. In the US and India, gold prices hit their lowest levels since March 2023 and have now erased all its gains for the year.

In contrast, Bitcoin has turned in a solid performance, up over 68% YTD.

“Meh” Volume For ETH ETFs In Big Trading Week

Last week, nine ETH future-based exchange-traded funds [ETFs] began their first trading week. This was supposed to be a historic moment was was subdued by a lack of trading activity which was described as “meh.”

Among the issuers of the ETH ETF was – ProShares, which has standalone BTC and ETH Futures ETFs and a combined one based on the top two cryptocurrencies’ market cap. However, the ETH ETF with the most traded volume in the first week of trading was – VanEck’s Ethereum Strategy ETF with a volume of $500,000.

Bitcoin, on the other hand, fared better despite any ETF tailwinds. The largest crypto closed the week about 1.2% up. The reason for this growth was – the macroeconomic conditions giving Bitcoin the allure of an “uncorrelated asset” in comparison to bonds, equities, and alternative assets.

Tech and AI – AI Chips In The Making

OpenAI, the star boy of the AI wave and the company behind the ChatBot – ChatGPT is looking to make its own AI Chips.

Going by the adage – “Own the supply chain” – OpenAI wants to acquire a chip-maker and design chips internally. The AI company replies on chip manufacturers for its GPU-based hardware chips to power:

• ChatGPT

• GPT-4

• DALL-E 3

Chip manufacturers have been slow to meet the rising demand for processing power. Companies like Microsoft are facing a shortage of server harder to run their AI bots. Nvidia, one of the largest chip manufacturers in the world, is sold out till 2024.

On a demand basis, if ChatGPT generates a tenth of the demand that Google Search generates, it will cost the company $64 billion, divided as:

• Initial GPU cost – $48 billion

• Annual chips cost – $16 billion

Top Headlines Of The Week

• Sam Bankman Fried lost half a million dollars a day when Alameda launched

• Bitcoin’s next bull run will have macro tailwinds

• DBS Bank is moving into crypto, starting with stablecoins

• In times of currency debasement, Bitcoin can act as a critical hedge

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