WSJ : Week Ahead for FX, Bonds: U.S. ISM Services Data, Australian Rate Decision

Week Ahead for FX, Bonds: U.S. ISM Services Data, Australian Rate Decision in Focus

Below are the most important global events likely to affect FX and bond markets in the coming week starting Aug. 5.

U.S. ISM data on services sector activity and an interest-rate decision in Australia are likely to prove the highlight of an otherwise quieter week. Rate decisions are also due in India and Mexico, while Japanese data will be watched closely after the Bank of Japan’s recent interest-rate hike.

U.S.

Investors will be keeping a close eye on U.S. data after recent evidence suggesting the economy could be slowing, adding to expectations that interest rates will soon be cut.

Focus will center on ISM data on services sector activity in July, due on Monday, to see whether it replicates unexpected weakness in the equivalent survey on manufacturing.

“Investors will keep an eye on employment and prices components [in ISM services data] following a big miss for the manufacturing gauge,” Deutsche Bank economists said in a note.

The U.S. Federal Reserve left interest rates unchanged at its July 31 meeting but suggested that it could reduce rates at its September meeting. Following weak U.S. jobs data for July, money markets are pricing in a minimum of three 25 basis point interest-rate cuts by year-end, with a risk that the Fed may opt for a bigger 50 basis-point reduction, according to Refinitiv.

The rest of the week is relatively quiet in terms of data releases, with U.S. trade data for June due on Tuesday and weekly jobless claims on Thursday.

CANADA

Canadian monthly jobs data for July due on Friday will be closely watched after recent stronger-than-expected second-quarter gross domestic product data cast some doubt over whether the Bank of Canada will cut interest rates again in September.

“It is activity in the second half of the year where we see scope for more substantial downside surprises relative to the Bank of Canada’s current forecasts,” Citi analysts said in a note.

TD Securities’ analysts said they are leaning toward a hold on rates in September but note that this remains a very tight call.

Canadian trade data for June are due on Tuesday and the latest Ivey PMI survey on Wednesday.

MEXICO

Mexico’s central bank announces an interest-rate decision on Thursday, with investors uncertain over whether it will cut or hold rates.

“The next central bank meeting is a close call. But on balance we think softness in the economy, alongside the fall in core inflation in the first half of July and the prospect of a rate cut in the U.S. in September, will prompt Banxico to resume its easing cycle,” Capital Economics emerging markets economist Kimberley Sperrfechter said in a note.

EUROZONE

Recent data suggest that the eurozone’s economic recovery is starting to falter but at the same time inflation remains elevated, potentially complicating the European Central Bank’s task.

A majority of investors expect the central bank will probably cut interest rates next month, but they will be looking to see whether coming data support that view or not.

Final purchasing managers’ surveys on services-sector activity during July are due on Monday, alongside eurozone producer price inflation figures for June. Eurozone retail sales data for June on Tuesday will give an indication of how the region’s consumers are holding up.

German industrial production and trade figures are due on Wednesday, followed by French unemployment and German final inflation data on Friday.

Government-bond issuance slows down significantly in August, in line with the seasonal pattern. Germany will conduct two auctions, selling the October 2029-dated federal note, or Bobl, on Tuesday and 2038- and 2041-dated bunds on Wednesday. Also on Tuesday, Austria will tap 2034- and 2040-dated bonds.

The Treasury will auction $58 billion in new three-year notes on Tuesday, $42 billion in 10-year notes on Wednesday and $25 billion in 30-year bonds on Thursday.

U.K.

The Bank of England announced its first interest-rate cut in four years at its Aug. 1 meeting, although it resulted from a very tight 5-4 vote, suggesting that policymakers could be cautious about cutting interest rates too fast from here.

Investors will be looking to see whether data suggest the U.K. economy is continuing to hold up well and on whether there are any signs of services inflation starting to drop.

The final purchasing managers’ survey on U.K. services-sector activity during July is due on Monday, followed by the British Retail Consortium’s retail sales monitor for July on Tuesday. Data later in the week will give an indication on the health of the housing market, with the RICS July house price balance due on Thursday.


The DMO will sell October 2043 gilts on Tuesday and July 2029 gilts on Wednesday.

SCANDINAVIA

Norwegian inflation data for July are due on Friday. These are unlikely to alter expectations that Norway’s central bank, or Norges Bank, is unlikely to cut interest rates before December.

Denmark and Norway are scheduled to hold bond auctions on Wednesday.

AUSTRALIA & NEW ZEALAND

The Reserve Bank of Australia appears set to keep its official cash rate on hold at 4.35% at its policy meeting that concludes Tuesday, but remain vigilant about inflation. Core inflation is still well above target and income tax cuts delivered to workers from July 1 pose upside risk.

Speculation had been building that RBA Gov. Michele Bullock might have to announce a deeply unpopular interest increase this month, but most economists think second-quarter inflation data failed to produce the smoking gun needed to tighten the policy screws further.

In New Zealand, second-quarter job market data on Wednesday are expected to show that unemployment jumped from the prior quarter, amplifying calls for the Reserve Bank of New Zealand to quickly shift the policy needle toward interest-rate cuts, and potentially deliver a string of reductions over the next year to revive the country’s moribund economy.

JAPAN

Japan reports a string of data during the week, including household spending and balance of payments data for July. Minutes from the Bank of Japan’s June meeting due Monday, plus a summary of opinions from its July meeting on Thursday, are also due.

Traders will keep a watchful eye on any policy comments from officials after Japanese stocks slumped and the yen strengthened in the wake of the BOJ’s rate increase. Analysts have been split on whether the rate increase has come too soon, given signs of continued weakness in the economy. That puts the week’s data releases in particular focus.

The BOJ is scheduled to buy Y350 billion of 1- to 3-year Japanese government bonds, Y375 billion of 3- to 5-year sovereign notes and Y150 billion of 10- to 25-year government securities on Wednesday. The Ministry of Finance is slated to auction Y2.6 trillion of 10-year JGBs on Tuesday and Y900 billion of 30-year JGBs on Thursday.

CHINA

China is set to release trade and inflation data, along with another indicator of the health of the services sector.

ING expects to see some tentative signs of strength in the figures, which would be welcome after a continued run of down beat data.

July’s data is likely to show that exports remained in high single-digit or low double-digit growth amid a supportive base effect, and a modest recovery in import growth, the economists said. Inflation may have trended a touch higher as well, ING added.

PPI deflation may have weakened slightly in July, Barclays economists expect, given declines in the PMIs for input and output prices despite low base effects.

Services PMI will also be watched on Monday after a surprise slip in the manufacturing gauge.

INDONESIA

Indonesia reports second-quarter economic growth data on Monday, which is expected to show still-robust momentum in Southeast Asia’s largest economy.

Economists polled by The Wall Street Journal project growth at 5.09% on year in the April-June period, easing a tad from the first quarter’s 5.11%.

Recent data indicate that domestic demand has slowed as the boost from the election earlier this year faded, ANZ economists Dhiraj Nim and Sanjay Mathur said.

Exports might also not contribute as much to economic growth moving forward, as the outlook for external demand seems challenging as global growth slows and commodity prices weaken, they said. Domestic demand could remain the primary growth driver for Indonesia in 2024, the economists said, tipping full-year growth at around 5%.

INDIA

India’s central bank is likely to keep rates on hold at its rate meeting on Thursday, with policymakers seemingly under little pressure to either cut or hike.

The Reserve Bank of India has a lot to digest since its last meeting in June: sticky food price pressures, a new government budget pointing to continued fiscal consolidation, and the Federal Reserve starting to hint at a September rate cut, Barclays economists Shreya Sodhani and Amruta Ghare said.

While broadly steady domestic growth indicators offer a source of comfort for the Indian central bank, the RBI also seems increasingly cautious about food inflation, which has been preventing durable disinflation in the headline rate, the economists said. Barclays only sees a rate cut window opening in December, with risks that the start of easing may be delayed into 2025.

ING economists also think RBI will hold fire but don’t fully dismiss the chance for a cut.

“As long as the dollar remains under weakening pressure and the inflation data plays out the way we think it will, then an October rate cut is definitely within reach and we cannot absolutely rule out a cut on 8 August,” they said.

PHILIPPINES

Data on Tuesday and Thursday will show the Philippines’s progress on the inflationary front and how its economy has fared in the second quarter.

Both releases will be looked at for hints as to when the central bank might start cutting rates.

ING economists think more time might be needed to see how inflation develops, given the potential impact of rice tariff cuts and typhoons.

“That probably puts a lid on Bankgo Sentral ng Pilipinas’ ambitions to front-run the Federal Reserve with rate cuts as soon as this month, though conditions are becoming more favorable, and BSP could well still see a window for easing in the fourth quarter of 2024,” they said.

ING expects economic growth to clock in to 7% on year for the second quarter, though this will be mainly a base-effect driven result.

Any references to days are in local times.

WSJ : How Elon Musk Wants to Wire the Human Brain, and the Rivals Racing to Beat

How Elon Musk Wants to Wire the Human Brain, and the Rivals Racing to Beat Him
Neuralink’s brain implant allowed a patient to move a cursor with his brain and play videogames

In March, Elon Musk’s brain-computer interface company Neuralink introduced its first human trial participant, a quadriplegic who showed the world how he could control a computer cursor with just his thoughts.

Neuralink’s fully implantable, wireless device—if it proves safe during clinical trials—would be a major upgrade on older technology, returning function to thousands of disabled individuals who have lost it.


Neuralink has raised over $600 million to invest in research. It recently got a green light from the Food and Drug Administration to implant a second trial participant with its device, which the company hopes to do shortly, Elon Musk said during a Neuralink presentation last month. The go-ahead demonstrates that the agency is comfortable with fixes Neuralink has proposed for a problem with the first participant’s implant.

That participant, Noland Arbaugh, noticed about a month after his January surgery that the performance of his Neuralink implant had declined. He was no longer able to move and click a virtual mouse as effectively as he had just days after the surgery. Some of the tiny threads that had been inserted in Arbaugh’s brain had retracted. Enough remained in place that the company was able to return Arbaugh’s capabilities to him after some tweaks to its algorithms.

One fix the company has proposed for patients after Arbaugh is to insert the threads deeper into the motor cortex, up to about 7 millimeters instead of about 3 to 4 millimeters for Arbaugh. Musk said during last month’s presentation that Neuralink hopes to implant a “high single digit” number of participants with its device this year and thousands within a few years.

WSJ : There’s a Tool to Catch Students Cheating With ChatGPT. OpenAI Hasn’t Rele

There’s a Tool to Catch Students Cheating With ChatGPT. OpenAI Hasn’t Released It.
Technology that can detect text written by artificial intelligence with 99.9% certainty has been debated internally for two years

OpenAI has a method to reliably detect when someone uses ChatGPT to write an essay or research paper. The company hasn’t released it despite widespread concerns about students using artificial intelligence to cheat.

The project has been mired in internal debate at OpenAI for roughly two years and has been ready to be released for about a year, according to people familiar with the matter and internal documents viewed by The Wall Street Journal. “It’s just a matter of pressing a button,” one of the people said.

In trying to decide what to do, OpenAI employees have wavered between the startup’s stated commitment to transparency and their desire to attract and retain users. One survey the company conducted of loyal ChatGPT users found nearly a third would be turned off by the anticheating technology.

An OpenAI spokeswoman said the company is concerned the tool could disproportionately affect groups such as non-native English speakers. “The text watermarking method we’re developing is technically promising but has important risks we’re weighing while we research alternatives,” she said. “We believe the deliberate approach we’ve taken is necessary given the complexities involved and its likely impact on the broader ecosystem beyond OpenAI.”

Employees who support the tool’s release, including those who helped develop it, have said internally those arguments pale compared with the good such technology could do.

Generative AI can create an entire essay or research paper in a matter of seconds, based on a single prompt, free. Teachers and professors say they are desperate for help to crack down on its misuse.

“It’s a huge issue,” said Alexa Gutterman, a high school English and journalism teacher in New York City. “It’s something that every teacher I work with has talked about.”

A recent survey by the Center for Democracy & Technology, a technology policy nonprofit, found 59% of middle- and high-school teachers were sure some students had used AI to help with schoolwork, up 17 points from the prior school year.

OpenAI Chief Executive Sam Altman and Chief Technology Officer Mira Murati have been involved in discussions about the anticheating tool. Altman has encouraged the project but hasn’t pushed for it to be released, some people familiar with the matter said.

Wall Street Journal owner News Corp has a content-licensing partnership with OpenAI.

99.9% effective
ChatGPT is powered by an AI system that predicts what word or word fragment, known as a token, should come next in a sentence. The anticheating tool under discussion at OpenAI would slightly change how the tokens are selected. Those changes would leave a pattern called a watermark.

The watermarks would be unnoticeable to the human eye but could be found with OpenAI’s detection technology. The detector provides a score of how likely the entire document or a portion of it was written by ChatGPT.

The watermarks are 99.9% effective when enough new text is created by ChatGPT, according to the internal documents.

“It is more likely that the sun evaporates tomorrow than this term paper wasn’t watermarked,” said John Thickstun, a Stanford researcher who is part of a team that has developed a similar watermarking method for AI text.

Still, staffers have raised concerns the watermarks could be erased through simple techniques like having Google translate the text into another language and then back, or having ChatGPT add emojis to the text and then manually deleting them, an OpenAI employee familiar with the matter said.

There is broad agreement within the company that determining who can use this detector would be a challenge. If too few people have it, the tool wouldn’t be useful. If too many get access, bad actors might decipher the company’s watermarking technique.

OpenAI employees have discussed providing the detector directly to educators or to outside companies that help schools identify AI-written papers and plagiarized work.

Google has developed a watermarking tool that can detect text generated by its Gemini AI. Called SynthID, it is in beta testing and isn’t widely available.

OpenAI has a tool to determine whether an image was created using its text-to-image generator, DALL-E 3, that was released for testing this past spring. The company has given priority to audio and visual watermarking over text because the harms are more significant, particularly in a busy election year in the U.S., the employee familiar with the matter said.

Essays about Batman
In January 2023, OpenAI released an algorithm intended to detect text written by several AI models, including its own. But it succeeded just 26% of the time, and OpenAI pulled it seven months later.

There are other tools developed by outside companies and researchers to detect text created with AI, and many teachers say they have used them. But they sometimes fail to detect text written by advanced large language models and can produce false positives.

At first, students “thought we had all these magic wizard tricks to figure out whether they were using AI,” said Mike Kentz, an AI consultant for educators who recently taught at a private high school in Georgia. “By the end of the year…they were like, hold on a second, my teacher has no idea.”

Some teachers encourage students to use AI to help with research or to provide feedback on ideas. The problem is when students have an app like ChatGPT do all the work and don’t even know what they are handing in.

Last year, Josh McCrain, a political-science professor at the University of Utah, gave students a writing assignment that included, in indecipherable small text, instructions to include a reference to Batman. If they copy and pasted the assignment into AI, the instructions would be incorporated.

Sure enough, a handful of students turned in papers with nonsensical references to Batman. Going forward, McCrain is tweaking writing assignments to focus more on current events AI is less familiar with and beseeching students not to outsource their work to AI. “That’s where I try to really hammer that point home to students: You need to learn this stuff,” he said.

Years of debate
Discussions about the watermarking tool started before OpenAI launched ChatGPT in November of 2022 and have been a persistent source of tension, the people familiar with the matter said. It was developed by Scott Aaronson, a computer-science professor who has been working on safety at OpenAI while on leave from the University of Texas for the past two years.

In early 2023, one of OpenAI’s co-founders, John Schulman, outlined the pros and cons of the tool in a shared Google Doc. OpenAI executives then decided they would seek input from a range of people before acting further.

Over the next year and a half, OpenAI executives repeatedly discussed the technology and sought fresh data to help decide whether to release it.

In April 2023, OpenAI commissioned a survey that showed people worldwide supported the idea of an AI detection tool by a margin of four to one, the internal documents show.

That same month, OpenAI surveyed ChatGPT users and found 69% believe cheating detection technology would lead to false accusations of using AI. Nearly 30% said they would use ChatGPT less if it deployed watermarks and a rival didn’t.

A recurring internal concern has been that the anticheating tool could hurt the quality of ChatGPT’s writing. OpenAI conducted a test earlier this year that found watermarking didn’t impair ChatGPT’s performance, people familiar with the matter said.

“Our ability to defend our lack of text watermarking is weak now that we know it doesn’t degrade outputs,” employees involved in the testing concluded, according to the internal documents.

In early June, OpenAI senior employees and researchers met again to discuss the project. The group agreed the watermarking technology worked well, but the results of the ChatGPT user survey from last year still loomed large. Staffers said the company should look into other approaches that were potentially less controversial among users but unproven, according to people with knowledge of the meeting.

They also said OpenAI needed a plan by this fall to sway public opinion around AI transparency as well as potential new laws on the subject, the internal documents show.

“Without this, we risk credibility as responsible actors,” a summary of the June meeting said.

Coin Telegraph : US, UK accelerate quantum computing programs after China breakt

US, UK accelerate quantum computing programs after China breakthrough
China’s room-temperature time crystals could radically affect the timeline for the arrival of useful quantum computers.

Scientists and lawmakers in the United States, United Kingdom and European Union are ramping up efforts to advance quantum computing in the West after scientists in China observed what appears to be the world’s first room-temperature time crystals.

A team of physicists hailing primarily from Tsinghua University in China, with contributions from scientists in Denmark and Austria, published peer-reviewed research on July 2 detailing the creation and observation of room-temperature time crystals.

In the month since the paper was published, quantum research labs in the West have announced numerous initiatives to extend existing efforts in the field of quantum computing and to create new research partnerships.

Room-temperature time crystals
Time crystals are a unique state of matter originally proposed by physicist Frank Wilczek in 2012. They work similarly to other crystals, such as snowflakes or diamonds, which are created when specific molecules form lattice-like bonds that repeat through space.

In time crystals, however, the molecules bond in time. Instead of locking into a crystalline structure that repeats, a time crystal’s molecules flicker back and forth between different configurations like a GIF on a loop.

Back in 2021, an international team of scientists working with Google’s quantum computing lab simulated time crystals using a quantum computer. This breakthrough demonstrated the potential for quantum computers to explore exotic states of matter and set the stage for the convergence of quantum tech and time crystals.

Now, in July 2024, the Tsinghua team appears to have created time crystals at room temperature. This, theoretically, allows time crystal technology to be employed in non-laboratory equipment and could serve as a massive accelerator for the development of useful quantum computers.

Quantum computing
The realization of room temperature time crystals could solve one of the biggest problems in the field: figuring out how to create stable qubits (sort of the quantum version of classical computer bits) that don’t require massive amounts of power and infrastructure to form and maintain.

While perhaps not directly related to the China team’s work, labs and governments around the world — especially in the US, UK and Europe — have signaled renewed interest in quantum computing since the room-temperature time crystals paper was published.

In the US, new initiatives have taken place at the national and state levels, with federal defense department think tank DARPA and the state of Illinois both recently agreeing to commit $140 million each to the development of a new quantum computing center in Chicago.

Across the pond, on July 31, the UK government announced plans to invest approximately $127 million dollars in the development of five quantum computing research hubs to be led by Oxford University.

On the same day, the Massachusetts Institute of Technology announced a multimillion-dollar partnership with the University of Copenhagen to share research and co-develop quantum computing solutions.

FT : Surging AI power demand boosts utility stocks

Surging AI power demand boosts utility stocks
Investors have found a cheaper way to play the market’s hot new obsession

US investors are piling into utility stocks as the emergence of power-hungry artificial intelligence drives a surge in electricity demand and transforms growth expectations for the once staid sector. 

More than $1.7bn poured into US utilities funds, which have about $41bn across them, in May and June, their best showing in nearly two years, according to data from Morningstar Direct. 

Another $1.1bn is expected to come into utilities funds in July, most of it in the Utilities Select Sector SPDR (XLU) exchange traded fund, according to State Street. 

Utilities often serve as a countercyclical safe-haven investment in turbulent times, so the capital inflows to utility shares during a strong bull market are drawing attention. The stocks provide a relatively cheap way for investors to gain exposure to the AI boom compared to buying more expensive tech stocks such as Nvidia, Microsoft and Google, where much of the gains are already built in.

Jay Jacobs, US head of thematic and active ETFs at BlackRock, said he expected continued investment into utilities funds at least through this year as investors seek out AI opportunities beyond the Big Tech stocks.

“Investors are looking past the Mag 7 names and waiting for the next shoe to drop,” Jacobs said.

Utilities’ emergence comes as Big Tech companies such as Microsoft and Google pump billions of dollars into data centres to power AI, adding to already burgeoning demand from the electrification of vehicles and the reshoring of manufacturing. And AI is putting a far greater call on power generation than the traditional computing that preceded it.

An internet search using an AI service such as ChatGPT requires about 2.9 watt hours of electricity versus 0.3Wh for a standard Google search, according to the International Energy Agency.

AI’s impact on the US energy demand forecast motivated $9.5bn Churchill Management to bulk up its utilities exposure over the past couple of months. The Los Angeles-based investment adviser boosted its exposure to XLU by more than $68mn in the second quarter of 2024, according to data compiled by Bloomberg.

“Utilities has become a go-to sector,” said Churchill president Randy Conner. “You mix a little bit of anything attached to AI, and you get some excitement behind it.”

Shares in the biggest US utilities have surged in recent months, with the S&P 500 Utilities index up 10.4 per cent since the beginning of the year versus -7.1 per cent for 2023 and 1.6 per cent in 2022. The State Street Select Utilities SPDR ETF has risen about 15.3 per cent year to date, per Morningstar.

The rapid expansion of power consumption after decades of stagnation has transformed market interest in utilities, which will need to invest heavily to satisfy it. The increase in appeal also comes amid a more favourable interest rate environment, as federal rate cuts later this year could help debt-dependent utilities burdened with high financing costs.

Prices soared in a power market auction on Tuesday run by PJM, the largest US grid operator, rising more than 800 per cent versus a year ago. PJM, which operates the grid across 13 states in the north-east US, said the market was “sending a price signal that should incent investment”.

Edison International, the parent company of Southern California Edison, one of the biggest US utilities, recently increased capital spending plans from $6bn to $8bn a year. “You’re seeing just a dramatic acceleration of growth” in power demand, said Pedro Pizarro, Edison’s chief executive.

Three utility companies — Vistra Corp, Constellation Energy and NRG Energy — are among the top 10 performers on the S&P 500 this year. Vistra jumped more than 15 per cent on Wednesday after the PJM auction. The company, one of the biggest US generators, is the third-best performer on the S&P 500 this year after Nvidia and Super Micro.

The resurgence of investor faith in utilities funds amounts to a “concerted reversal” after they sustained more than $7.4bn in net outflows over the prior 12 months, said Matt Bartolini, head of SPDR Americas research at State Street Global Advisors.

“You basically have a new business opportunity,” said Bartolini. “Utilities tends to be more of a defensive sector, and right now, it is acting and behaving quite differently, because some of the macro tailwinds have changed, but also because some of the secular client demand has changed.”

Over the past 20 years, US electricity consumption edged up by less than 0.5 per cent annually, according to Goldman Sachs. Between this year and 2030, however, it is expected to grow at 2.4 per cent a year. Utilities have responded by overhauling their spending plans to plough cash into building new generation and transmission. 

The IEA estimates power demand from data centres globally could top 1,000 terawatt hours by 2026 — double 2022 levels and an increase equivalent to the total power demand of Germany. Microsoft said earlier this year it was opening a new data centre every three days. 

“Some of the numbers that utilities are putting out in terms of electricity demand over the next 10 years are numbers the industry hasn’t seen in a generation,” said Travis Miller, energy and utilities strategist for Morningstar.

FT : Can the Rolls-Royce rally continue?

Can the Rolls-Royce rally continue?
Erginbilgiç targets post-2027 growth in bid to turn FTSE 100 engineer around for the long-haul

Four years ago, Rolls-Royce was forced to ask shareholders for money and cut 9,000 staff to weather the downturn brought on by the Covid-19 pandemic.

Last week, Britain’s flagship engineer reported a 74 per cent jump in half-year profits, a resumption of dividend payments and a gift of 150 shares per employee, marking one of the most remarkable and rapid turnarounds in recent UK corporate history. 

The sharp shift in its fortunes coincided with the arrival of Tufan Erginbilgiç, who took the controls in January 2023. Shares in Rolls-Royce have more than quadrupled over that time, outperforming most major indices. 

The company’s turbocharged performance means that it is already more than halfway towards annual profit and cash flow targets set by Erginbilgiç for 2027; Rolls-Royce now expects to deliver more than 75 per cent of its target of up to £2.8bn in annual operating profit and more than 65 per cent of its goal of up to £3.1bn free cash flow by the end of this year. 

Although his predecessor, Warren East, successfully steered the company through the depths of the pandemic, Erginbilgiç, who described Rolls-Royce as a “burning platform” when he joined, has moved quickly to shake up senior management, reduce duplication and cull middle managers.


The rapid transformation of the 118-year-old manufacturer, whose recent history has been marked by sharp swings in fortune, has raised questions over how long Rolls-Royce’s current winning streak can last. Can the former oil industry executive deliver on his promise to turn the company into a “high-performing, competitive and resilient business”? 

Erginbilgiç admitted that the rate of recovery would not be linear but argued that the group’s midterm targets should be seen as a “milestone, not a destination”. 

“There is a very exciting, more profitable growth story beyond the midterm,” he said.  

He dismissed suggestions that part of the recent success was down to the return of international air traffic following the pandemic, which all but halted travel. Rolls-Royce’s biggest division builds engines for the world’s largest passenger aircraft but makes most of its money from servicing and maintaining these while they are in service. 

“This is not a flying hours story, that question should disappear,” he said. The company, he argued, was instigating real change, reducing costs and expanding the “cash potential and quality of the civil business”. 

Rolls-Royce has renegotiated lossmaking contracts with customers to lift profitability and will invest more than £1bn over the coming years to improve the durability and performance of its Trent family of engines which power long-haul passenger planes such as Boeing’s 787 and the Airbus A350. 

Analysts said the performance of the civil business in the half-year stood out. Engine flying hours, a key metric given the company makes most of its money when its engines are in operation, were back to pre-pandemic levels while margins in the business had risen 18 per cent over the six months. 

The new management had “squeezed more out of the upside than people expected . . .[they] got more out of it than the old Rolls-Royce would have done”, said Nick Cunningham, analyst at Agency Partners.

The “structural change”, he added, “is partly about the company being more tightly run with a clear set of guidelines as to what they are trying to achieve”.

Company insiders talk about the “pace and intensity” Erginbilgiç has brought to the business, much of it evident in the rigorous, regular reviews he holds with senior managers, where clear targets are set. 

He had instilled a “sense of commercial-mindedness . . . not only through civil but throughout the entire organisation and [has] kept the costs out that the company had taken out during Covid”, said Harsh Jhaveri, investment analyst at Orbis Investments, which bought into Rolls-Royce in 2016 and owns 0.5 per cent of the company. 


While much of the focus has been on the improvement in Rolls-Royce’s commercial aircraft division, its other businesses have also rebounded. The underperforming power systems unit — which makes diesel and gas engines for ships, as well as power generators for data centres — has recovered.

Last week’s half-year results showed that the division’s underlying operating profit grew by 56 per cent to £189mn. Its underlying operating margin rose to 10.3 per cent, with expectations of further improvement in the second half.  

In the defence unit, Rolls-Royce has notched up some notable contract awards and should benefit from higher government spending, including on the Aukus submarine programme with Australia and the US.

In the medium term, the big challenge strategically will be how the company can re-enter the lucrative short-haul narrow-body aircraft market. Rolls-Royce left that sector over a decade ago when it pulled out of a joint venture with Pratt & Whitney of the US. The British company recently started work on a demonstrator of its Ultrafan engine, which would be specifically designed to power a next-generation narrow-body jet.

Erginbilgiç said he was talking to Airbus and Boeing about the engine. Rather than developing and building it alone, he would prefer a partnership with another company, he added. 

Notwithstanding the company’s strong performance, there are some clouds on the horizon. Industry-wide supply chain challenges could persist for another two years. Rolls-Royce’s cash flow guidance for the year includes an impact of as much as £200mn from supply chain issues. 

There are also some early signs of pressure on airline yields, a measure of average ticket prices that takes into account passenger numbers and distance flown. Most aerospace executives insist it is too early to talk about a fall in traffic growth and hence demand, but the biggest test of whether Erginbilgiç’s transformation has paid off will probably come with the industry’s next downturn — and whether he has made Rolls-Royce more resilient. 

Most analysts reiterated their “buy” ratings on the company last week, arguing there was more to come despite the shares trading at a multiple of around 25 times next year’s earnings.

Philip Buller, analyst at Berenberg, who downgraded the stock to “sell” at the start of the year, admitted his call came to too early given the 50 per cent plus run-up in the shares since January.

He credited Erginbilgiç and his team for “over-delivering” on cost controls but argued that investors should look beyond 2027. “What happens to cash post-2027 . . . and is there anything else in the interim that could spoil the party, such as air traffic softening?” 

The shares, he said, were now priced for “this very nice moment in all end markets to be a permanent feature”. However, “history tells us this is not normally the case”, he cautioned.

FT : Axa chief says proposed €5bn BNP deal could enable deal spree

Axa chief says proposed €5bn BNP deal could enable deal spree
French insurer expects ‘significant’ M&A firepower from offloading asset manager

Axa’s chief executive said its proposed €5bn deal to offload its asset manager to banking group BNP Paribas would give it significant firepower to “reinforce” its core insurance operation through a string of acquisitions.

The French insurance group announced on Thursday evening that it had entered into exclusive negotiations with BNP in a transaction that would give the latter a leading European fund manager with €1.5tn in assets under management.

If the deal goes through, the insurer will receive overall proceeds of €5.4bn, about €3.8bn of which would be used to buy back shares, based on today’s prices, to counterbalance the earnings impact.

“We have a significant amount that remains, and also when you look at [our cash position], we have sufficient means to use it to reinforce ourselves in the insurance space,” Axa chief Thomas Buberl told the Financial Times.

Businesses in the property and casualty insurance and health insurance sectors would each be a “good target”, Buberl added. Alongside the proposed BNP deal, Axa announced a €423mn bolt-on acquisition of an Italian insurer, Nobis, which is predominantly a retail insurer in areas such as motor. “This is the kind of acquisition that we will be looking at,” said Buberl.

Axa will look at reinforcing its core geographies including Europe and Japan, he added.

Buberl said the decision to sell its asset manager reflected the desire to create a “European champion” that could compete in what is a heavily consolidated fund management sector that is increasingly dominated by big global firms.

“When you look at the consolidation of the industry, [Axa Investment Managers] is certainly not big enough.”

He added that the growing regulatory burden in each major area of finance had also made it less attractive to combine them under one roof.

“The business of asset management and insurance becomes more and more distinct,” he said, also highlighting the sale in 2019 of its banking operation in Belgium. “Every company needs to make their own choice. For us, what’s right is to focus . . . less is more.”

Buberl said political instability in the group’s French home market — which accounts for roughly a quarter of its overall assets and underlying earnings — was not an “easy situation” but should not affect its business for now. 

Parliamentary elections in June and July delivered a hung parliament, creating uncertainty over who would lead the next government and what would remain of President Emmanuel Macron’s pro-business reform agenda, as well as rattling stock markets. 

“Everybody needs health insurance, everybody needs car insurance. There are still business owners in France that . . . need insurance,” said Buberl. “I am looking at a country from a structured perspective, around demographics, around business sentiment. France is in a good space.”

FT : Private capital groups deploy $160bn as they prepare for deal revival

Private capital groups deploy $160bn as they prepare for deal revival
Ares, Apollo, Blackstone and KKR prepare to increase buyout-linked investments as interest rates ease

Four of the largest US private capital groups deployed more than $160bn in the latest quarter as they ramped up investment ahead of an expected full-throttle revival in dealmaking.

Ares, Apollo, Blackstone and KKR said they had invested a combined $162bn between April and June, with Apollo accounting for more than 40 per cent of the total.

Executives at the firms said they were readying for an increase in buyout and merger activity, as the US Federal Reserve edges closer to cutting interest rates.

“The deal market is back,” said Scott Nuttall, the co-head of KKR. “This year, we not only have an open market, we have pent-up supply of deals . . . coming to markets. So we are optimistic.”

Private equity firms are sitting on more than $2tn of dry powder — capital that has been committed, but not yet deployed in investments, according to data provider Preqin.

But an 18-month hiatus in dealmaking sparked by the Federal Reserve’s aggressive series of interest rate rises has also meant that firms have struggled to sell existing investments and return cash to their backers.


There are now signs that the deal freeze is starting to thaw. Buyout activity is up 28 per cent so far this year to $471bn, according to data provider LSEG.

That remains well below the boom years of 2021 and 2022, however, and the lacklustre market for pure private equity deals has meant that big alternative asset managers have instead sought to deploy capital into credit and infrastructure.

Apollo, which deployed $70bn in the quarter, put $11bn to work financing Intel’s construction of a chip manufacturing plant in Ireland.

More than 13 per cent of the $34bn Blackstone invested in the quarter was used to anchor a $7.5bn debt financing package for technology company CoreWeave.

Since the quarter ended in June, there has nonetheless been a number of high-profile buyouts.

Apollo struck a string of multibillion dollar deals, including the acquisitions of UK parcel delivery group Evri and gaming company Everi. The firm’s co-president Scott Kleinman estimated the firm had struck five deals worth a combined $15bn including debt in the last couple of months. “Our deal pipeline looks strong from here,” he said.

KKR meanwhile announced buyouts of broker dealer Janney Montgomery Scott, the $4.8bn acquisition of educational technology business Instructure, and entered a joint venture with T-Mobile to buy broadband provider Metronet.

And this week, private equity firms TowerBrook Capital Partners and Clayton, Dubilier & Rice won a takeover battle for US healthcare IT provider R1 RCM with a bid worth $9bn in what is likely to be one of the biggest buyout deals of the year.

“My briefcase indicator continues to be getting full and indicates that there should be increasing solid levels of transaction activity,” Blackstone president Jon Gray said in a reference to the number of deal term sheets stuffed in his briefcase.

“The fact that we’re seeing rates coming down, markets being more conducive, more people are thinking about selling assets, I think as the IPO market reopens we should see more,” he added.

Credit-focused investment manager Ares also said it was seeing a pick-up in new buyout activity. Ares chief executive Michael Arougheti told the Financial Times that banks and private credit funds were increasingly being tapped to assemble new buyout financing packages instead of just refinancing existing debt or funding small acquisitions.

Other private investment groups including Brookfield, Carlyle and TPG report earnings next week.

>>> Barron's Weekend Summary

Barron's Weekend Summary: Merck's market value lost $30B by lunchtime and ended the day down 10%

Cover:
-Merck's market value lost $30B by lunchtime on July 30 and ended the day down 10%, largely due to a decrease in demand for its HPV vaccine, Gardasil, in China. This selloff is a warning for Merck investors, as big pharma companies rely on the success of a few big drugs. However, Merck is also facing the largest patent expiration in the industry's history, with Keytruda, a groundbreaking medicine approved ten years ago by the FDA. Keytruda, which turned the body's immune system against cancer cells, has revolutionized how doctors treat cancer. Merck sponsored hundreds of human studies, showing that Keytruda worked far better than existing treatments. Today, countless patients owe years of their lives to Keytruda, and the FDA has expanded its approval to cover new cancers and indications.

Interview:
A recent client note by geopolitical strategist Marko Papic warned investors that a Trump victory could lead to a "bond riot" as investors sell off U.S. debt in anticipation of higher inflation and deficit-driven growth. Papic, a chief strategist at BCA Research, a Montreal-based firm that advises clients on macroeconomics, politics, and investment strategy, has been closely watching the contest between former President Donald Trump and President Joe Biden and Vice President Kamala Harris. His often-contrarian and always-entertaining calls on how investors should think about the former and would-be future president have cost him friends, but he is not bothered. Papic is a keen reader of global political currents and has been closely watching the contest between Trump and Biden.

Tech Trader:
-Intel has reported a series of negative news, including 15,000 job cuts, a suspension of its dividend, and a disappointing outlook. The company reported adjusted earnings per share of 2 cents for its June quarter, compared to Wall Street's estimate of 10 cents. Revenue came in at $12.8B, compared to a $12.9B estimate. Intel also issued a worse-than-expected guidance, expecting $12.5B to $13.5B in revenue for the current quarter, way below the consensus call of $14.4B. This implies an 8% decline in revenue from a year ago. Wall Street's reaction was violent, with Intel shares finishing down 26%, the stock's worst day since 1985. Shares were off 42% on the year heading into Thursday's report, compared to a 14% rise for the iShares Semiconductor exchange-traded fund, SOXX. Intel CEO Pat Gelsinger said that the company has hit key milestones in its transformation toward becoming a foundry on par with Taiwan Semiconductor Manufacturing.

The Trader:
-The Dow plunged 852 points on Friday, while the S&P fell 1.8%, and the Nasdaq dropped 2.4%, putting it in correction territory. Investors went from hoping the Federal Reserve would gradually start cutting interest rates in September to begging for big rate cuts now. On Friday, traders began to wager that the Fed will announce a 50-basis-point cut in September, with Fed-funds futures suggesting a 71.5% chance that rates will drop by that much. The last two times the Fed made cuts of greater than 25 basis points were at the start of Covid-19 and during the 2008-09 financial crisis.
-The shift from gasoline-powered cars to electric ones in America will require significant changes and be expensive in the short term. PJM, a grid operator overseeing electricity connections in 13 states and Washington D.C. is waving billions of dollars in cash to companies producing electricity to convince them to build more power plants to meet the surging demand from electric vehicles, AI data centers, domestic factories, and other electricity users. Data centers powering artificial intelligence are expected to consume more of the nation's electricity, growing from 3% of the load in 2022 to possibly 9% by the end of the decade. The PJM area includes Virginia, home to more data centers than anywhere else on earth. In the short term, the biggest beneficiaries will be companies that already own nuclear and natural-gas plants, as well as some that produce natural gas needed for those plants. Natural-gas producers like Pittsburgh-based EQT should also benefit as natural-gas plants are likely to stay in service longer to benefit from higher PJM payments. Traditional utilities like Richmond-based Dominion Energy will also benefit from rising prices, but their upside is limited by their business structure, as state regulators decide how much of their costs they can pass on to consumers and what they can keep as profit.

Features:
-Vice President Kamala Harris is expected to announce her running mate next week as she campaigned through seven battleground states. The Democratic presidential nominee has vetted around a dozen candidates for the vice presidential position. Betting markets have Pennsylvania Gov. Josh Shapiro, Kentucky Gov. Andy Beshear, Arizona Sen. Mark Kelly, and Minnesota Gov. Tim Walz as favorites. Shapiro, who comes from a swing state critical to Harris's and Trump's election chances, is considered the front-runner. The vice president has disclosed a multimillion-dollar portfolio, but little is known about their personal finances.
-Vice President Kamala Harris' shift on fracking, a controversial process used to extract oil and gas from shale, aligns with the Obama and Biden administrations' recognition of the importance of US energy production in the economy and foreign policy. During her 2020 presidential campaign, Harris pledged to end fracking, which has made the US the world's largest oil and gas producer and major energy exporter. However, her campaign now signals her no longer opposing fracking. Instead, Harris is likely to highlight the differences between herself and President Trump on climate issues and her support for renewable and green energy. Harris was a supporter of the Green New Deal, which failed to win Congress approval and was part of the 2022 climate-focused Inflation Reduction Act. For investors, traditional energy holdings should remain attractive, but they might be more attractive under Harris if her policies cause oil prices to rise. Strategas Research believes that a Harris administration would be beneficial for integrated oil and gas companies due to higher commodity prices. However, Dan Pickering, chief investment officer at Pickering Energy Partners, expects Trump's policies to be beneficial for oil companies, as decarbonization efforts would slow and there would be an easier regulatory and tax environment.

Europe:
-Wall Street Journal reporter Evan Gershkovich has been released as part of a prisoner swap between the US and Russia, marking the largest deal of its kind between the East and West since the Cold War. The White House confirmed the release of former US Marine Paul Whelan, journalist Alsu Kurmasheva, Pulitzer Prize-winning columnist Vladimir Kara-Murza, and several political dissidents. The swap took place at an airport in Ankara, Turkey. The family of Gershkovich expressed relief and joy at the news, expressing gratitude to President Biden, Secretary Blinken, Jake Sullivan, Chancellor Scholz, and every US or foreign government official who helped get Evan released. The individuals were on a flight back to the U.S. and are expected to land Thursday night. Gershkovich was sentenced to 16 years in a Russian penal colony last month on charges of espionage, which both he and the U.S. deny.

Emerging Markets:
-Venezuelan President Nicolas Maduro has announced that he has won 51.2% of the vote for a third term, against opposition-backed rival Edmundo Gonzalez. However, Maduro's views are not widely believed, with Brazilian President Luiz Inácio Lula da Silva and Latin American neighbors demanding transparency, credibility, and legitimacy of the election result. The views that matter most are in Washington, which will take cue from Gonzalez and the power behind his campaign, Maria Corina Machado. Machado declared that Maduro's departure is irreversible but refrained from stoking spontaneous street protests after the vote. Instead, Machado and Gonzalez are focusing on access to ballots for a full count and building diplomatic support. The opposition is taking a responsible attitude, and calling people into the streets would be risky. Maduro's high road is unlikely to budge him from power, as he wiped out 80% of Venezuela's GDP over the following seven years.

Commodities:
-No update

Streetwise:
-JetBlue Airways, based in Queens, New York, has an activist investor, a new CEO, and a 12% stock price jump following its announcement of its turnaround plans. The company offers over 100 destinations across the US, with a few in Europe and plenty in the Caribbean and Latin America. New York is the largest US market, and capacity is constrained due to lack of acreage, airspace, and air-traffic controllers. This limits price wars but also makes for high delay rates. JetBlue gained popularity over its 25-year history by offering premium perks on all-economy flights, such as free Wi-Fi, seat-back entertainment, and extra legroom. However, seating is less egalitarian, with some seats branded Even More Space. A review last year found that these perks often cost too much compared to competitors, indicating JetBlue's pricing power on some of its posh routes.