TheChek News Flow

Policy mistakes and economic vulnerabilities could disrupt markets.

Are financial markets pricing sufficiently for future risks? Measures of financial market volatility suggest not. 

There are different measures of market volatility. Occasionally, they move the same way. This is often countercyclical, when the economic environment is stable and the political and policy outlook is clear and predictable.

Shocks, likewise, can have a similar effect, usually triggering rising volatility. Then the policy response may lead asset classes to behave differently, both in direction and volatility.

What about now? Volatility across equity and currency markets is low. The most widely followed gauge of equity market volatility expectations is the Vix. Its value of 12.46 compares with an average over five years of 21.5 and over the longer-term of 19.9.

Increased issuance of yield-enhancing structured investment products and their greater use by option dealers has reinforced the low value of the Vix. Notwithstanding this, other measures such as standard deviations in market moves confirm low volatility. The fall in inflation since 2022 has been the main driver. Equity markets, it seems, are discounting good news and a disinflationary environment.

More remarkable, perhaps, is low volatility across currency markets. The DB index of foreign exchange volatility captures the picture. It is at 6.3 versus an average of 7.6 over five years and 9.3 over the longer term. This is despite bouts of volatility associated with a competitive weakening of the yen, renminbi and won. 

However, low currency volatility may discourage hedging, undermine market depth and resilience. Low volatility and tight spreads in credit interest rates over benchmarks have also been evident in corporate bond markets, despite higher refinancing costs and defaults. 

In contrast, volatility in bond markets has risen this year. The ICE BofA Move index of volatility in US Treasuries is at 83.6, just below both its five-year and longer-term averages. This is explained by the market’s shift away from expectations of a large number of rate cuts in the US. 

As policy rates fall, bond market volatility should ease, perhaps temporarily. But the challenge is that many of the assumptions underpinning low volatility across markets may be subject to challenge. Not least is how the juncture of political, geopolitical, policy and economic risks are likely to align.

Take inflation. Inappropriate monetary policy and supply-side shocks led inflation to persist. A key driver of low global inflation over the past quarter of a century has been the combination of globalisation, technology, financialisation and a squeeze on how much of the national incomes goes to labour, or wage shares. Now globalisation is being replaced by fragmentation and in turn, wage shares have risen. The net result is monetary policy will have to work harder to achieve inflation targets. While policy rates can fall, they will settle at higher levels than pre-pandemic. Plus, there is uncertainty about where neutral rates, where monetary policy is not too tight or too easy, lie.

Fragmentation still has some way to go. One area to watch is digital currencies. If the imminent low-scale rollout of mBridge, a project involving China, Hong Kong, Thailand and the UAE, with more likely to join, is successful then it will not only reduce the costs of cross-border flows, but reinforce a shift in currency holdings. Passive dollar diversification will be a norm, as more central banks put less of their future reserves into the west. This will be disruptive. 

Markets are evolving from a focus on inflation to growth. A focus on debt will follow. While higher nominal GDP growth provides some temporary respite, debt levels, globally, are close to all-time highs. It is not only the level, but the future relationship between growth and rates that poses problems.

The plethora of elections this year has not destabilised markets as some feared. That’s largely because across emerging economies, incumbents have been re-elected or are likely to be. In Europe, the UK and US incumbents will suffer, as they did during the inflationary 1970s. That will trigger policy uncertainty and market volatility. 

Moreover, the geopolitical landscape is shifting to a less predictable G3 world, comprising the US, China plus the third group of middle ground powers, like India, Nigeria and Brazil.

It is hard to quantify fully political and geopolitical risks, but it suggests greater risk premia in many areas. It’s not just tail risks, but policy mistakes and economic vulnerability to possible shocks that could disrupt markets. It suggests the present calm may be replaced by increasing financial market volatility.

Commitments more than doubled in three months earlier this year as It builds out its DGX Cloud service.

Nvidia has become the world's third-most-valuable company by selling chips to power artificial intelligence. Now it's also one of the biggest corporate buyers of cloud computing services.

Last week, Nvidia said it has committed to spend nearly $9 billion on cloud computing in the coming years, which involves spending with Amazon, Microsoft, Google and Oracle. That’s a huge jump from the $3.5 billion Nvidia said it had committed to cloud services as of January.

The Takeaway

• Nvidia has contracts to spend $8.8 billion on cloud services over the coming years

• The planned spending is to support R&D and Nvidia’s DGX Cloud service

• Nvidia wants to sell its own cloud services as well as chips

Nvidia didn’t disclose the lengths of its contracts, but two people familiar with contracts for cloud services said they typically span five to seven years. Even stretched out over seven years, Nvidia would be spending more than $1 billion annually, making it one of the top three spenders in The Information's Cloud Database.

It’s not clear why Nvidia’s planned spending increased so dramatically, but the company offered another hint with its quarterly financial results. Previously, Nvidia had said that its cloud spending was to support its internal research and development. But last week, Chief Financial Officer Colette Kress said in a statement accompanying the results that the cloud deals also would help power cloud services Nvidia sells under the name DGX Cloud.

DGX Cloud is part of Nvidia’s complicated relationships with the biggest cloud providers, Amazon, Microsoft, Google and Oracle. Through DGX Cloud, Nvidia rents servers with its chips located in those companies’ data centers. It then turns around and rents those servers to its own customers, including ServiceNow and Amgen.

S. “Soma” Somasegar, a managing director at Madrona Ventures, said Nvidia’s mention of DGX Cloud shows the company is “not happy being just a hardware play,” and wants to capture more of the revenue generated by companies that rent out its chips.

“Nvidia doesn't want you to buy [graphics processing units] and then spend all of your cloud money on AWS, [Google Cloud], and [Microsoft] Azure,” he said. So, Somasegar said, Nvidia is seeking some of the billions companies spend on services such as software that runs in the cloud. Nvidia has begun to sell AI-related software to customers including Adobe, Getty Images and Shutterstock, which say they are using it to build AI models.

DGX Cloud helps Nvidia get closer to some of its customers and guard against a future where its largest customers compete with it. Amazon, Google and Microsoft are working on their own AI chips that could lessen their dependence on Nvidia. Nvidia sells customers on DGX Cloud by promising better performance.

Nvidia's DGX Cloud service relies on AWS, Microsoft Azure, Google Cloud and Oracle, so it’s unclear which providers will benefit from Nvidia’s uptick in cloud spending. A spokesperson for Nvidia declined to provide more details beyond the company's public filings but said the cloud agreements are “long-term contracts over several years.”

The Information previously reported that Nvidia planned to rent servers containing around 16,000 H100s—one of its most advanced chips—to power DGX Cloud on AWS; that’s roughly as much computing power as a large AI startup might use. At Oracle, Nvidia is the second largest customer of servers that contain H100 chips, behind xAI, according to someone with direct knowledge.

Somasegar said the big cloud providers have similar symbiotic relationships with companies such as Snowflake, which spends hundreds of millions of dollars annually on cloud computing services and sells database software that runs on top of it. The cloud providers offer products that compete with Snowflake, but they’re also happy to work with the firm because it drives use of their servers, he said.

Jan Leike, a leading AI researcher who earlier this month resigned from OpenAI before publicly criticizing the company’s approach to AI safety, has joined OpenAI rival Anthropic to lead a new “superalignment” team.

In a post on X, Leike said that his team at Anthropic will focus on various aspects of AI safety and security, specifically “scalable oversight,” “weak-to-strong generalization” and automated alignment research.

A source familiar with the matter tells TechCrunch that Leike will report directly to Jared Kaplan, Anthropic’s chief science officer, and that Anthropic researchers currently working on scalable oversight — techniques to control large-scale AI’s behavior in predictable and desirable ways — will move to report to Leike as Leike’s team spins up.

In many ways, Leike’s team sounds similar in mission to OpenAI’s recently-dissolved Superalignment team. The Superalignment team, which Leike co-led, had the ambitious goal of solving the core technical challenges of controlling superintelligent AI in the next four years, but often found itself hamstrung by OpenAI’s leadership.

Anthropic has often attempted to position itself as more safety-focused than OpenAI.

Anthropic’s CEO, Dario Amodei, was once the VP of research at OpenAI, and reportedly split with OpenAI after a disagreement over the company’s direction — namely OpenAI’s growing commercial focus. Amodei brought with him a number of ex-OpenAI employees to launch Anthropic, including OpenAI’s former policy lead Jack Clark.

Australian miner’s CEO is meeting Anglo investors as it seeks another deadline extension

BHP and Anglo American have failed to make progress on terms for their £39bn mining megamerger, setting the stage for fraught final hours of talks before a deadline for negotiations expires on Wednesday.

Anglo American last week rejected BHP’s “final offer” but granted the Australian company another seven days to discuss the proposed takeover after a push from its key shareholders including BlackRock.

Although the extension has led to the first meaningful engagement between the two sides since BHP made its initial approach in early April, the parties still fundamentally disagree on the deal structure after six days of talks, according to people familiar with the matter.

The impasse on the sequencing of the takeover, which requires Anglo to first spin off its stakes in its South African platinum and iron ore units, will make a deal by 5pm in London on Wednesday unlikely, the people said.

Under UK takeover rules Anglo could grant a further extension for talks to continue but its board was unlikely to do that unless a possible way forward emerged, one of the people said.

BHP chief executive Mike Henry has been meeting investors in London since Monday in a bid to increase the pressure on Anglo to extend talks again, a second person close to BHP said. Many large asset managers, such as BlackRock, hold shares in both companies.

Anglo and BHP disagree on the execution risks associated with demerging Johannesburg-listed Anglo American Platinum and Kumba Iron Ore before BHP would complete its takeover of London-listed Anglo.

Anglo says that making the takeover conditional on the twin demergers opens the door for the South African government to impose “change of control” obligations on Amplats and Kumba, such as employee ownership requirements or permanent restrictions on job cuts.

Such “public interest” concessions could weigh on the respective companies’ share prices, Anglo says, penalising its investors who under the proposed deal would receive stock in the demerged business.

Anglo had expected BHP to use the extension of the talks to propose solutions, such as offering to buy the whole company and demerge Amplats and Kumba later. BHP, however, has been adamant that it will not improve the share offer or alter the structure of the deal. 

“Unless BHP has shown it is willing to compromise on the structure, I don’t see how Anglo’s board can recommend this offer,” said one person close to Anglo American. 

BHP says that Anglo is overstating the execution risks as a defence strategy and has been unwilling to engage in an in-depth discussion of how each individual issue might be mitigated.

“What’s interesting here is Anglo hasn’t come out and said there is a fatal flaw to this transaction,” said one person close to BHP.

While South Africa’s competition watchdog has the discretion to demand concessions, the regulatory regime is clear and there are many precedents for similar transactions, the person added.

Anglo and BHP declined to comment.

Wednesday’s deadline, which was selected by Anglo, coincides with South Africa’s national election, adding an extra layer of political complexity. The vote is set be the most hard-fought since South Africa gained democracy in 1994 and South African politicians, notably mining minister Gwede Mantashe, have expressed opposition to the deal in recent weeks.

Several behind-closed doors meetings between executives from both companies and government leaders have taken place since, tempering the criticism. Mantashe, reached by the Financial Times on Monday, declined to comment.