Mercury Weekly (24.09.2024)

Central Banks, Russia, and AI

Fed Cuts Interest Rates

The Federal Reserve cut its benchmark interest rate by half a percentage point. This marks the Fed’s first easing cycle in over four years as inflation pressures ease. The decision has been well received by markets, with the S&P 500 closing at a record high driven by the gains in technology stocks.

While inflation has cooled, concerns about a weakening labour market linger, but the Fed remains focused on maintaining economic stability. “This recalibration of our policy stance will help maintain the strength of the economy and the labour market,” Fed Chair Jay Powell said on Wednesday, “and will continue to enable further progress on inflation as we begin the process of moving towards a more neutral stance.”

Market participants are already pricing in additional cuts, with some expecting rates to fall by as much as three-quarters of a percentage point by the end of the year. This easing is seen as a positive signal, especially for riskier assets, as the Fed attempts to balance inflation management with broader economic concerns.

Russia Targets 20% Share in Global LNG Market by 2030

Despite stringent Western sanctions, Russia is aggressively aiming to secure 20% of the global LNG market by 2030. This ambitious goal centres on the Arctic LNG 2 project, a $21 billion facility that started production last December. To circumvent sanctions, Russia is using a shadow fleet managed through proxy companies, employing older vessels and tactics like spoofing to evade detection.

The U.S. has intensified sanctions in response, aiming to thwart Russia's LNG exports which are crucial for its economic recovery post-conflict. However, Russia's strategic manoeuvres suggest a continued push to exploit its significant LNG resources, aiming to establish itself as a major contender against leading competitors such as the U.S. This ongoing commercial battle highlights the importance of dominating LNG supply to major markets, including China, the world's largest LNG consumer.

BlackRock and Microsoft Commit $30 Billion to AI Infrastructure Expansion

BlackRock, in partnership with Microsoft, is setting up a new $30 billion fund aimed at enhancing artificial intelligence infrastructure. The Global AI Infrastructure Investment Partnership will focus on building data centres and developing energy solutions necessary to support advanced AI technologies. This initiative reflects a strategic response to the significant energy demands of AI systems, which involve extensive data processing and computational power.

MGX, supported by Abu Dhabi, and Nvidia, known for its AI chip technology, are also key players in this venture. The fund plans to facilitate up to $100 billion in investments through a combination of equity and debt, with projects primarily based in the United States and extended to other partner countries.

This move is part of a broader trend where major tech and financial companies invest heavily in infrastructure critical to AI development, signalling the sector's rapid growth and its increasing importance in the global technology landscape.

BoE holds Interest Rates

The Bank of England has decided to hold interest rates at 5%, with inflation remaining steady at 2.2% since August. While inflationary pressures have eased, the BoE is adopting a cautious approach, indicating a likely rate reduction at its next meeting in November.

Following this, two-year mortgage rates are falling faster than longer-term deals as the market prices in expectations of future interest rate cuts by the BoE. Since Liz Truss's controversial "mini" Budget in September 2022, which disrupted markets and caused borrowing costs to surge, five-year mortgage rates have remained lower than two-year rates. This turmoil contributed to a prolonged downturn in the UK property market.

The narrowing gap between two- and five-year mortgage rates is due to short-term interest rate swaps falling faster than long-term ones. This has made shorter-term deals more competitive, with more sub-4% deals (see Santander) expected in the coming weeks. However, concerns over potential economic shocks still make long-term fixes attractive to some borrowers.