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South Korea’s economy had a roaring first quarter, delivering its fastest growth in nearly six years on the back of booming chip exports. SK Hynix, one of its top chipmakers, reported a five-fold jump in earnings and forecast AI chip demand would keep exceeding supply.
It’s the sort of positive message that shows why, nearly two months into the war in Iran, global stock markets are rallying. Investors are looking past the geopolitical risks and piling back into the artificial intelligence trade - a boon for financial market operators.
A laser-like focus on AI spending by big tech firms will give even more weight to the outlooks from hyperscalers like Alphabet, Meta and Microsoft next week.
In the meantime, financial markets are doing well out of all the trading, with the London Stock Exchange Group forecasting annual revenue growth at the top of its range. There are also winners from consumers cutting costs, with Nestle CEO Philipp Navratil saying more people eating at home rather than in restaurants, especially in emerging markets in Asia, was helping his company’s food and snack sales.
But how long can the market ignore the supply shocks at the heart of the Iran conflict? SK Hynix says it sees limited impact, having secured inventory, key chemicals and energy supplies. But the longer this goes on, the more likely that rising prices will impact demand.
We’re already seeing demand destruction emerge in the euro zone, where business activity suffered a surprise contraction in April as prices soared. In Britain, meanwhile, manufacturers have turned their most pessimistic since the start of the COVID-19 pandemic as the inflation indicators flash red. One survey of expected prices had its biggest month-to-month increase since records began in 1975.
And it’s not all roses in the corporate garden. We are seeing all sorts of companies - particularly airlines exposed to high fuel costs, but also consumer names - signalling higher prices and supply disruptions. A price warning from the world’s top maker of condoms went viral in China, stoking talk of stockpiling.
With all the uncertainty, it’s not surprising that the European Central Bank is expected to raise interest rates in June after holding next week, although there is no agreement among economists on what could follow. That’s because a quarter-point June hike is largely seen as an insurance move while the extent of any second-round inflationary effects arising from higher fuel prices remains unclear.
The Federal Reserve is still expected to cut rates but not for at least six months, according to the latest Reuters poll. That’s not going to be fast enough for U.S. President Donald Trump and piles pressure on Kevin Warsh, his pick to head the Fed. We’re still waiting for his confirmation but ahead of that, we got into the potential policy trap Warsh faces if he takes over next month on the latest episode of Reuters Econ World. Listen here.
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