Vertaeon Risk Highlights – Week of 07/29/2024
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Financial Risks: Contraction in manufacturing, new orders and exports
At 49.7, down from 50.8 in June, the Global Manufacturing PMI, sponsored by
J.P.Morgan and compiled by S&P Global Market Intelligence, indicated a deterioration of business conditions for the first time in seven months in July. While 1H24 saw a manufacturing recovery, compared to the last two years, the decline in PMI signals a halt to that recovery.
According to the report, global output growth was subdued by new orders for goods falling in July for the first time since January, in part fueled by the second successive monthly decline in worldwide new export orders. These exports were hit in part by intensifying trade disruptions emanating from shipping delays, often linked to the diversion of ships from the Red Sea.
Geopolitical Risks: Managing AI Risks
The United Kingdom’s competition watchdog, Competition and Markets Authority (CMA), has published a joint statement alongside counterparts from the United States and European Union in a pledge to support competition in AI, per multiple news reports. While there was consensus on AI opportunities, there is a focus on ensuring consumer protection and for fair competition. To balance the risks and benefits posed by the evolving AI technology, the bodies have committed to dialogue and sharing information in the memorandum signed by the European Commission, the US Federal Trade Commission, and the US Department of Justice.
The CMA outlined its principal concerns regarding AI technology earlier this year. These included the potential domination of a handful of Big Tech AI leaders who could use their position in foundational AI to dictate the market.
The CMA and its US and EU counterparts on Tuesday revealed the shared principles that will determine AI competition regulation across the territories. These principles are: Discouraging exclusionary tactics in AI, encouraging interoperability between AI technologies and ensuring businesses and consumers have a wide array of choices in the AI market.
Vertaeon View:
There are multiple risks to manage as AI evolution continues. Player concentration can be harmful to consumers from a pricing point of view but also for B2B customers where reliance on one or two major providers can create significant supplier concentration and risks.
While in a separate segment, reliance or Microsoft on Crowdstrike and its cascading impact to businesses and airlines, is an example.
Macroeconomic Risks: Continuing volatility/decline trends
For the US – mixed signals
On a positive note, U.S. consumer confidence unexpectedly rose in July, but remained in the tight range of the past two years amid lingering worries about inflation and higher borrowing costs per Reuters. The Conference Board said that its consumer confidence index increased to 100.3 this month from a downwardly revised 97.8 in June.
On a negative note, the number of job openings on the last business day of June stood at 8.184 million, the US Bureau of Labor Statistics (BLS) reported in the Job Openings and Labor Turnover Survey (JOLTS). This reading followed the 8.23 million openings (revised from 8.14 million) reported in May.
For Germany – Declining trends
Inflation in Germany rose unexpectedly in July, according to preliminary figures released. New data released by federal statistics agency Destatis showed that consumer prices were up 2.3% from a year ago.It was also reported that the German economy unexpectedly contracted in Q2 after skirting a recession at the beginning of the year.
Vertaeon View on Impact:
There are direct impacts to companies and suppliers in Germany, especially in the automotive and chemicals sectors. In our analysis, the revenue/profit results for Q2 have shown a declining trend for some of the leading companies.Climate Risks: A week of floods and fires
Heavy rainfall and resulting severe weather caused damages including floods in
China (Hunan Province), India (Himachal Pradesh), Vietnam, and Poland. Earlier in the month Switzerland had severe floods. Over 14,000 areas in the EU are at significant risk of flooding, according to a map (Image to the right) published by the European Commission in October 2023.
Wildfires in eastern and central Spain, Italy (near Rome), southern Greece and the US (At least four major wildfires are burning across California and Washington). The Guardian reported that the largest wildfire in the US swelled to more than 380,000 acres (154,000 hectares), an area bigger than the city of Los Angeles and three times the surface area of Lake Tahoe, in northern California.
Vertaeon View on Impact:
Significant damages can occur (and have) for company and supplier operations. It is important to highlight weather-related risks in the overall risk assessments. This starts with identifying the potential for a site-specific risk for critical materials and suppliers. Adverse effects can include supply issues, employee impact, operational disruption, utility impact and ultimately financial impact on revenue and profitability.Porsche issues related to a supplier of aluminum alloys and impact on revenue estimates (revised in billions) is a strong example of this.
Vertaeon’s risk platforms have been tracking multiple disasters and other risks mentioned above for the last three years. Contact Us for more detailed analysis.
Vertaeon Risk Highlights – Week of 07/22/2024
Geopolitical Risks:
On July 10, 2024, The Biden Administration issued two separate proclamations that narrowed the exclusions from tariffs imposed under Section 232 of the Trade Expansion Act of 1962 (“Section 232”) for certain steel and aluminum articles imported from Mexico. These measures are in coordination with the outgoing administration of President Andrés Manuel López Obrador of Mexico, which recently imposed measures requiring Mexican importers to provide more information to the Mexican government about the country of origin of imported steel products.
The proclamations stipulate
(i) duties (25%) on all steel imports from Mexico that are melted and poured in a country other than Mexico, Canada, or the United States and
(ii) duties(10%) on all aluminum imports from Mexico that include primary aluminum in which the primary country of smelt, secondary country of smelt, or country of most recent cast is China, Russia, Belarus, or Iran
Vertaeon View: Exporters of steel and aluminum from Mexico will have to assess sub-tier mapping and tracking to establish country of origin for compliance.
Financial Risks:
Stock decline for technology companies, especially the ones benefitted from ‘AI boom’
Note Vertaeon comment on this as a ‘leading indicator’ from Week of 07/08/2024 Highlights
Recent sell-off in technology shares have affected the US and Asia markets this week. Nasdaq fell 3.5% (5-day image). On Thursday, Japan’s Nikkei index led declines in Asia as it fell by more than 3%.
The Dow Jones Industrial Average dropped by 1.2%.
Technology companies with artificial intelligence (AI) stocks hit particularly hard, including Nvidia, Alphabet, Microsoft, Apple and Tesla. These have driven recent stock market gains. AI chip maker Nvidia, saw its shares drop 8.8% in the last five days. It has lost about 15% of its value in the last two weeks per reports.
Macroeconomic Risks:
Inflation update – as of July 17, 2024
According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI)for All Urban Consumers increased 3.0 percent from June 2023 to June 2024. But they are rising at a slower pace, and showed a monthly decline of 0.1% from May to June 2024. The last time this figure was below 3.0 percent was in March 2021, when consumer prices increased 2.6 percent on a 12-month basis.
On the other hand, the unemployment rate rose to 4.1%, up from 4% from the previous month prior. It was the highest reading in almost three years. Market expectation is that the Fed will hold interest rates steady at its July meeting before its first interest rate cut in September. Markets may be already pricing this in?
Climate Risks:
Taiwan’s coast guard is working to rescue dozens of sailors stranded off its southern coast after Typhoon Gaemi sank one freighter and left eight others stranded. The typhoon flooded streets, knocked out power and killed at least five people in Taiwan before heading to China. It earlier killed 22 people in the Philippines.
Tropical cyclone GAEMI (“Carina” in the Philippines) approached north-eastern Taiwan moving north-west, and on 24 July at 0.00 UTC. According to the media, residents have been evacuated in Hualien county from areas vulnerable to landslides, floods, and other disasters. Several flights and train services have been canceled in Taiwan.
Impact? Taipei is suspending work on July 25th, classes and its US$2.4 trillion stock market as Typhoon Gaemi approaches Taiwan with strong winds and heavy rain. Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) expects its local chipmaking fabs to maintain normal production, the company said in a statement. In addition, a cargo ship sank off Taiwan’s coast.
Vertaeon’s risk platforms have been tracking multiple disasters and other risks mentioned above for the last three years. Contact Us for more detailed analysis.
Vertaeon Risk Highlights – Week of 07/15/2024
Technology Risks:
Crowdstrile failure and extensive outages: A massive IT failure by CrowdStrike Holdings Inc. on Friday, July 19 caused a global disruption for flights, markets, healthcare and corporations. CrowdStrike shares have dropped as much as 30%, after the “largest outage in history” disrupted the lives of millions. Fault in CrowdStrike software update linked to Windows PCs is expected to take days to fix. The impact of the disruption was compounded by an apparently unrelated issue with Microsoft Corp.’s Azure cloud services.
The cybersecurity company is a dominant supplier of software that protects businesses from ransomware attacks. CrowdStrike controls about 18% of the $8.6 billion global market for so-called “modern” endpoint detection and response software, just ahead of archrival Microsoft, according to market research firm IDC.
Supply chain impact? Air freight was hit the hardest, with many global airlines grounding flights, and facing a recovery period that could last days or weeks per CNBC. UPS said its airline continues to operate normally. For rail and ports, varying levels of impact, but most major rails in the U.S. were operating normally by Friday afternoon. NY, Houston and LA ports from reported temporary container terminals shut down overnight, but were mostly operational by early morning.
According to maritime intelligence company Kpler, early indications showed the global IT outage affecting operations at global ports including Poland’s Gdansk, and Dover, Felixstowe and Liverpool in the U.K.
Vertaeon View: Ensuring cascaded testing and deployment of software and its updates can be one mitigation. Scenario analysis having tested backup or contingency plans, and having more than one supplier could have also reduced the extent of disruption.
It was apparent that the ports and rail systems recovered relatively quickly. The impact on selected air freight may compound the logistics costs in light of the increased container rates (due to other reasons). In addition, the full impact on sub-tiers of the supply chain and trickle-down effect to company delivery has to be investigated further.
Geopolitical Risks:
Elections and potential impact on the market: President Trump told Bloomberg Businessweek that Taiwan should pay the U.S. for its defense, sending shares of Taiwanese chip manufacturer TSMC, the world’s largest contract chipmaker and a major Apple and Nvidia supplier. The US is Taiwan’s most important international supporter and arms supplier, but there is no formal defense agreement, unlike with South Korea and Japan.
Vertaeon View: Election results and candidate policies will have an impact on how foreign relations are managed. This can extrapolate to company financials, supply chains and global sourcing.
Trade hikes in anticipation of sanctions: ASML has shipped more than $2.2 billion worth of chip making machines to China in Q2 2024, worth nearly half of its total sales for the period per Asia Financial. This was the second consecutive month of China accounting for nearly half of ASML’s sales. Tightening US export sanctions have meant that Chinese chip makers remain cut off from ASML’s most advanced EUV (Extreme Ultraviolet) and several high-end DUV (Deep Ultraviolet) lithography systems required to make cutting-edge chips.
Vertaeon View: While the most advanced equipment sale remains restricted, the above increase can point to plans to increase production of legacy chips.
Macroeconomic Risks:
China Growth Decline: After weak retail spending dragged down the growth rate, pressure on Beijing to take steps to improve Chinese consumer confidence has intensified. Annual retail sales growth slowed from 3.2% to 2% in the three months ending in June – the weakest in 18 months – and fell slightly in June alone. The Chinese economy expanded at an annual rate of 4.7% in Q2, weaker than the 5.1% expected by the financial markets.
However, China posted a record $99bn trade surplus last month with importers bringing forward orders to beat higher tariffs on goods. The latest official figures from Beijing showed exports growing at their fastest rate in 15 months, while the weakness of China’s domestic economy resulted in falling imports.
Higher US tariffs on Chinese-made EVs and other hi-tech products came into force on August 1st, while higher EU import duties on Chinese electric vehicles came into force earlier in July.
Vertaeon View: We see a mixed view for imports – on one hand, significant increases for imports with anticipation of upcoming tariffs and on the other reduced imports (domestic weakness).
Vertaeon’s risk platforms have been tracking multiple disasters and other risks mentioned above for the last three years. Contact Us for more detailed analysis.
Vertaeon Risk Highlights – Week of 07/08/2024
Tariffs: Geopolitical Risks
(i) The US announces new rules targeting firms from China and other countries that are routing shipments of steel and aluminum through Mexico to try to evade tariffs. The White House said firms shipping via Mexico must now prove the origins of their products if they want to avoid the border taxes. The measures expand protections for US steel and aluminum-makers that were launched under President Trump in 2018. The tariffs, which set a 25% tax on steel and 10% tax on aluminum imports, were controversial, sparking trade battles with countries around the world.
(ii) EU countries are wavering over whether to back additional tariffs on Chinese-built EVs highlighting Brussels’ challenge in building support for its largest trade case yet while Beijing threatens retaliation. Germany, whose carmakers made a third of their sales last year in China, wants to stop the tariffs, while France is among the firmest backers.
Vertaeon View: While they offer protectionism measures, these steps can also increase operational costs for corporations (till local supply chains emerge) and consumers alike in the short-term.
Tariff circumvention: Compliance Risks
(i) BYD to build a factory capable of producing 150,000 EVs and plug-in hybrids annually, as well as a research and development center in Turkey, in a step seen as a way to sidestep tariffs.
(ii) Nvidia to make $12 billion selling AI GPUs to China. Nvidia’s new HGX H20 GPUs for AI are designed to comply with U.S. export rules while still providing rather formidable performance for AI applications.,
Vertaeon View: Companies are developing alternate production sites and products to be sanction compliant. This raises a complex question – how effective are sanctions in providing competitive advantage for local and global firms?
Climate Risks:
(i) Extreme heat: The hidden costs of extreme heat — from lost
productivity to healthcare for heat-related illnesses — totaled more than $7.7 billion over the last decade, a new report from the California Department of Insurance found.
(ii) Hurricanes: AccuWeather estimates that Beryl’s total damage and economic loss will be between $28bn to $32bn. NOAA predicts an 85% chance the 2024 Atlantic hurricane season, which spans from 1 June to 30 November, will be “above normal”.
Texas households are being forced to swelter in summer heat without air-conditioning for another week as the state continues to suffer with power outages in the aftermath of Hurricane Beryl.
Vertaeon View: Two risk scenarios to be mapped for operational and ESG risks- potential extreme heat and hurricane damage.
Technology Risks:
Goldman Sachs estimates that around $1 trillion will be spent over the next few years on data centers, semiconductors, grid upgrades, and other AI infrastructure. Their report argues that even if a so-called “killer application” were to emerge, it’s unclear that generative AI will generate the financial returns investors have been banking on.Vertaeon View: There is an implication for AI-related stock performances and potential for major market correction. Life-changing consumer applications may not emerge while challenges on energy and hardware loom.
ESG Risks:
(i) Samsung Electronics workers began a three-day strike for better pay on Monday. Low participation and automated production means the strike is unlikely to have a significant impact on output.
Vertaeon View: While overall impact is expected to be lower, it can affect employee morale and eventually productivity
(ii) Scientists found PFAS used in lithium-ion batteries in air, water, snow, and soil near chemical plants in the US, Belgium, and France.
Vertaeon View: A range of serious issues from ‘forever chemicals’ perspective from health to expensive litigation can come up. However, earlier detection of this major risk can help firms plan mitigation and reduce impact on communities and environment.
Macroeconomic Risks:
Weekly jobless claims fall, Federal Reserve seeks more evidence of inflation cooling to revise rates. Powell highlighted the three latest inflation readings. He also cemented a shift in tone toward emphasizing potential risks to the labor market, alongside the Fed’s continued focus on taming prices.Vertaeon View: Impact of persistent high interest rates on consumer spending and cost of borrowing for both corporations and consumers
Vertaeon’s risk platforms have been tracking multiple disasters and other risks mentioned above for the last three years. Contact Us for more detailed analysis.