Finance

Do you buy the hype? The release of Chatgpt, a tool designed by OpenAI, has kicked off a wave of enthusiasm about artificial intelligence (ai). Everyone from spy agencies to law firms is trying to make use of the technology. And investors are working out how they might be able to take advantage of this by buying ai-exposed firms.In the stockmarket this has manifested itself as an almighty boom in the valuation of tech companies. Openai might be private, but more than a dozen firms that design ai software, have invented or build the computing chips that make ai possible, or run the data centres that the tech relies on are included in the s&p 500 index of leading American shares. The latest firm to experience an ai-induced rally is Nvidia. The Californian company’s share price has risen by almost 40% since it reported unexpectedly strong earnings on May 24th, and has almost tripled in the year to date. Nvidia is now the fifth most-valuable listed corporate entity in America. Yet it is not just tech firms that are thriving. The ai boom has coincided with a broader recovery in stockmarkets, which were battered last year by a combination of high inflation and rising rates. The s&p 500 is up by 8% since Chatgpt was launched, and has risen almost 20% from its October low. This prompts a question. Just how much of the rally is explained by ai enthusiasm?To answer such a question, it is necessary first to rule out the usual culprits for major market moves: namely, shifting interest-rate or growth expectations. After all, owning a share is ultimately a claim on the future earnings of a firm. One way of working out the value of a share today is by estimating future earnings, and potential growth, before applying a discount or interest rate to calculate their value. This time around a shifting macro outlook cannot illuminate market movements. In November investors thought the federal-funds rate would rise to around 5-5.5% by the end of 2023. Although sentiment has oscillated, it has settled at about the same place. An average of earnings expectations for the year is also where it was six months ago. The next step is more straightforward: it involves quantifying the size of the ai bounce. Analysts reckon that the s&p 500 has 14 firms with significant exposure to the tech. These include both well-known giants, such as Google and Microsoft, and lesser-known providers of underlying infrastructure, like Arista and NetApp, two data-centre companies. On its own, the price of Nvidia is responsible for an enormous slice of the stockmarket recovery. Since the end of November the firm’s market capitalisation has soared from under $400bn to $950bn—accounting for a fifth of the rally. Add Nvidia’s surge to the growing market capitalisations of the 13 other firms with ai exposure and a remarkable 73% of the broader rally is explained. The boom in ai tech stocks has comfortably outstripped the wider tech rally. The nasdaq is up by a fifth since November, compared with a third for the most ai-exposed firms. That ai optimism is the driver of the recent rally becomes even clearer when looking at share price “multiples”, which divide current prices by current or future earnings. These multiples are affected by earnings and economic factors like interest rates, but also more nebulous things under the broad label of “animal spirits”. In November the average price to current earnings multiple of an s&p 500 firm, excluding the 14 most exposed to ai, was around 27. As we went to press, the multiple had dipped to 26. Meanwhile, the average multiple of firms in our ai bucket had leapt from 43 to 77.These multiples might be justified. Much of the excitement about Nvidia’s prospects has been prompted by orders for the company’s chips. During the firm’s earnings call representatives suggested that income from data-centre chips was on track to double, from an already record-breaking $4bn in the first quarter to $8bn in the second. On the other hand, investors have been known to get over-excited about novel technologies. The internet made a new generation of companies (and their bumper profits) possible. It set off a wave of productivity improvements for economies around the world. The problem is that much of this happened after a stockmarket bubble, which caused speculators to lose their shirts. It is obvious that investors making bets on ai must assess whether the hype is justified this time around. But such is the importance of ai to the broader stockmarket, so must everyone else, too. ■ More

Cryptocurrency, examples of which include bitcoin and ethereum, is the most common investment held by Gen Z investors, according to a joint Finra-CFA Institute study.
That’s likely because its members grew up amid an era of social media, technological growth and easier investment access, experts said.
Crypto should generally be just 1% to 3% of an investor’s portfolio, one advisor said.

Fatcamera | E+ | Getty Images

Cryptocurrency is the most common investment held by Gen Z investors, a trend likely fueled by the cohort growing up during an age marked by technological change, social media and easier access to investing, according to a new joint report from the CFA Institute and Financial Industry Regulatory Authority’s Investor Education Foundation.
But while young people can afford to take more investment risk relative to older generations, using crypto as the linchpin of an investment portfolio is nonetheless a risky bet due to its volatility, experts said.

Also, on Tuesday, the Securities and Exchange Commission sued Coinbase, the largest U.S. crypto exchange, alleging the company was selling investment securities while not being registered to do so. The SEC sued Binance, a Coinbase rival, on Monday.

Crypto zeal a concern if investors don’t diversify

Fifty-five percent of Gen Z investors currently invest in crypto, according to the joint Finra-CFA Institute report.
Gen Z is a cohort born in the late 1990s and into the 21st century, meaning its oldest members are in their mid-20s, and the report is based on an online survey of people in the U.S. ages 18-25.
Individual stocks ranked second, held by 41% of these investors, followed by mutual funds (35%), nonfungible tokens (25%) and exchange-traded funds (23%), the report said.
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By comparison, mutual funds were the most common holding among Gen X investors, a cohort born between 1965 and 1980. Forty-seven percent held mutual funds, followed by individual stocks (43%) and crypto (39%).  
Gen Z’s relatively high concentration in cryptocurrency — examples of which include bitcoin and ethereum — and individual stocks “may be cause for concern” if investors aren’t adequately considering and managing risk, said Gerri Walsh, president of the Finra Investor Education Foundation.
“Whereas mutual funds and most ETFs typically offer a degree of diversification, the same is not true when purchasing cryptocurrency and individual stocks,” Walsh said.

Crypto should be a small piece of the portfolio

Gen Z is the first generation to grow up in an age of technology and social media, consuming information including investment advice from platforms such as TikTok and Instagram, said Ted Jenkin, a certified financial planner based in Atlanta.
Their enthusiasm for cryptocurrency also coincides with the growth of investment apps that let users buy with relatively small sums of money and can therefore offer more investment access to those with less disposable cash. They’ve also generally witnessed the rise of technology giants such as Alphabet, Apple and Meta and have a high degree of confidence in the continued growth of tech and the digital economy, said Jenkin, founder of oXYGen Financial and a member of CNBC’s Advisor Council.

Crypto can be a volatile asset class. For example, bitcoin has lost more than half its value since its peak around $69,000 in November 2021. It’s currently trading around $27,000.
Crypto can play a role in investors’ portfolios, especially those with a higher tolerance for risk, said Jenkin. However, they should generally limit their exposure, he said.
“There’s certainly a case for aggressive growth, but I generally wouldn’t recommend more than 1% to 3%” of a portfolio in cryptocurrency, Jenkin said.

The joint Finra-CFA Institute report doesn’t specify the average share of Gen Z investors’ portfolios allocated to cryptocurrency.
Investors should also consider it as a long-term investment meant to be held for at least 10 years, he recommended.
Gen Z investors in the U.S. view themselves as risk-takers. Indeed, 46% say they’re willing to take substantial or above-average financial risks, according to the joint Finra-CFA Institute report. And a similar share (50%) say they’ve made an investment due to the fear of missing out, which “might not always entail a careful risk assessment,” Walsh said.

SEC actions consider ‘unregistered exchanges’

The SEC’s legal actions against Coinbase and Binance this week hinge partly on “registered” versus “unregistered” exchanges.
An unregistered exchange doesn’t carry the same protections for investors as a registered one, such as the New York Stock Exchange, that sells stocks and other securities. Registered exchanges, for example, offer a maximum $500,000 financial backstop for investors if the exchange were to fail.
In a blog post, Binance wrote it was “disappointed” by the SEC action. The company said it has “actively cooperated with the SEC’s investigations” and “engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations.”
Coinbase’s chief legal officer, Paul Grewal, told CNBC there’s an “absence of clear rules for the digital asset industry,” which ultimately “hurts companies like Coinbase that have a demonstrated commitment to compliance.” More

Founder and CEO of Citadel Ken Griffin believes artificial intelligence will be transformative one day but it’s still in the early innings.
“I do think the AI community is making a terrible mistake by being full of hype on the near-term implications of generative AI,” Griffin said.
One industry that could see a material impact from AI is programming and software engineering, Griffin said.

Ken Griffin, Citadel, at CNBC’s Delivering Alpha, Sept. 28, 2022.
Scott Mlyn | CNBC

Ken Griffin, founder and CEO of Citadel, believes the hype around artificial intelligence could be overblown at this early stage.
“I do think the AI community is making a terrible mistake by being full of hype on the near-term implications of generative AI,” Griffin said Tuesday during an event for Citadel’s new class of interns in Fort Lauderdale, Florida. “I think they’re actually doing everybody a huge disservice with the level of hype they are creating.”

Griffin, 54, said the advanced technology will be transformative one day but it’s still in the early innings. The billionaire investor believes the threat about AI eliminating a wave of skilled professional jobs is far from reality.
“If you listen to the CEOs of tech companies, it’s going to eliminate millions of white-collar jobs,” Griffin said. “I say, ‘Not that fast.’ Some professions are accepting of errors, but you have to be really accurate in finance. You have to be really accurate as a lawyer.”
AI has been dominating headlines this year, creating a buying frenzy on Wall Street that briefly pushed major enabler Nvidia over a $1 trillion market cap. Buzzy chatbot ChatGPT, capable of taking written inputs from users and producing a human-like response, was an instant phenomenon globally, becoming the fastest-growing software in history. Even legendary value investor Warren Buffett said he took a crack at it, asking the chatbot to write a song in Spanish.
“Here’s the problem with large language models: they are built on the past, everything we do is about the future,” Griffin said. “We are at the start of the journey of large language models. It will be really interesting to see where this journey takes us. It will have a real impact across the economy.”
A group called the Center for AI Safety issued an eye-popping warning recently, saying AI could be putting pressure on the existence of humanity.

Coders under attack?
One industry that could see a material impact from AI is programming and software engineering, Griffin said. Citadel is in the process of getting an enterprise-wide license to use OpenAI’s ChatGPT.
“Programing is going be a big target for generative AI,” Griffin said, asked by an intern about AI’s impact on his business. “You want to make sure that if you are a software engineer, you are putting yourself really close to the domain problems that need to be solved. Your career path will be defined by your ability to solve problems. The days of ‘I’m a good programmer’ are becoming numbered.”
Many of Citadel’s interns have a computer science background. The firm’s internship program has become extremely competitive. A total of 69,000 students applied for about 300 positions this year. The acceptance rate of less than 1% is even lower than that of Harvard and MIT.
Griffin, who also learned programming in school, stressed that software engineering will continue to be part of the toolkit that helps run his business as the skill is crucial in identifying and solving commercial problems.
The interns are kicking off the 11-week program in Fort Lauderdale for Citadel and in Palm Beach for Citadel Securities this week. More

Netflix gift cards are seen in a shop in Krakow, Poland on June 13, 2022.
Jakub Porzycki | Nurphoto | Getty Images

Check out the companies making headlines in premarket trading.
Tesla — Shares of the electric vehicle maker added more than 3% in premarket trading after an update on the company’s website showed that new Model 3 and Model Y cars are eligible for a $7,500 tax credit from the Inflation Reduction Act.

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Netflix — The streaming giant climbed 3.1% after JPMorgan increased its price target on the stock, citing the company’s effort to limit password sharing on its platform. The said the move could fuel revenue growth, JPMorgan said.
Stitch Fix — Shares jumped more than 7% after the company’s fiscal third-quarter revenue and adjusted EBITDA earnings came above expectations. The company mentioned it focused on “improving efficiencies, maintaining profitability and cash flow” during the third quarter.
GameStop — The meme stock added 2.4% premarket ahead of quarterly results on Wednesday. Analysts polled by FactSet are forecasting a quarterly loss of an adjusted 15 cents per share.
Petrobras — The Brazilian oil giant rose 2% in premarket trading after Morgan Stanley upgraded the stock to overweight from equal weight. The bank said Petrobras could deliver a larger dividend to investors this year than it has historically.
Coinbase — The crypto exchange climbed about 2% in premarket following a 12% selloff the day before. The SEC sued Coinbase on Tuesday, alleging the company was operating as an unregistered exchange and broker. Ark Invest’s Cathie Wood bought the dip in Coinbase.

NovoCure — The oncology company added 3.2% before the opening bell. The company just wrapped up a presentation of key data from a study linked to a treatment for lung cancer at the 2023 American Society of Clinical Oncology Annual Meeting which reached its “primary endpoint.”
Yext — The online marketing firm soared more than 17% in premarket trading on better-than-expected quarterly results. Yext earned an adjusted 8 cents per share in the first quarter on revenue of $99.5 million. Analysts expected a profit of 5 cents per share on revenue of $98.5 million, according to StreetAccount.
— CNBC’s Hakyung Kim, Jesse Pound and Yun Li contributed reporting. More

Exports fell 7.5% in May from a year ago, far worse than the 0.4% decline predicted by a Reuters poll.
Imports for May dropped by 4.5% from a year ago — less than the 8% plunge forecast by Reuters.
The decline was so sharp that export volumes are below their levels at the start of the year, after accounting for seasonality and changes in export prices, Julian Evans-Pritchard, head of China Economics, at Capital Economics, said in a note.

A cargo ship carrying containers is seen near the Yantian port in Shenzhen, following the novel coronavirus disease (COVID-19) outbreak, Guangdong province, China May 17, 2020.
Martin Pollard | Reuters

BEIJING — China’s exports fell in May for the first time since February, adding to concerns that growth in the world’s second-largest economy could be faltering.
Exports fell 7.5% year-on-year to $283.5 billion, customs data showed Wednesday, far worse than the 0.4% decline predicted by a Reuters poll.

The decline was so sharp that export volumes came in below their levels at the start of the year, after accounting for seasonality and changes in export prices, Julian Evans-Pritchard, head of China Economics at Capital Economics, said in a note.
“This points to subdued global demand for Chinese goods,” he said.

In April, China’s exports beat expectations slightly with 8.5% year-on-year growth. However, the disappointing export figures for May indicate that the longer-term trend is down, said Hao Hong, chief economist at Grow Investment Group.
China won’t be able depend on trade to boost its economy for “another six months, for sure,” he said, noting a drag from lackluster U.S. demand, where inflation — and interest rates — remain high.
Customs data released Wednesday showed the dollar value of China exports to the U.S. slumped 15.1% in May from a year earlier, while exports to the European Union declined 4.9%. China exports to ASEAN, however, rose 8.1% in dollar terms in May from a year earlier.

Imports stabilize

Imports for May dropped by 4.5% from a year ago to $217.69 billion — less than the 8% plunge forecast by Reuters. China’s monthly imports have declined on a year-on-year basis since late last year.
Other analysis of the data showed signs of recovery in domestic demand.
Capital Economics’ Evans-Pritchard estimated that import volumes for May reached an 18-month high, after accounting for a lower comparison base and price changes.
He expects imports “will continue to recover over the coming quarters as the boost from reopening continues to feed through.”
China is set to release inflation data on Friday.
— CNBC’s Jihye Lee contributed to this report. More

HSBC UK wants to preserve Silicon Valley Bank UK’s focus on startups and innovative businesses, CEO Ian Stuart told CNBC.
“We are going to keep it ringfenced within our own ringfenced bank, it will have its own board, it will have its own risk policies, we are going to protect what it’s got today,” Stuart said, following the March takeover of the bank.
Stuart also outlined plans to grow the rebranded bank in the U.S., U.K., Middle East and Asia.

Silicon Valley Bank UK will continue to serve startup businesses from “seed funding to IPO,” the chief executive of its new owner, HSBC UK, said Tuesday.
“We’re going to protect what we’ve got,” Ian Stuart told CNBC’s Arjun Kharpal at the Money20/20 fintech conference in Amsterdam.

“We are going to keep it ringfenced within our own ringfenced bank, it will have its own board, it will have its own risk policies, we are going to protect what it’s got today.”
HSBC UK bought the London-headquartered subsidiary of Silicon Valley Bank for £1 ($1.21) in March after its U.S. parent company collapsed. Despite not having a major customer base in the U.K., hundreds of founders and VCs said the bank’s failure would be highly damaging to the tech sector, and the government stepped in to facilitate a deal over the course of a weekend.

Some have expressed concern that HSBC, a traditional financial institution, is not well placed to enable Silicon Valley Bank UK to continue to finance the kind of tech-focused startups and small businesses that it used to specialize in.
However, Stuart said the bank wanted to reassure customers that wouldn’t be the case.
“Our plan is we’ll take it from seed funding all the way through to IPO, customers will never have to go outside of that network to meet their funding requirements,” he said, but with the addition of HSBC products and services.

After migrating back-end systems and processes from the U.S. and relaunching under a yet-to-be-announced name — which sources have told Sky News will be HSBC Innovation Banking — Stuart said they wanted to take the operation global.
“We want to be global very, very quickly, setting up infrastructure in the U.S., U.K., Israel, Middle East and Asia. So it’s a really comprehensive plan,” he said. More

Federal regulators say they lack sufficient assurance over the safety of $2.2 billion of U.S. customer assets nominally under the control of Binance’s U.S. subsidiary.
SEC lawyers filed an emergency motion, and have argued that Binance’s main business and its founder Changpeng Zhao exert effective control over billions of dollars of client funds.
The SEC is asking a federal judge to institute a temporary restraining order that would freeze those assets.

Binance’s Co-founder & CEO Changpeng Zhao has given several interviews discussing the outlook for cryptocurrency following a turbulent couple of weeks in the market.
NurPhoto / Contributor / Getty Images

The $2.2 billion of U.S. customer assets held by Binance is at “significant risk” of being stolen by founder Changpeng Zhao unless a freezing order is in put place, federal regulators said in a filing Tuesday night, after the crypto regulator was charged by the Securities and Exchange Commission.
Lawyers from the SEC filed an emergency motion earlier, citing a risk of capital flight and asking a judge to repatriate and freeze U.S. customer assets to prevent illicit transfers by Zhao or Binance entities. The SEC sued Binance and Zhao on Monday, alleging they engaged in the unregistered offer and sale of securities and commingled investor funds with their own.

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The latest filing described Zhao as a “foreign national who has made overt his views that he is not subject to the jurisdiction of this Court.” SEC lawyers alleged that two Binance U.S. subsidiaries — BAM Trading and BAM Management — were controlled by Zhao and had already garnered “illicit gains” of at least $420.4 million in profits and venture fundraising.
Years of communications between the SEC and Binance, which claims no official headquarters, suggest that Binance.US couldn’t clearly indicate who controlled customer assets, according to the filing.
“Zhao and Binance have had free reign,” the SEC alleged, over “customer assets worth billions of dollars.”
Zhao’s attorneys say the billionaire is not subject to U.S. law, despite his control over or beneficial ownership of U.S. companies and bank accounts that sent billions of dollars to Swiss and British Virgin Islands-based holding companies, the SEC said.
The SEC says federal law and precedent establish the court’s jurisdiction over Zhao and Binance.

“There is no doubt that the Court has personal jurisdiction over all Defendants,” the SEC said.
While Binance’s U.S. arm has said it maintains control over much of its technology and financial infrastructure, the SEC says Zhao’s ultimate control puts investor assets at risk unless action is taken immediately.
“Given the history of Zhao’s and Binance’s open desire to avoid U.S. regulation and oversight, and their surreptitious control over BAM Trading and commingling of and movements of BAM Trading assets through a web of Zhao-controlled entities outside of the United States, there can be no assurance that BAM Trading employees are not influenced by Zhao or Binance today,” the filing said.
Federal regulators are also requesting the court allow them to serve Zhao by emailing his lawyers, saying his “pattern of geographical elusiveness” makes it difficult to identify his exact residence or whereabouts. Zhao is reportedly a resident of the UAE.
Binance did not immediately responded to a request for comment.
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Net outflows from the crypto exchange Binance and its U.S. arm reached $791 million, crypto research firm Nansen said on Tuesday.
The outflows spiked after Binance and its founder, Changpeng Zhao, were charged with 13 different securities violations by the SEC.
Zhao and Binance’s two entities have strongly disputed the allegations.

Changpeng Zhao, billionaire and chief executive officer of Binance Holdings Ltd., speaks during a session at the Web Summit in Lisbon, Portugal, on Wednesday, Nov. 2, 2022.
Zed Jameson | Bloomberg | Getty Images

Crypto investors pulled $791.6 million from the crypto exchange Binance in 24 hours, crypto research firm Nansen said Tuesday, after U.S. regulators unveiled 13 securities charges against the company and its founder Changpeng Zhao.
After the collapse of allegedly fraudulent crypto exchange FTX in November 2022, investors moved their assets to a number of exchanges, but Binance won the lion’s share of those inflows. Following Monday’s Securities and Enforcement Commission charges, it appears some of those gains have been returned.

Investors withdrew $1.65 billion worth of assets from Binance and $13 million from contested Binance’s U.S. arm on the Ethereum blockchain after the charges were unveiled. Inflows totaled only $871.8 million and $11.53 million to Binance and Binance.US, respectively.
The SEC alleged that Binance had been engaging in the unregistered offer and sale of securities, that Zhao and his entities had improperly commingled investor funds with Binance’s funds and that the exchange subverted its own controls to allow institutional U.S. investors to use Binance’s international exchange, rather than the supposedly firewalled U.S. version.
The Commodity Futures Trading Commission had already unveiled a similar set of charges against the crypto exchange earlier this year. The allegations of commingling and compliance failings echo the charges levelled against FTX founder Sam Bankman-Fried and his collapsed exchange.
Zhao and Binance’s two entities have strongly disputed the allegations. More