Stock indices traded mixed on Wednesday, with the Dow Jones Industrials (US30) setting a new record high and the Nasdaq 100 (US100) falling to a two-week low. The Dow Jones Industrials (US30) Index gained 0.59%, while the S&P 500 (US500) Index fell by 1.39%. The NASDAQ Technology Index (US100) closed negative 2.77%. Positive corporate news boosted the broad market on Tuesday. Stock declines in chip companies and technology mega-companies negatively impacted the broader market. Nvidia stock fell by 7%, Qualcomm and AMD lost 8%, ARM fell nearly 10%, and ASML’s ADR decreased by 11%. In addition, larger technology stocks, Apple and Microsoft, lost more than 2% each. Shares of chip companies declined on concerns that the US may adopt tougher restrictions on Chinese trade and semiconductor technology. Bloomberg reported Wednesday that the Biden administration has told allies it is considering the toughest trade restrictions against chipmakers if they continue to give China access to advanced semiconductor technology.
Equity markets in Europe traded mixed on Wednesday. Germany’s DAX (DE40) was down 0.44%, France’s CAC 40 (FR40) closed down 0.12%, Spain’s IBEX 35 (ES35) was up 0.13%, and the UK’s FTSE 100 (UK100) closed positive 0.28%. European stocks have been suffering heavy losses for the past 2 sessions, as chip stocks have been under pressure due to reports that the US is considering tightening restrictions on chip exports to China. Donald Trump’s comments about Taiwan having to pay the US for defense also added to geopolitical concerns in the sector.
The UK labor market report was mixed. In the three months to May 2024, the number of people employed in the United Kingdom rose by 19,000 after falling by 139,000 in the previous period and exceeded market estimates. This marked the first rise in job creation in the three months to December 2023. Average weekly earnings, including bonuses in the UK for the three months to May 2024, rose 5.7% year-on-year to £689 a week, down 5.9% in each of the previous two periods and in line with estimates of 5.7%.
WTI crude oil prices climbed above $83 a barrel on Thursday, extending gains from the previous session, thanks to a larger-than-expected drawdown in US crude inventories. According to the EIA, the US crude oil inventories fell by 4.87 million barrels in the week ended July 12, marking the third straight week of decline and exceeding the market estimates for a 0.8 million barrel decline. It is the longest stretch of inventory declines since September.
Asian markets traded mixed yesterday. Japan’s Nikkei 225 (JP225) was down 0.43%, China’s FTSE China A50 (CHA50) added 0.46%, Hong Kong’s Hang Seng (HK50) was up 0.06% and Australia’s ASX 200 (AU200) was positive 0.73%.
Australia added more jobs than expected in June amid strong job openings and a high participation rate, although the unemployment rate rose to 4.1% from 4%. The Reserve Bank of Australia is expected to keep interest rates unchanged in August. Still, some traders continue to bet on another rate hike amid persistent inflationary pressures and a tight labor market. The RBA is also expected to ease policy much later than other major central banks.
S&P 500 (US500) 5,588.27 −78.93 (−1.39%)
Dow Jones (US30) 41,198.08 +243.60 (+0.59%)
DAX (DE40) 18,437.30 −80.73 (−0.44%)
FTSE 100 (UK100) 8,187.46 +22.56 (+0.28%)
USD Index 103.74 −0.53 (−0.51%)
Important events today:
– Japan Trade Balance (m/m) at 02:50 (GMT+3);
– Australia Unemployment Rate (m/m) at 04:30 (GMT+3);
– UK Average Earnings Index (m/m) at 09:00 (GMT+3);
– UK Claimant Count Change (m/m) at 09:00 (GMT+3);
– UK Unemployment Rate (m/m) at 09:00 (GMT+3);
– Eurozone ECB Interest Rate Decision at 15:15 (GMT+3);
– Eurozone Monetary Policy Statement at 15:15 (GMT+3);
– US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
– Eurozone ECB Press Conference at 15:45 (GMT+3);
– Eurozone President Lagarde Speaks (m/m) at 17:15 (GMT+3);
This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.
The Australian dollar has stabilized against the US dollar, currently trading around 0.6738. This follows a period of decline influenced by ongoing speculations regarding the US Federal Reserve’s impending policy actions. Expectations are set for the Fed to initiate rate cuts starting in September, with an additional reduction anticipated before the year’s end.
Fed Chairman Jerome Powell recently reinforced these expectations by indicating that the regulator might not wait for inflation to hit the 2% target before reducing rates, responding to the current trajectory of the consumer price index.
Conversely, the Reserve Bank of Australia (RBA) is perceived to be trailing its international counterparts in easing monetary policy, which has contributed to the subdued performance of the AUD.
Later this week, Australia is slated to release its employment statistics. These figures are crucial as they provide a tangible measure of the labour market’s health and could potentially influence the RBA’s policy decisions moving forward.
AUD/USD technical analysis
The AUD/USD pair is currently developing a downward movement towards the 0.6703 level, which serves as a local target. Upon reaching this level, a corrective movement upwards to 0.6747 is expected, which will test this resistance from below. Following this correction, the market may resume its downward trend towards 0.6696, completing the current correction wave before potentially initiating a new upward trajectory towards 0.6811. The MACD indicator supports this outlook, with its signal line indicating a downward trend despite being above the zero mark.
On the hourly chart, the AUD/USD has established a consolidation range around the 0.6747 level. With a downward exit, the pair continues to develop a downward structure aiming for the 0.6704 level. After this target is achieved, an upward correction to retest 0.6747 is anticipated. Subsequently, a new decline towards 0.6696 may occur. The Stochastic oscillator suggests that the current upward momentum is waning, with its signal line poised to drop from above 80, indicating potential for further declines.
Investors and traders should monitor these levels closely, especially in light of forthcoming economic data from Australia, which could significantly sway market sentiment and currency valuation.
Disclaimer
Any forecasts contained herein are based on the author’s particular opinion. This analysis may not be treated as trading advice. RoboForex bears no responsibility for trading results based on trading recommendations and reviews contained herein.
Probability of BoE rate cut in August drops to 40%
UK jobs data and retail sales in focus
UK100 index coils up in a falling wedge pattern
Key levels of interest include 8208.4, 8279.0, 8120, and 8083
FXTM’s UK100 declined on Wednesday after stickier-than-expected inflation data cooled bets around the BoE cutting rates next month.
The Consumer Prices Index (CPI) held at the BOE’s 2% target for a second month in June while services inflation was also unchanged at 5.7%. With CPI proving more stubborn than expected, Sterling jumped to a session high as bets for an August rate cut dropped to 40%.
Note: Over 80% of the revenues from FTSE100 companies come from outside of the UK. Meaning, that an appreciating pound results in lower revenues for those companies – weighing on the UK100 as a result. The same is true vice versa.
More volatility could be on the horizon for the UK100 due to the incoming jobs report on Thursday and retail sales on Friday. It is worth keeping in mind that, over the past year, the UK jobs report has triggered upside moves of as much as 0.6% or declines of 1.2% in a 6-hour window post-release.
Technically speaking, UK100, daily is seen consolidating into a falling wedge pattern, (a sideways movement in price bounded by two downward-sloping converging lines).
According to Thomas Bulkowski’s book Encyclopedia of Chart Patterns, price (in a falling wedge pattern) can break out either upward or downward but is usually upward.
The index bulls (those looking to see the index rally) may observe the following near-term resistance levels;
8208.4 – The 21-day simple moving average
8265.2 – The 50-day simple moving average
8279.0 – The upper bound trend line of the falling wedge pattern
8320 – A significant round number level.
UK 100 bears on the other hand may have their sights on the following near-term support levels
8120 – An important price level
8083 – The lower bound trend line of the falling wedge pattern
Stock indices closed higher on Tuesday, with the S&P 500 and Dow Jones Industrials setting new all-time highs. The Dow Jones Index (US30) gained 1.85%, while the S&P 500 Index (US500) rose by 0.64%. The NASDAQ Technology Index (US100) closed positively, 0.20%. Positive corporate news boosted the broad market on Tuesday.
Bank of America (BAC) closed higher by more than 5% after reporting a second-quarter net interest income of $13.86 billion, better than the consensus of $13.81 billion, and estimating fourth-quarter net interest income of $14.50 billion, above consensus of $14.33 billion. Morgan Stanley (MS) closed higher by more than 1% after reporting second-quarter net sales of $15.0 billion, above the consensus expectation of $14.27 billion.
US retail sales for June were unchanged m/m, stronger than expectations for a 0.3% m/m decline. Additionally, June retail sales excluding autos rose 0.4% m/m, stronger than expectations of 0.1% m/m.
Bitcoin (BTC/USD) climbed above the $65,000 mark, hitting its highest level in nearly a month amid renewed bullish sentiment toward digital assets. Data showed that daily net inflows into 11 US spot bitcoin ETFs totaled $422.67 million on July 16, the highest since June 5 and extending the positive momentum to eight consecutive days.
Equity markets in Europe were mostly down on Tuesday. Germany’s DAX (DE40) fell by 0.39%, France’s CAC 40 (FR40) closed down 0.69%, Spain’s IBEX 35 (ES35) lost 0.47%, and the UK’s FTSE 100 (UK100) closed negative 0.22%.
The UK’s annualized inflation rate for June 2024 was 2%, the same as in May and at the 2021 low, although market estimates pointed to 1.9%. The annual rate of core inflation in the UK in June 2024 was 3.5%, holding steady for the second consecutive month and at its lowest level since October 2021. The data matched market estimates, with the annualized CPI services rate at 5.7% for the second consecutive month.
WTI crude oil prices hovered near $80.8 a barrel on Wednesday, trying to break a four-day slide as lingering demand concerns in top consumer China were offset by a decline in US inventories. China’s second-quarter GDP growth and June retail sales came in below expectations, dragged down by the ongoing real estate market crisis and job insecurity. Meanwhile, the IMF estimates moderate global economic growth over the next two years, including a slowdown in the US, stabilization in Europe, and increased consumption and exports in China.
Asian markets traded mixed yesterday. Japan’s Nikkei 225 (JP225) rose by 20%, China’s FTSE China A50 (CHA50) gained 0.10%, Hong Kong’s Hang Seng (HK50) fell by 1.60% and Australia’s ASX 200 (AU200) was negative 0.23%. On Tuesday, China’s Central Bank injected the largest amount of cash into the Chinese banking system since January to offset the impact of the tax season and maintain ample liquidity. That will support Chinese indices.
The offshore yuan settled at 7.285 per dollar, holding near a one-week low as investors digested Chinese President Xi Jinping’s recent speech at the Third Plenum. Xi urged the Communist Party to maintain “unwavering faith and commitment” to its strategic program amid a challenging domestic and international environment characterized by sluggish economic growth and geopolitical tensions. He also emphasized that Beijing intends to prioritize technology, advanced manufacturing, and other critical sectors necessary for China’s long-term sustainability.
The New Zealand dollar rose to $0.606 on the back of inflation data. New Zealand’s annual inflation rate slowed to 3.3% in the second quarter, the lowest in three years, from 4% in the previous period. However, the latest figure remains outside the Reserve Bank’s target range of 1–3%. The Central Bank expects inflation to return to the target range later this year and will only consider cutting rates once it is satisfied that inflation will remain within that range.
S&P 500 (US500) 5,667.20 +35.98 (+0.64%)
Dow Jones (US30) 40,954.48 +742.76 (+1.85%)
DAX (DE40) 18,518.03 −72.86 (−0.39%)
FTSE 100 (UK100) 8,164.90 −18.06 (−0.22%)
USD Index 104.24 +0.05 (+0.05%)
Important events today:
– New Zealand Consumer Price Index (m/m) at 01:45 (GMT+3).
– UK Consumer Price Index (m/m) at 09:00 (GMT+3);
– UK Producer Price Index (m/m) at 09:00 (GMT+3);
– Eurozone Consumer Price Index (m/m) at 12:00 (GMT+3);
– US Industrial Production (m/m) at 16:15 (GMT+3);
This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.
Shares of ASML have been on a tear this year, surpassing the $1000 and €1000 milestone across both exchanges.
Note: ASML shares can be traded on the Euronext Amsterdam and Nasdaq exchanges.
Its position as the world’s leading manufacturer of chip-making equipment has allowed it to benefit from the A.I. frenzy with shares up over 40% year-to-date.
Prices could push higher depending on how investors react to the latest earnings report.
When will earnings be published?
ASML will report its earnings for the second quarter before US markets open on Wednesday 17th July.
Market expectations:
The company is expected to post earnings of €3.74 compared to €4.93 a year ago.
Quarterly revenues are seen falling to €6 billion from €6.9 billion in the prior year – equating to a 13% decline.
Why is this important?
As a leading manufacturer of chip-making equipment, its earnings and forward guidance may serve as a gauge for the AI hype.
In the first quarter, ASML disappointed investors with revenues declining by 21% year-over-year to €5.3 billion. While sales are expected to fall in Q2, much focus will be on net machinery bookings which are estimated to be around €4.56 billion. Still, growing demand for AI Chips may translate to a significant increase in new orders.
Potential challenges…
China is ASML’s biggest market, accounting for 49% of total sales in the first quarter of 2024.
However, this may be impacted by Dutch licensing requirements and US export restrictions. A noticeable decline in total sales in China may weigh on the business outlook.
How will ASML react to earnings?
Markets are forecasting a 5.7% move, either Up or Down, for ASML stocks on Wednesday post earnings.
What does this mean for prices?
A 5.7% move up from $1062 will take ASML shares to fresh all-time highs beyond $1120.
While a 5.7% move down will send prices back towards the psychological $1000 level.
Keep an eye on TSMC’s earnings
Watch out for Taiwan Semiconductor Manufacturing Company (TSMC) which is due to release its earnings on Thursday 18th July.
TSMC accounts for 28% of ASML’s revenue, so better-than-expected earnings from TSMC may boost ASML’s shares and vice versa.
Technical picture
Prices are firmly bullish on the daily charts as there have been consistently higher highs and higher lows.
A solid set of earnings and forward guidance that satisfies investors could push prices to all-time highs beyond 1120.
If the manufacturer of chipmakers disappoints, prices could slip back towards the 1000 psychological level.
At Monday’s close, the Dow Jones (US30) Index was up 0.53%, while the S&P 500 (US500) Index was up 0.28%. The NASDAQ Technology Index (US100) closed positive 0.40% yesterday. The Russell 2000 Index also gained 1.8% as investors continued to refocus on small-company stocks. The energy, financials, and industrial sectors outperformed the market, while utilities, consumer staples, and healthcare stocks were the biggest fallers. Federal Reserve Chairman Jerome Powell said yesterday that the central bank won’t wait until inflation reaches 2 percent before cutting interest rates because it operates with “long and variable lags.” That raised the likelihood of the first-rate cut in September, which is a positive for indices. Investors are now awaiting Tuesday’s US retail sales data and Fed officials’ comments for more clues on the future course of monetary policy. Markets have already all but priced in September’s rate cut, with two more cuts expected before the end of the year.
The Bank of Canada’s Business Outlook Survey emphasized continued pessimism among Canadian companies, attributing it to weak sales expectations and high equipment costs holding back investment. In addition, Canada’s unemployment rate rose in June to its highest level since January 2022, accompanied by an unexpected 1.4k jobs decline versus an expected 22.5k increase, adding to the Bank of Canada’s concerns about the impact of higher interest rates on the labor market.
Bitcoin (BTC/USD) surged to $65,000 on Tuesday, hitting its highest level in nearly a month, as US presidential candidate Donald Trump picked Sen. J.D. Vance as his running mate. The Ohio Republican said he owns more than $100,000 worth of bitcoin and has been critical of regulatory actions taken by the US Securities and Exchange Commission (ІSEC) against the crypto industry. Bitcoin has risen more than 10% since Friday, helped largely by the prospect of a second Trump presidency.
Equity markets in Europe were mostly down on Monday. Germany’s DAX (DE40) fell by 0.84%, France’s CAC 40 (FR40) closed down 1.19%, Spain’s IBEX 35 (ES35) lost 0.96%, and the UK’s FTSE 100 (UK100) closed negative 0.85%. Disappointing economic data from China, negative corporate news, and quarterly results dampened investor sentiment.
WTI crude oil prices fell to $81.5 a barrel on Tuesday, declining for the third consecutive session. Demand uncertainty in top consumer China and a rising dollar pressured oil prices. Data released Monday showed China’s oil imports fell month-on-month and year-on-year to 46.45 million tons in June amid weak domestic demand.
Asian markets were predominantly up yesterday. Japan’s Nikkei 225 (JP225) was not trading yesterday, China’s FTSE China A50 (CHA50) added 0.36%, Hong Kong’s Hang Seng (HK50) was down 1.52% and Australia’s ASX 200 (AU200) was positive 0.73%.
Hong Kong stocks fell by 1.3% in Tuesday morning trading, declining for a second day and moving away from their highest level in 3 weeks amid a retreat in all sectors. Disappointingly, Q2 Chinese GDP data continued to weigh on sentiment. Meanwhile, Goldman Sachs cut China’s 2024 GDP forecast to 4.9% from 5%, and JPMorgan cut its forecast to 4.7% from 5.2%. Investors’ attention turns to the Third Plenum, a high-level leadership conference scheduled for July 15-18, where they will await policy decisions. However, the focus is expected to be long-term economic and social issues.
The Australian dollar will remain positive against other currencies as the Reserve Bank of Australia (RBA) is expected to ease policy much later than other major central banks. Due to ongoing domestic inflationary pressures, markets are also looking at the possibility of another rate hike by the RBA this year. Investors are now awaiting Australian employment data later this week to gauge the state of the labor market.
The New Zealand dollar fell to $0.605, at its lowest level in two weeks, as investors await second-quarter inflation data that could influence the Reserve Bank of New Zealand’s (RBNZ) policy trajectory. Economists expect New Zealand’s consumer inflation to slow to 3.5 percent in the second quarter, the lowest rate on record.
S&P 500 (US500) 5,631.22 +15.87 (+0.28%)
Dow Jones (US30) 40,211.72 +210.82 (+0.53%)
DAX (DE40) 18,590.89 −157.29 (−0.84%)
FTSE 100 (UK100) 8,182.96 −69.95 (−0.85%)
USD Index 104.26 +0.17 (+0.16%)
Important events today:
– German ZEW Economic Sentiment (m/m) at 12:00 (GMT+3);
– Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+3);
– Eurozone Trade Balance (m/m) at 12:00 (GMT+3);
– US Retail Sales (m/m) at 15:30 (GMT+3);
– Canada Consumer Price Index (m/m) at 15:30 (GMT+3).
This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.
Gold prices have surged, reaching $2430 per troy ounce on Tuesday, flirting with historic highs. The recent spike in gold prices is largely attributed to comments made by Federal Reserve Chairman Jerome Powell, which have bolstered expectations of an impending interest rate cut.
In his latest address, Powell highlighted that recent U.S. economic indicators are encouraging, suggesting that inflation is moving towards the target. Importantly, he indicated that the Federal Reserve might initiate monetary easing before inflation strictly hits the 2% target mark.
Market anticipation for rate adjustments is palpable, with consensus almost fully expecting a rate cut as early as September, with a potential second cut before year-end. Such monetary policy adjustments typically bolster gold prices, making it an attractive investment in times of lower interest rates.
Concurrently, the political landscape in the U.S. could influence market dynamics. Increasing prospects of Donald Trump’s success in the upcoming presidential race could strengthen the U.S. dollar and uplift Treasury yields, potentially tempering gold’s rally.
Technical analysis of XAU/USD
The XAU/USD pair has recently executed a significant upward move to $2420.50 and is now oscillating within a consolidation range near this level. We might see an extension of this range up to $2444.44. Should this level be reached, a corrective pullback to $2350.50 could ensue. This scenario is technically supported by the MACD indicator, which shows a strong upward trend.
On the hourly chart, gold has breached the $2420.50 mark and is stabilizing above this threshold. We anticipate further growth towards $2444.44. Upon achieving this peak, a potential reversal towards $2350.50 may occur, marking the commencement of a bearish phase. The Stochastic oscillator, currently positioned above 80, suggests a downward adjustment is likely following the climb.
Investors and traders are advised to monitor these levels closely, especially in light of upcoming economic data and Fed communications which could further sway gold’s price trajectory.
Disclaimer
Any forecasts contained herein are based on the author’s particular opinion. This analysis may not be treated as trading advice. RoboForex bears no responsibility for trading results based on trading recommendations and reviews contained herein.
In twomajor rulings this past month, the U.S. Supreme Court curtailed the authority of federal agencies to draft and enforce policies that affect the nation’s financial health. One important agency, the Securities and Exchange Commission, took a particularly big hit.
Speaking as someone who has researched financial shenanigans for almost 50 years, I’m concerned that these rulings will backfire on markets and investors.
Taken together, they could lead to watered-down regulations, weakened enforcement and less oversight of the nation’s financial markets and public companies. I fear that they could ultimately be a significant factor in a future market crash.
In one case, Securities and Exchange Commission v. Jarkesy, the court rebuked the SEC — the agency that protects investors from fraud — for using in-house proceedings to discipline firms and others for breaking securities laws. Now, the SEC will need to bring accused securities fraudsters to federal court, which could be more complicated and expensive.
And in the other case, Loper Bright Enterprises v. Raimondo, the court cut back sharply on a long-standing doctrine — the Chevron rule — that gave agencies considerable freedom to craft rules and regulations, particularly when the underlying law might be ambiguous. As a result, federal agencies, including the SEC, have less power to act, ceding that power to lengthier and costlier trial proceedings.
More layers of hidden risk for investors
Both decisions could affect the nation’s financial well-being. Investors who rely on the disclosure rules and the enforcement mechanisms of the SEC for protection – now subject to legal challenge – are about to be saddled with an extra layer of hidden risk not seen in decades – in particular, more questionable accounting practices in their regulatory filings.
Recall that in 1933 and 1934, Congress established the SEC in the aftermath of the Great Depression. What followed in the ensuing years was the formation of less risky and more informed markets.
Investors could also rely on market prices to efficiently and unbiasedly reflect all public information, rather than have to pore over complex financial statements. This led to the U.S. markets becoming the most attractive destination in the world for funds to invest in risky business projects.
The SEC later bolstered financial markets with measures under the Dodd-Frank Act of 2010 to rectify other excesses — such as overly generous credit ratings — that arguably contributed to the 2007–2008 Great Recession. Today, thanks to extensive disclosure requirements and relatively efficient enforcement mechanisms, the U.S. has perhaps the healthiest and most robust financial markets ever.
A new challenge to enforcement
Healthy and robust financial markets don’t operate out of altruism, however.
Monitoring and enforcement mechanisms are pivotal. While the SEC relies partly on the private sector to spot and discipline errant managers for violations of the securities laws – for example, through federal and state securities class action litigation – much of the effort relies on the enforcement division of the SEC.
In particular, the SEC uses “accounting and auditing enforcement releases,” or AAERs, to ensure that firms keep a clean set of books. Since 1995, the SEC has issued 3,266 AAERs, mostly to correct accounting and auditing deficiencies in company financial statements. Numerous studies confirm AAERs as evidence of financial fraud.
AAERs are also a highly efficient form of enforcement — and much less costly than a private securities class action lawsuit. Companies generally agree to settle the allegations of wrongdoing without admission of liability by taking timely steps to improve accounting and auditing and paying fines and penalties.
The payments have been substantial. For example, for 760 enforcement actions in 2022, companies paid as much as US$6.4 billion to the SEC. The announcement of an AAER action is also costly for the firm’s shareholders, with stock prices falling 50% over the next six months following an AAER announcement, according to researchers.
But the Jarkesy ruling could change everything. I don’t see why any publicly traded company would agree to settle an AAER action with fines and sanctions now that it can challenge the SEC’s arguments in a court of law.
The danger of enforcement by courts
What might be the result of removing or paring back the SEC’s key tool of enforcement?
The risk is possibly reverting to an environment like 1928 or 2007. That’s because the ruling will effectively reduce the cost of accounting or auditing violations for would-be or actual violators. It shifts the purview of deciding penalties and fines to the courts rather than in-house proceedings by the SEC, increasing the cost of enforcement to the SEC.
In short, companies will worry less about a future AAER investigation.
In addition, despite auditors’ efforts to ensure that publicly traded financial and investment firms keep a clean set of books based on generally accepted accounting principles, or GAAP, there is still much room for choice, including greater use of non-GAAP accounting rules. With less enforcement, the Jarkesy ruling will encourage more creative accounting, not less.
That creativity already skews toward optimistic earnings reports. The vast majority of earnings releases now exceed analysts’ forecasts — 77% for the S&P 500 in the first quarter of 2024. Moreover, my own research indicates that it’s not just that earning reports exceed analysts’ forecasts, but the dollar size of firms’ positive earnings surprises has grown steadily over the past decade, which is another hidden risk.
While that’s true for some actions, I think the largest impact will lie in SEC actions not yet undertaken. Businesses and the SEC will act differently in the future because Jarkesy makes SEC enforcement activity more expensive and more uncertain.
Expect more efforts by firms to present their financial performance in the most glowing terms possible, knowing that the cost of SEC enforcement has just increased and the detection likelihood and expected cost to a firm of violating generally accepted accounting principles or generally accepted auditing standards has just decreased.
While not all scholars agree, there are two major periods in the financial history of the United States when a financial meltdown occurred that was in part plausibly due to shoddy accounting and reporting – the Great Depression of 1929 and the Great Recession of 2007–2009.
In the years or decades ahead, should the country face another serious financial crisis leading to a recession, it will be harder to blame the accountants and investment bankers. Instead, attention may turn to two mid-2024 court decisions and the justices who wrote them.
We explain carbon credits, cover some of the system’s inherent problems, discuss future market growth and highlight some carbon credit streaming companies working hard to operate transparently.
Last year, scrutiny of the carbon credits/offsets market rose with media exposés on unethical carbon projects and system abuses. Despite issues with the system and harsh criticisms, the market is reportedly gaining traction.
Forecasts call for rapid growth over the next decade due to efforts by countries around the world to reach a net zero carbon status in the foreseeable future.
A Quick Primer
Carbon credits were introduced in 1997 as a way to lower carbon dioxide (CO2) emissions. Today, their purpose goes further, to help speed up decarbonization by offsetting global emissions.
“We are in a climate emergency, and we need every tool in the box to meet the 1.5 degrees C [global warming] target,” said Annette Nazareth, council chair of the Integrity Council for the Voluntary Carbon Market. “High-integrity carbon credits can mobilize private finance at scale for projects to reduce and remove billions of tons of emissions that would not otherwise be viable.”
Carbon credits allow a company or entity to emit CO2 or other greenhouse gases, specifically one ton of either per credit, according to Investopedia. Though these credits are akin to rations, companies earn them by avoiding, reducing, or removing carbon through a project verified by an independent third party.
As explained by Carbon Direct, “Carbon avoidance is an action that prevents a carbon-emitting activity from happening. Carbon reduction is an action that decreases the amount of greenhouse gas emissions compared to prior practices. Carbon removal is the process of removing carbon dioxide from the atmosphere and locking it away for decades, centuries, or millennia.”
After a project is verified, the company behind it receives the credits. Companies may either use, trade, or sell their credits.
Carbon Cowboys
While the concept is lofty, the carbon credit system has inherent problems. This has dampened companies’ confidence in it, which is reflected in the decrease in traded carbon credits in 2023, reported the Center for Strategic and International Studies.
The world learned about one major abuse in 2006, when Gustav Daphne and three coconspirators were arrested for stealing €5−10 billion (€5−10B) from the European Union’s carbon emissions trading system, meant to facilitate transactions between member countries, according to an article by The Guardian. The scammers achieved “the fraud of the century,” the media called it, in just months, by exploiting a loophole in the market’s policy.
According to MIT News, “Several experts at the Massachusetts Institute of Technology (MIT) now say that the system could be effective.”
The case of the Kariba REDD+ project in Zimbabwe illustrates two additional issues with carbon credit systems: a lack of transparency and accountability in where revenues from carbon-offsetting projects go and a lack of checks and balances in the verification process.
The Kariba project promised to conserve vast forest areas to sequester carbon and pass on benefits to the community by, for instance, investing in infrastructure and job creation. Reportedly, an independent third party verified the project, and it generated more than €100 million (€100M) from sales of carbon credits to Western companies. Yet only €14M of the proceeds went to the local villages, The Guardian reported. The other €86M went to the project broker/lead and local coordinator for costs and profits.
This very scheme has happened enough around the world, primarily in developing countries, that there is a name for groups involved in nature-based carbon markets just to make money from trading carbon: “carbon cowboys.” Like with Kariba, questions linger about the integrity and value of many projects.
Critics argue that forest carbon schemes often benefit international traders over local communities. More broadly, opponents of carbon credits/offsets claim they do not work and, sometimes, the associated projects harm the planet.
“Scientific studies and investigative have found that a growing number of projects failed to deliver the emission reductions promised,” reported Climate Home News on May 29. “Nongovernmental organizations have also denounced instances of human rights abuse and environmental damage caused by carbon-offsetting activities.”
Notable Growth Projected
Despite the controversy, the carbon credit/offset market is forecasted to skyrocket between 2023 and 2028 at a compound annual growth rate (CAGR) of 31%, according to Market and Markets, even with the expectation that transparency and traceability will hamper its growth. By 2028, the market is projected to reach US$414.8B in value, more than 250 times the US$1.6B it was in 2023. The primary growth driver will continue to be the massive global effort to reach net zero carbon targets.
CarbonCredits.com highlighted Carbon Streaming Corp. as one of its Top 4 Carbon Stocks To Watch in 2024. The company, the first of its kind in the carbon credit market.
“Rising environmental concerns and government support are expected to offer lucrative opportunities for the market players in the next five years,” the report said.
Demand for voluntary carbon markets (VCMs), marketplaces in which entities may buy, sell, or trade carbon credits, is growing. Thus, the voluntary carbon credit market is projected to expand at a 27% CAGR between 2024 and 2032, according to Global Market Insights. During this period, the market value is forecasted to reach US$21.7B, up from US$2.4B.
In the U.S. in May, the Departments of Treasury, Agriculture, and Energy and White House representatives published a joint policy statement that laid out seven principles for responsibly participating in VCMs and ensuring they are effective, fair, and equitable, noted a White House fact sheet.
Carbon Streaming Isn’t Over
While bad actors may have previously polluted the carbon credit market, there are companies striving to operate transparently, and some experts consider the system worth looking into.
According to MIT News, “Several experts at the Massachusetts Institute of Technology (MIT) now say that the system could be effective, at least in certain circumstances, but it must be thoroughly evaluated and regulated.”
Base Carbon
One company, Base Carbon (BCBN:NEO; BCBNF:OTCMKTS), is working to set standards for transparency in the sale of carbon credits.Base Carbon is a carbon credit company focusing on carbon capital allocation, project origination, and data transparency tools. According to the company, its primary objective is to allocate “capital directly into carbon reduction projects and carbon development companies.”
According to Base Carbon, “Pledges to lower carbon emissions now cover 92% of GDP and 88% of emissions worldwide. However, emission reduction, capture, and sequestration technologies are not yet scaled to meet these targets, creating a growing demand for quality carbon credits.”
Base Carbon aims to aid in this divide by connecting project developers who need financing and credit buying who may be searching for reputable carbon credits for their individual climate pledges.
Source: Base Carbon
In terms of renewing credibility in the carbon market, CEO Michael Costa stated, “Our mission is to simplify the carbon credit economy, and we are working to become the trusted financier within the voluntary carbon markets.”
One of the ways it does this is through data transparency tools. The company’s data standardization frameworks help capture and organize information from initial carbon emission sources. This process transforms raw data into valuable, usable components within the carbon credit ecosystem. By ensuring the accuracy and consistency of project-generated data, the company hopes to build a solid foundation of trust for our investment decisions and collaborative efforts.
You can see Base Carbon’s list of projects in the image below.
While past “bad apples” in the carbon credit space may have put a bad taste in investors’ mouths, Base Carbon is not slowing down anytime soon. As an article from Green Investing notes, “There’s a never-ending list of potential factors that turn people away from the space. This can either be seen as a contrarian opportunity or a reason to look elsewhere. Regardless, Base Carbon is going to continue advancing in the industry.”
The article solidified this opinion by sharing Base Carbon’s upcoming catalysts, which include:
The company will likely become profitable this year (2024).
Base Carbon has 8.1 million credits to be issued from its cookstove and household devices projects, which Green Investing believes could result in US$50 million in revenue.
Announcements about deals to sell carbon credits or get government approval for these sales.
New developments from current partnerships and more potential projects in the works.
More information about the company’s joint investment plan with STX Group to be released.
Graham Mattison of Water Tower Research also sees promise in Base Carbon, as shown in a May 1 research note. Mattison wrote he saw “continued execution across all projects,” a growing cash flow, and “multiple potential catalysts ahead” for Base Carbon.
He wrote, “The current market cap of Base Carbon is ~US$40 million; the Vietnam project alone will deliver cash of ~US$29.1 million in the next 12 months.”
According to Reuters, 10.57% of the company is with management and insiders.
16.79% is with strategic investor Abaxx Technologies Inc.
7.10% is with institutions.
The rest is with retail.
According to the company, Base Carbon has a market cap of US$46.8 million, US$0 in debt, US$667,391 in cash, and 117.1 million shares outstanding as of May 16, 2024.
Market Watch notes that the company trades in the 52-week range between US$0.2025 and US$0.4520.
Carbon Streaming Corp.
Base Carbon is not alone in its mission to make carbon credits more attractive to the market. Carbon Streaming Corp. (NEO-NETZ; OTC-OFSTF) is also working on changing this perspective as part of a corporate turnaround following a drop in its stock price to CA$0.50 per share from CA$15.
The largest investor in the company, Marin Katusa of Katusa Research, is spearheading the changes. He willingly became a technical and financial adviser to the board at no cost, he said, to benefit all shareholders.
Certain changes at the management and board level were required to make the company a success for shareholders, which in turn will enable more investments to help improve the environment, in my eyes,” he told Streetwise Reports. “I trust the individuals I’ve asked to be on the board fully, and I believe we [the shareholders] are in good hands moving forward.” The new interim chair is Olivier Garret, and the interim chief executive officer is CEO Christian Milau.
Katusa also provided Carbon Streaming’s five-part plan for moving forward:
Go through the existing deals and see what we are dealing with. I don’t have an answer for anyone at this point, but I will within 120 days. I will be involved in the technical review of the projects with the new board.
Immediately meet with all existing employees and figure out who we want to keep and who needs to move on and pursue a new venture. Getting rid of the ridiculous compensation that was taken by certain prior management members has now stopped, and further cuts to G&A will be put into place.
In addition to 1&2 above, we have initiated a search both internally and externally for a new permanent CEO. There are two individuals currently employed at NETZ who did catch my eye as the potential to rise to the occasion, and every person at the firm will be given every opportunity to see if the CEO role is the right one. The culture of the company has already changed immediately after replacing the former CEO, and this is a chance for anyone in the firm to rise from the ashes or move on. Christian and the rest of the new NETZ board have the same “business culture” as my own, as does Alice Schroeder, and that will be paramount moving forward.
Moving forward, when it comes to Voluntary Carbon Markets — I’ll be encouraging Carbon Streaming will adopt my rule from 2022, only invest in the VCM market if there is an offtake in place for the credits. No offtake, no investment in the voluntary market.
We will look at all projects, assets, etc., to return shareholder value.
Unlike the company’s previous practice, Katusa said the board members now will only receive the standard options, no cash, no deferred or restricted stock units, nor any other form of compensation “third-party consultants justify.”
About the new culture Katusa is working to achieve, he commented, “This is a win for the shareholder rights. I am proud of this result. It wasn’t easy, but we got what we needed to give this company a chance to succeed. We live to see another day, and I’m expecting big things.”
CarbonCredits.com highlighted Carbon Streaming Corp. as one of its Top 4 Carbon Stocks To Watch in 2024. The company, the first of its kind in the carbon credit market, “expects moderate and then rapid growth of credits in the coming years, peaking near 20 million (20M) credits per year by 2027,” the article indicated. “Its unique business model could help it outperform the competition.”
On June 7, Jack Gilleland of the American Association of Individual Investors gave Carbon Streaming Corp. a Value Score of 62, which, according to the article, he considers good.
According to Reuters, management and insiders hold 6.5% or 3.12M shares of Carbon Streaming. In this category, Ross Beaty owns 2.9%, or 1.39M shares.
The company has one institutional investor, Black Diamond Asset Management Inc., which holds 0.02%, or 0.01M shares.
The rest of the company, 93.48%, is with retail.
Carbon Streaming has 47.97M shares outstanding and 44.85M free float traded shares.
Its market cap is CA$31.51M. Its stock price range over the past 52 weeks was CA$0.46−$1.47 per share.
Another carbon credit streamer striving to be transparent is Key Carbon. Headquartered in Vancouver, British Columbia, this private company finances and supports developers of carbon projects around the world and is building a diversified portfolio of carbon credit streams and royalties. Corporations and other entities may purchase Key Carbon’s voluntary carbon credits to help them achieve their climate and sustainability goals.
“We will be a large environmental services company,” Luke Leslie, co-founder and chief executive officer of Key Carbon Ltd., told Streetwise Reports. “We want to do that to service these projects in a way others can’t, with cutting-edge monitoring systems to provide the data to better understand the impact.”
How it works is Key Carbon selectively chooses a carbon project after rigorously vetting its developer. The company pays the developer upfront in return for a portion of future carbon credits, as defined in an exclusive financing agreement created by Key Carbon. It receives the credits once an independent third party, such as Verra, verifies the project. Then Key Carbon sells the credits to corporations or groups that need them to offset their carbon emissions. Key Carbon also continues to support the developer with strategy and operational improvements.
Current partners of Key Carbon include BURN, Africa’s leading clean cooking company, and Worldview International Foundation, a nonprofit organization that has pioneered 680 sustainable development projects in 26 countries.
BURN is a small project with a big impact, in which Key Carbon has invested US$36M. Through BURN, they provide fuel-efficient cookstoves to families cooking on open fires, a practice that has caused 4M premature deaths, noted Leslie. Cookstoves use less fuel, are safer, and free up users’ time.
Key Carbon’s work with Worldview is an example of a higher-value project that Key Carbon has helped fund. This project consists of reforestation of native trees, specifically mangroves.
With Key Carbon’s portfolio, an estimated 41.2 million tons of carbon will be removed or avoided, according to the company’s website.
The types of projects Key Carbon could partner on are numerous, Leslie said, given that “the carbon markets have 200 ways to generate carbon credit.”
As for catalysts, Key Carbon will close a US$15M financing this month, moving it closer to its goal of raising US$100M by year-end, Leslie said. The company is continuing to build out direct sales channels and acquire biodiversity businesses. Also, of course, additional partnerships and project deals could also move the stock.
Carbon Industry Surviving
While so-called “carbon cowboys” may have sullied the name of carbon credits, these three companies, Base Carbon, Carbon Streaming, and Key Carbon, and growth forecasts might be showing that the carbon credits industry is surviving the negative aspects is very much alive, and is expanding.
These companies are working to ensure transparency and efficiency within the companies and to create a sustainable army in the fight against the climate crisis.
Important Disclosures:
As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Key Carbon Ltd.
Doresa Banning and Katherine DeGilio wrote this article for Streetwise Reports LLC and provide services to Streetwise Reports as an independent contractor/employee.
This article does not constitute investment advice and is not a solicitation for any investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Each reader is encouraged to consult with his or her personal financial adviser and perform their own comprehensive investment research. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company.
All prime ministers bring their own personality and approach to the job. Each has a different style of leadership, which can shape how things work and what gets done. Herbert Asquith famously summed it up when he said being prime minister is all about “what the holder chooses and is able to make of it”.
When searching for clues as to how Keir Starmer will choose to be Britain’s prime minister, there isn’t too much to go on. When asked directly on a recent podcast, he declared “an inclusive, determined prime minister who will look out for everyone in the country”. This only takes us so far, as it’s rather hard to imagine anyone saying the opposite (except, perhaps, Nigel Farage). But sifting through what we know, we can at least make a start at piecing together the puzzle.
In terms of his personality and approach, Starmer has been described as “methodical, professional, good on detail but lacking in flair”. He is very likely to be what the late MP and historian David Marquand called a “pragmatic operator”. Not for Starmer the visionary appeal or oratory fireworks of a Tony Blair or Harold Wilson. But nor is he simply a “machine politician”.
Starmer comes across as a quiet, experienced man, who speaks of values and of being a socialist (though the public are unsure if he is, or if that’s a good or bad thing). He can justifiably say he has a more authentic working-class background than many of his predecessors.
We do know that Starmer only became a member of parliament in 2015, so, at 52, was a relative latecomer to politics. He has spent the entirety of his political career in opposition. His predecessors, going back to Theresa May, came to the role with substantial experience of being a government minister (though, you may point out, it didn’t do them much good).
Starmer attends a socially distanced PMQs during the pandemic. Flicker/UK Parliament, CC BY-NC
Yet Starmer’s time in parliament has been more intense than most. He was deeply involved in Brexit, and then led his party during the pandemic. As leader of the opposition, he saw two prime ministers removed in quick succession (and played a large role in removing at least one, with his methodical lawyer’s approach). Now, he has taken down a third.
Man on a mission
Importantly, Starmer has led what is effectively a large government department. His five years as director of public prosecutions (DPP) means he comes into Number 10 as an experienced leader having, rather unusually, run a state organisation before his political career had even begun.
Starmer’s experience as DPP implies an emphasis on delivering. We can expect him to focus on fixing problems, finding solutions, and getting things done. We can also perhaps expect more emphasis on outcomes and an end to the politicisation and battles with the bureaucratic machinery of government that characterised the previous administration.
It has been suggested that Starmer’s will be a mission-led government, organised around a set of guiding, longer-term missions with the goal of delivering certainty and sustained change. This idea is not new or particularly radical but it may appear so after the seeming chaos and short-termism of recent years.
How, and how swiftly, decisions are made – or not made – will be the crucial test. Starmer’s apparent indecision over the net zero agenda could be the shape of things to come. Being methodical and interested in detail can be shorthand for delay and indecision.
He has hinted at being a consultative leader: “The best decisions I’ve made in my life were those held up to the light and that survived scrutiny. The worst were when nobody said ‘boo’”. However his penchant for “undersharing”, as noted by his deputy Angela Rayner, may mean he keeps decision-making concentrated in a small group of confidants.
Man of mystery
A Starmer-led government is likely, especially with a large parliamentary majority, to be empowered to make changes. As a self-described socialist and progressive, Starmer can hardly avoid it. But how radical will he be? One former Labour minister spoke of how “he is very impressive, but he never strays too far beyond the boundaries. Even when he was a radical lawyer, he was one of a conventional sort.”
But one truism of political leadership is that what begins as a strength ends as a weakness. Lots of the fault lines within the Labour party are already visible, from child poverty to Gaza. Other issues are bubbling away. Starmer’s ability to float above the fray can’t last, and there are likely to be plots and challenges (especially if a large majority means underemployed backbenchers).
Here, Starmer sits within perhaps another classic dilemma of the Labour party and of Labour prime ministers: what David Marquand called the “progressive dilemma”, namely how far can you, and do you, push change, without stretching the support of the broad coalition who put you in the job? The approach has so far been caution, supported by a disciplined shadow cabinet, but a large majority may transform the situation.
Yet other leaders have made huge changes quietly. Theresa May, for example, pushed through a net zero law so silently that “nobody even noticed the Tories’ biggest legacy”.
However, to revisit the warning of Asquith, being prime minister is about what a leader is “able” to do. Events blow all governments off course, and plenty have been overwhelmed by crises. Starmer would do well to heed the warning of boxer Mike Tyson that “everyone has a plan until they get punched in the mouth”.
After his win, there is a weight of expectation on Starmer. But trust in all politicians is low and damaged. There will be pressing domestic issues over migration, public service funding, and the NHS. Abroad, as one Labour advisor warned, there is a “stormy world” from Gaza and Ukraine to the US election. The true test of what Prime Minister Starmer may be is when his methodical approach meets a messy world.
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