Netflix Reports - Tesla is Next, Trump-China Trade Talks, Google Cloud Deal | Bloomberg Brief

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Key Concepts

• Market Sentiment & Futures: Flat futures for S&P 500 and fractional dip in Nasdaq indicate market waiting for clarity.
• Inflation Data (UK): September inflation held steady at 3.8%, nearly double the Bank of England's 2% target, but lower than expected, leading to increased bets on rate cuts.
• US-India Trade Deal: Reports suggest the US and India are close to a trade deal, potentially reducing tariffs on Indian exports.
• Anthropic & Google Cloud Deal: Discussions are underway for a cloud computing deal valued in the high tens of billions of dollars, with Google supplying processing power and its own processors to Anthropic.
• Netflix Earnings: Disappointing results due to a $600 million charge for a Brazilian tax case settlement, overshadowing solid subscriber growth.
• Barclays Earnings: Shares up on a buyback announcement and raised earnings guidance, despite flat equity trading revenue.
• Private Credit Market: Discussed in the context of market turbulence and its role in life insurance businesses.
• Asia Growth: Highlighted as a significant growth area for life insurance, particularly in wealth and asset management, driven by demographic trends.
• AI Investments: Seen as a crucial opportunity for life insurance companies to improve pricing, anticipate markets, and conduct real-time reporting.
• Investor Diversification: A trend of global investors diversifying portfolios away from the US and towards markets like Asia.
• Trump's Legal Demands: President Trump is reportedly demanding $230 million in compensation from the Justice Department for federal investigations.
• White House East Wing Demolition: Expansion plans for the White House's East Wing are facing criticism from preservationists.
• Gold Market: A significant drop of over 5% yesterday, flirting with the $4000 mark again, but still supported by central bank buying and expectations of weaker rates and a weaker dollar.
• Tesla Earnings & Outlook: Anticipation of Elon Musk potentially lowering the business bar for 2026, with a pivot towards autonomous vehicles and robots.
• Mag Seven Earnings: Focus on upcoming earnings from Tesla, Amazon, and Alphabet, with potential for stock pops due to relative valuations.

Market Overview and Economic Indicators

Futures and Market Direction: Futures were flat, indicating a market seeking direction. The S&P 500 closed fractionally down, and the Nasdaq saw a fractional dip. Markets are awaiting clarity from upcoming CPI data on Friday, more earnings reports, and the possibility of a meeting.

Bond Market: No significant movement was observed in bonds, with yields staying firmly between the 4% mark and just below the 345 mark. The long end of the curve continues to decline.

Gold Market: Gold experienced a 5% drop yesterday. Despite this, it is flirting with the $4000 mark again. Paul Donovan notes that plenty of factors, including central bank buying, weaker rates, and expectations of a weaker dollar, continue to support gold.

UK Inflation Data: UK inflation unexpectedly held steady at 3.8% in September, driven by a drop in food prices. While this is nearly double the Bank of England's 2% target, it eased concerns over price pressures. Traders are increasing bets on rate cuts, with a 70% chance of a cut by December. However, Bloomberg Economics suggests the Bank of England might wait for inflation to be much closer to the 2% target before easing policy. This data led to falling gilt yields, a dropping pound, and benefited the FTSE 100.

Corporate News and Earnings

Anthropic and Google Cloud Deal:

• Details: Google and Anthropic are reportedly in discussions for a cloud computing deal valued in the high tens of billions of dollars.
• Google's Role: Google would supply processing power and its own processors to Anthropic.
• Anthropic's AI: Anthropic owns the Claude family of large language models, which compete with OpenAI's ChatGPT.
• Concerns: There are concerns about circular financing, as Alphabet has been a major investor in Anthropic.
• Significance: This deal represents a significant "more compute" play, with Google aiming to scale its cloud business, currently third after Amazon and Microsoft. The deal's structure, whether a straight commercial exchange or involving equity, is crucial.

Netflix Earnings:

• Disappointing Results: Shares were down nearly 7% in pre-market trade due to a $600 million charge to settle a tax case with Brazilian regulators.
• Impact: This charge significantly dented operating income, overshadowing a solid earnings report and strong subscriber engagement, including the success of "K-Pop Demon Hunters."
• AI Video Concerns: Netflix executives stated that AI-generated videos are unlikely to impact their business model as much as videos from platforms like TikTok or Instagram.
• Potential Buying Opportunity: Paul Meeks views the pre-market dip as a potential buying opportunity, especially given Netflix's decision not to pursue legacy assets of Warner Bros. Discovery.

Barclays Earnings:

• Positive Performance: Shares were up 4% on the back of a buyback announcement and raised earnings guidance.
• Underlying Weakness: Despite the positive headline figures, there were signs of a weak release, with equity trading revenue coming in flat quarter-on-quarter, lagging behind Wall Street peers.
• Provisions: Barclays also set aside more money for motor finance provisions.
• Investor Focus: Investors largely overlooked the weaker trading revenue, focusing on the buyback and guidance raise.

Texas Instruments Earnings:

• Disappointing Guidance: The analog chip maker issued disappointing guidance for the second consecutive quarter, leading to shares falling nearly 9% in pre-market trade.
• Sector Impact: This decline is dragging down the entire chip sector and dampening hopes for a turnaround.
• Reasons Cited: Weakness was specifically cited in the automotive and China markets.

Hermès Earnings:

• Sales Miss: Shares fell after its key leather goods division missed sales growth estimates.
• Investor Expectations: Double-digit growth in the US was not enough to satisfy investors expecting outperformance.

Tesla Earnings and Outlook:

• Anticipated Lowering of Bar: Elon Musk is expected to potentially lower the business bar for 2026, with a significant backward revision.
• Pivot to AVs and Robots: Musk is likely to pivot the conversation to the potential of autonomous vehicles (AVs) and robots, a promise he has made for years.
• Competition in AVs: Competition in AVs from Alphabet and Amazon is noted as aggressive and well-funded, suggesting Tesla may not dominate this sector as it did with EVs.
• Valuation Concerns: The stock's current valuation is heavily tied to the success of AVs. If AVs don't materialize within a reasonable timeframe, the EV business alone might only be worth a fraction of the stock price.

Amazon and Alphabet (Mag Seven):

• Potential for Pops: Amazon and Alphabet are identified as companies whose stocks could see a pop due to their relatively inexpensive valuations, even if earnings guidance is status quo. Alphabet, in particular, is seen as poised for a rebound after recent declines.

Geopolitical and Trade Developments

US-India Trade Deal:

• Reported Progress: The Mint newspaper in India reported that New Delhi and Washington are nearing a trade deal that could cut tariffs on Indian exports from approximately 50% to as low as 15%.
• Negotiation History: This potential deal has been months in the making, with various phases of negotiation.
• Strategic Timing: The report comes at an interesting time, with the US President seeking a meeting with China's President, suggesting a potential gamesmanship between the US, India, and China.
• Uncertainty: Official confirmation from the White House and the Indian government is pending, and past reports of deals being close have not always materialized.

Trump-Xi Jinping Meeting:

• Equivocation: President Trump has shown equivocation regarding a potential meeting with China's President Xi Jinping.
• Leverage: Talks with India are seen as leverage against China, potentially pressuring China to meet Trump halfway in negotiations.
• China's Demands: China is reportedly seeking lower tariffs on fentanyl, eased tech export controls, and a toned-down rhetoric from the US.
• Escalatory Mood: Both sides have been in an escalatory mood, making a comprehensive trade deal unlikely in the short term. A small victory could be an agreement on principles and continued talks.

Russia-Ukraine Conflict:

• Drone and Missile Strikes: Russia launched multiple drone and missile strikes on Ukraine, killing at least six civilians, including two children, and injuring dozens.
• Targeted Regions: Ten regions, including Kyiv and Odessa, were attacked, with energy infrastructure being a target.

Financial Services and Investment Trends

Private Credit Market:

• Growth and Volatility: Private credit has grown significantly but is often below investment grade, leading to increased volatility.
• Life Insurers' Stance: While life insurance businesses don't heavily utilize private credit, some, like Manulife, have acquired private credit businesses due to customer demand.
• Long-Term Outlook: The private credit industry is seen as here to stay for many cycles to come.

Asia Growth in Life Insurance:

• Exciting Prospects: Asia is a significant growth area for life insurance, particularly in wealth and asset management.
• Demographic Drivers: This growth is driven by demographic powers and individuals who have not previously purchased financial services.
• Market Advantage: Asia offers a level of growth not seen in developed markets, positioning companies well for the next decade.

Hong Kong Pension Market:

• Regulatory Changes: Regulatory changes in Hong Kong's pension market, where Manulife is a leading provider of mandatory pension funds, are expected to offer different value propositions for customers.
• Centralized Administration: Administration will be done centrally.
• Financial Impact: A reduction in earnings of $25 million USD per quarter was announced due to these changes, but commitment to the market and strong growth prospects remain.

AI Investments in Life Insurance:

• Augmenting Operations: AI is seen as a huge opportunity for life insurance companies to improve pricing, anticipate market trends, and conduct real-time reporting.
• CFO Perspective: For CFOs, AI can significantly augment day-to-day financial production and operations.

Investor Diversification and Capital Flows:

• Shifting Away from US: Global investors are diversifying portfolios, with incremental dollars being invested in markets like Asia, which have fundamental tailwinds in terms of growth.
• Multipolar World: This trend aligns with a multipolar world where regional economies are becoming more important.
• Asia's Appeal: Capital is flowing to Asia as regional economies become more dependent on trading growth.
• US Investor Shift: US investors with small allocations in Asia are also expected to shift capital towards the region for diversification and access to growth.

Gold Market Support:

• Central Bank Buying: Continued buying by central banks is a key support for gold.
• Rate and Dollar Expectations: Expectations of weaker interest rates and a weaker dollar also contribute to gold's support.

Other Notable Developments

Trump's Legal Demands:

• Compensation Claim: President Trump is reportedly demanding approximately $230 million in compensation from the Justice Department for federal investigations into him.
• Potential Approval: Any settlement might require approval from senior Justice Department officials who previously served as defense lawyers for the President.

White House East Wing Demolition:

• Expansion Plans: The White House is expanding the demolition of the East Wing.
• Preservationist Concerns: The National Trust for Historic Preservation has warned that a 90,000-square-foot ballroom would overwhelm the White House itself.
• White House Response: The White House dismissed these criticisms as "manufactured outrage."

Oil Prices:

• Impact of US-India Deal: A potential US-India trade deal could lead to reduced Russian oil flows to India, putting upward pressure on crude oil prices.
• Price Movement: Both crude oil benchmarks were up more than 1.5%. Crude oil prices were subdued, around $50 a barrel.

Conclusion and Key Takeaways

The market is in a holding pattern, awaiting key economic data and corporate earnings for direction. Inflation in the UK has stabilized but remains a concern, influencing rate cut expectations. Geopolitical developments, particularly the potential US-India trade deal and the ongoing US-China trade tensions, are creating a complex global economic landscape. Corporate news highlights significant investments in AI and cloud computing, with the Anthropic-Google deal being a major development. While some companies like Netflix faced headwinds from one-off charges, others like Barclays showed resilience. The upcoming earnings season for the "Mag Seven" companies, especially Tesla, will be crucial in determining the next leg of the market's upward movement. Investor sentiment is shifting towards diversification, with Asia emerging as a key growth destination. The private credit market, despite its volatility, is expected to remain a significant part of the financial landscape.