Could OpenAI Be the Next Tech Giant?

Economic

Stocks

Summary:

What the business of AI's leading startup says about the technology's future.

The creation of a new market is like the start of a long race. Competitors jockey for position as spectators excitedly clamour. Then, like races, markets enter a calmer second phase. The field orders itself into leaders and laggards. The crowds thin.

In the contest to dominate the future of artificial intelligence, Openai, a startup backed by Microsoft, established an early lead by launching Chatgpt last November. The app reached 100m users faster than any before it. Rivals scrambled. Google and its corporate parent, Alphabet, rushed the release of a rival chatbot, Bard. So did startups like Anthropic. Venture capitalists poured over $40bn into ai firms in the first half of 2023, nearly a quarter of all venture dollars this year. Then the frenzy died down. Public interest in ai peaked a couple of months ago, according to data from Google searches. Unique monthly visits to Chatgpt's website have declined from 210m in May to 180m now (see chart).

The emerging order still sees Openai ahead technologically. Its latest ai model, gpt-4, is beating others on a variety of benchmarks (such as an ability to answer reading and maths questions). In head-to-head comparisons, it ranks roughly as far ahead of the current runner-up, Anthropic's Claude 2, as the world's top chess player does against his closest rival—a decent lead, even if not insurmountable. More important, Openai is beginning to make real money. According to The Information, an online technology publication, it is earning revenues at an annualised rate of $1bn, compared with a trifling $28m in the year before Chatgpt's launch.

Can OpenAI translate its early edge into an enduring advantage, and join the ranks of big tech? To do so it must avoid the fate of erstwhile tech pioneers, from Netscape to Myspace, which were overtaken by rivals that learnt from their early successes and stumbles. And as it is a first mover, the decisions it takes will also say much about the broader direction of a nascent industry.

Openai is a curious firm. It was founded in 2015 by a clutch of entrepreneurs including Sam Altman, its current boss, and Elon Musk, Tesla's technophilic chief executive, as a non-profit venture. Its aim was to build artificial general intelligence (agi), which would equal or surpass human capacity in all types of intellectual tasks. The pursuit of something so outlandish meant that it had its pick of the world's most ambitious ai technologists. While working on an ai that could master a video game called “Dota”, they alighted on a simple approach that involved harnessing oodles of computing power, says an early employee who has since left. When in 2017 researchers at Google published a paper describing a revolutionary machine-learning technique they christened the “transformer”, Openai's boffins realised that they could scale it up by combining untold quantities of data scraped from the internet with processing oomph. The result was the general-purpose transformer, or gpt for short.

Obtaining the necessary resources required Openai to employ some engineering of the financial variety. In 2019 it created a “capped-profit company” within its non-profit structure. Initially, investors in this business could make 100 times their initial investment—but no more. Rather than distribute equity, the firm distributes claims on a share of future profits that come without ownership rights (“profit-participation units”). What is more, OpenAI says it may reinvest all profits until the board decides that Openai's goal of achieving agi has been reached. Openai stresses that it is a “high-risk investment” and should be viewed as more akin to a “donation”. “We're not for everybody,” says Brad Lightcap, Openai's chief operating officer and its financial guru.

Maybe not, but with the exception of Mr Musk, who pulled out in 2018 and is now building his own ai model, just about everybody seems to want a piece of Openai regardless. Investors appear confident that they can achieve venture-scale returns if the firm keeps growing. In order to remain attractive to investors, the company itself has loosened the profit cap and switched to one based on the annual rate of return (though it will not confirm what the maximum rate is). Academic debates about the meaning of agi aside, the profit units themselves can be sold on the market just like standard equities. The firm has already offered several opportunities for early employees to sell their units.

SoftBank, a risk-addled tech-investment house from Japan, is the latest to be seeking to place a big bet on Openai. The startup has so far raised a total of around $14bn. Most of it, perhaps $13bn, has come from Microsoft, whose Azure cloud division is also furnishing Openai with the computing power it needs. In exchange, the software titan will receive the lion's share of Openai's profits—if these are ever handed over. More important in the short term, it gets to license Openai's technology and offer this to its own corporate customers, which include most of the world's largest companies.

It is just as well that Openai is attracting deep-pocketed backers. For the firm needs an awful lot of capital to procure the data and computing power necessary to keep creating ever more intelligent models. Mr Altman has said that OpenAI could well end up being “the most capital-intensive startup in Silicon Valley history”. Openai's most recent model, gpt-4, is estimated to have cost around $100m to train, several times more than gpt-3.

For the time being, investors appear happy to pour more money into the business. But they eventually expect a return. And for its part Openai has realised that, if it is to achieve its mission, it must become like any other fledgling business and think hard about its costs and its revenues.

gpt-4 already exhibits a degree of cost-consciousness. For example, notes Dylan Patel of SemiAnalysis, a research firm, it was not a single giant model but a mixture of 16 smaller models. That makes it more difficult—and so costlier—to build than a monolithic model. But it is then cheaper to actually use the model once it has been trained. because not all the smaller models need be used to answer questions. Cost is also a big reason why Openai is not training its next big model, gpt-5. Instead, say sources familiar with the firm, it is building gpt-4.5, which would have “similar quality” to gpt-4 but cost “a lot less to run”.

But it is on the revenue-generating side of business that Openai is most transformed, and where it has been most energetic of late. ai can create a lot of value long before agi brains are as versatile as human ones, says Mr Lightcap. Openai's models are generalist, trained on a vast amount of data and capable of doing a variety of tasks. The Chatgpt craze has made Openai the default option for consumers, developers and businesses keen to embrace the technology. Despite the recent dip, Chatgpt still receives 60% of traffic to the top 50 generative-ai websites, according to a study by Andreessen Horowitz, a venture-capital (vc) firm which has invested in Openai (see chart).

Yet Openai is no longer only—or even primarily—about Chatgpt. It is increasingly becoming a business-to-business platform. It is creating bespoke products of its own for big corporate customers, which include Morgan Stanley, an investment bank. It also offers tools for developers to build products using its models; on November 6th it is expected to unveil new ones at its first developer conference. And it has a $175m pot to invest in smaller ai startups building applications on top of its platform, which at once promotes its models and allows it to capture value if the application-builders strike gold. To further spread its technology, it is handing out perks to ai firms at y Combinator, a Silicon Valley startup nursery that Mr Altman used to lead. John Luttig of Founders Fund (a vc firm which also has a stake in Openai), thinks that this vast and diverse distribution may be even more important than any technical advantage.

Being the first mover certainly plays in Openai's favour. gpt-like models' high fixed costs erect high barriers to entry for competitors. That in turn may make it easier for OpenAI to lock in corporate customers. If they are to share internal company data in order to fine-tune the model to their needs, many clients may prefer not to do so more than once—for cyber-security reasons, or simply because it is costly to move data from one ai provider to another, as it already is between computing clouds. Teaching big models to think also requires lots of tacit engineering know-how, from recognising high-quality data to knowing the tricks to quickly debug the source code. Mr Altman has speculated that fewer than 50 people in the world are at the true model-training frontier. A lot of them work for Openai.

These are all real advantages. But they do not guarantee Openai's continued dominance. For one thing, the sort of network effects where scale begets more scale, which have helped turn Alphabet, Amazon and Meta into quasi-monopolists in search, e-commerce and social networking, respectively, have yet to materialise. Despite its vast number of users, gpt-4 is hardly better today than it was six months ago. Although further tuning with user data has made it less likely to go off the rails, its overall performance has changed in unpredictable ways, in some cases for the worse.

Being a first mover in model-building may also bring some disadvantages. The biggest cost for modellers is not training but experimentation. Plenty of ideas went nowhere before the one that worked got to the training stage. That is why Openai is estimated to have lost $500m last year, even though gpt-4 cost one-fifth as much to train. News of ideas that do not pay off tends to spread quickly throughout ai world. This helps Openai's competitors avoid going down costly blind alleys.

As for customers, many are trying to reduce their dependence on Openai, fearful of being locked into its products and thus at its mercy. Anthropic, which was founded by defectors from Openai, has already become a popular second choice for many ai startups. Soon businesses may have more cutting-edge alternatives. Google is building Gemini, a model believed to be more powerful than gpt-4. Even Microsoft is, despite its partnership with Openai, something of a competitor. It has access to gpt-4's black box, as well as a vast sales force with long-standing ties to the world's biggest corporate it departments. This array of choices diminishes Openai's pricing power. It is also forcing Mr Altman's firm to keep training better models if it wants to stay ahead.

The fact that Openai's models are a black box also reduces its appeal to some potential users, including large businesses concerned about data privacy. They may prefer more transparent “open-source” models like Meta's llama 2. Sophisticated software firms, meanwhile, may want to build their own model from scratch, in order to exercise full control over its behavour.

Others are moving away from generality—the ability to do many things rather than just one thing—by building cheaper models that are trained on narrower sets of data, or to do a specific task. A startup called Replit has trained one narrowly to write computer programs. It sits atop Databricks, an ai cloud platform which counts Nvidia, a $1trn maker of specialist ai semiconductors, among its investors. Another called Character ai has designed a model that lets people create virtual personalities based on real or imagined characters that can then converse with other users. It is the second-most popular ai app behind Chatgpt.

The core question, notes Kevin Kwok, a venture capitalist (who is not a backer of Openai), is how much value is derived from a model's generality. If not much, then the industry may be dominated by many specialist firms, like Replit or Character ai. If a lot, then big models such as those of Openai or Google may come out on top.

Mike Speiser of Sutter Hill Ventures (another non-Openai backer) suspects that the market will end up containing a handful of large generalist models, with a long tail of task-specific models. If ai turns out to be all it is cracked up to be, being an oligopolist could still earn Openai a pretty penny. And if its backers really do see any of that penny only after the company has created a human-like thinking machine, then all bets are off.

Source: Economist

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Michelle

Economic

Commodity

Countries that are rich in a particular resource and export that commodity as a primary income generator relative to their economy are known as having commodity currencies. Australia, Norway, or New Zealand, for example, have currencies that are historically correlated with the prices of respective commodities.

2022 proved to be an aberration from commodity currency correlations. For much of the year, global inflation and central banks policy dominated the headlines and drove trading activity. Many commodity currencies suffered this year when prices for oil and other raw materials fell from their 2022 peaks amid expectations that central banks' fight against inflation would hurt global growth and slow demand for commodity exports.

In addition to heightened volatility, stronger than expected economic data has provided tailwinds for the U.S. dollar which has driven many commodity currencies to underperform. Compared with other central banks, the Federal Reserve appears to still be more aggressive which could put further pressure on global commodity currencies. The Fed has started to show signs that they may be in the final stages of their quantitative tightening, which could lead to a weaker U.S. dollar and opportunity for global currencies to move higher.

Australian Dollar Undervalued

Some commodity currencies have enjoyed strong runs against the dollar this year. The Australian dollar, according to Deutsche Bank, is undervalued against the U.S. dollar by about 20%.

Australia is a major producer and exporter of iron ore, gold and other metals. As gold and metals have retreated from their early 2023 highs, so has the AUD/USD exchange rate. For commodity currencies, the cheaper commodities get, the currency generally follows suit. Given the historical correlations in price between the Australian dollar and gold/metals, it is not surprising that they would experience similar volatility and price changes. In the volatility chart below, it is easy to see how strong the correlation is between the AUD/USD exchange rate, and gold and metals.

Energy Prices and the Krone

Norway is one of the largest oil and gas producers in the world, which causes its currency to generally trade based off energy prices. Since the start of the Russia-Ukraine war, the krone has been strong due to increased energy prices. In August 2022, the EUR/NOK conversion traded at levels that it had not seen in over three years because of record high energy prices. Although the krone has strengthened as of late against the Euro, it has continued to weaken in 2023 against the dollar. The Norwegian krone is the second worst performing G10 currency against the U.S. dollar this year, down nearly 3% against the greenback and undervalued against the U.S. dollar by more than 30%, according to Deutsche Bank. With energy prices back on the rise, one would expect to see the krone strengthen against the U.S. dollar, but that has not proven to be the case yet.

Commodity currencies have mostly regained their correlations after a difficult 2022 that was dominated by central banks combating inflation by raising interest rates. As we near 18 months since the first interest rate hike by the Fed, inflation numbers continue to fall, and it appears the end of the quantitative tightening cycle may be near. If and when interest rates begin to decline, the U.S. dollar could weaken.Commodity prices and their respective currency pairs would be helped by such an event, and may require it in order to enter a new phase of growth.

Source: CME Group

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Glendon

Central Bank

Economic

Federal Reserve Is Poised to Leave Rates Unchanged As It Tracks Progress Toward a 'Soft Landing'_1

When they meet again this week, the policymakers are likely to decide they can afford to wait and see if the progress continues. As a result, they're almost sure to leave their key interest rate unchanged when their meeting ends Wednesday.

The cooling of inflation suggests that the Fed is edging toward a peak in the series of rate hikes it unleashed in March of last year — the fastest such pace in four decades, one that has made borrowing much costlier for consumers and businesses.

The focus for Wall Street investors and analysts now is shifting toward what comes next. Some clues could come in the updated interest rate projections it releases each quarter and at a news conference with Chair Jerome Powell.

Another rate hike this year will likely remain on the table, and Fed officials may project fewer cuts in their key rate next year than they did in June. This would underscore the Fed's determination to keep rates elevated well into next year as it strives to get inflation down to its 2% target.

Inflation pressures showed signs of persistence in two government reports last week, adding some uncertainty to the outlook. Claudia Sahm, a former Fed economist, said she thinks a “soft landing,” in which the Fed manages to curb inflation without causing a recession, remains possible. But she cautioned that inflation might stay higher for longer than the central bank expects. Or, she suggested, the cumulative effects of the Fed's 11 rate hikes could ultimately tip the economy into recession.

“We are at a point where things could plausibly go in a lot of different directions,” Sahm said. “They're going to react as it unfolds.”

Still, most economic data in the past two months has pointed in a positive direction. Inflation in June and July, excluding volatile food and energy prices, posted its two lowest monthly readings in nearly two years.

And signs have grown that the job market isn't as robust as it had been, which helps keep a check on inflation: The pace of hiring has moderated. The number of unfilled openings fell sharply in June and July. And the number of Americans who have started seeking work has jumped. This has brought labor demand and supply into better balance and eased the pressure on employers to raise pay to attract and keep workers, which can lead them to raise prices to offset higher labor costs.

“That was a hell of a good week of data we got last week,” Christopher Waller, a member of the Fed's Board of Governors who is close to Powell, said in an interview on CNBC this month. “It's going to allow us to proceed carefully. There is nothing saying that we need to do anything imminent anytime soon.”

Powell's own speech late last month at the Fed's annual conference of central bankers in Jackson Hole, Wyoming, stressed his belief that the Fed can act in a measured fashion.

“We will proceed carefully,” he said, “as we decide whether to tighten further or instead to hold the policy rate constant and await further data.”

Last week's inflation data underscored, though, that even a soft landing may not be a smooth one. On a monthly basis, consumer prices jumped 0.6%, the most in more than a year and 3.7% from a year earlier, the second straight such increase.

The updated projections the Fed will issue Wednesday will include estimates of where its policymakers think their key rate is headed. In June, they projected two more hikes, and in July they imposed one of them, raising their benchmark rate to roughly 5.4%, its highest level in 22 years.

Last week's inflation readings might lead the Fed to forecast one additional rate hike this year. And some economists say the policymakers may forecast just one or two rate cuts in 2024, fewer than the three they envisioned in June, in part to dispel any overly optimistic expectations on Wall Street for deeper rate reductions.

“They're going to want to hedge that risk,” said Jose Torres, chief economist at Interactive Brokers. “Market participants are just a little too optimistic about inflation.”

Even some moderate members of the Fed's interest-rate committee have said recently that they may have more work to do to conquer inflation.

“I expect we'll need to hold rates at restrictive levels for some time,” said Susan Collins, president of the Federal Reserve Bank of Boston. “And while we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”

But even more hawkish officials — those who typically prefer higher rates to fight inflation — are acknowledging that the Fed risks acting too aggressively and causing a recession. That represents a shift from even a few months ago, when the Fed's hawks worried more about doing too little to fight inflation.

Lorie Logan, president of the Dallas Fed, said that “we must proceed gradually, weighing the risk that inflation will be too high against the risk of dampening the economy too much.”

This week's Fed meeting comes as central banks around the world are mostly raising rates to fight inflation, which spiked after the pandemic hampered global supply chains, causing shortages and higher prices. Inflation worsened after Russia's invasion of Ukraine in February 2022 sent oil and other commodity prices spiking.

The European Central Bank raised its benchmark rate last week for the 10th time to 4%, the highest level on record since the euro was established in 1999, though it signaled that it could be its last hike. The Bank of England is also expected to increase its rate when it meets Thursday. The Bank of Japan, which meets Friday, is under less pressure to boost rates, although it has taken steps to allow Japanese long-term rates to tick up.

Rising rates overseas have led to higher yields on U.S. Treasurys, which are needed to attract investors.

“Globally, monetary policy is on a tightening track, and that puts some upward pressure on rates in the U.S.,” said William English, a former senior Fed official who is now a professor at Yale School of Management.

Source: AP

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Justin

Forex

Central Bank

Economic

A pause with strings attached?

The Federal Reserve is widely anticipated to keep interest rates unchanged at its September meeting but what investors are more anxious to find out is whether policymakers will keep the door open to further hikes. The other big discussion point is about the rate path in 2024, specifically, if the median dot plot will be revised higher.

The US economy continues to perform well by most measures even if there are signs of some cooling off, particularly in the tight labour market. With recession odds being slashed and a soft landing looking more attainable, inflation is once again the primary concern for investors and policymakers as how quickly it falls from hereon will determine how soon the Fed can begin cutting rates.

Inflation is creeping up again

Looking at the latest CPI numbers, it’s fair to say that there’s been a bit of a setback in the progress lately. The annual rate of CPI has quickened from 3.0% to 3.7% over the past two months. That trend could continue if oil prices maintain their ascent. However, most investors are looking through this latest increase, hoping that it will be temporary, and focusing on the decline in core CPI for clues as to what the Fed will do next.

Fed Set to Skip a September Hike, But Will It Flag One for November?_1

Another striking datapoint that markets are not overreacting to is the big jump in consumption over the summer, which was likely boosted by one-off factors that are expected to fade in the final months of 2023. One might therefore deduce that this leaves the Fed in a neutral position as far as the outlook is concerned and a pause in September and beyond is justified.

Fed is fearful of overtightening

However, there are two significant unknowns here. One is the extent of the effects from the existing tightening that haven’t been felt yet. The other is whether energy prices will rally further, making inflation even stickier than it already is.

The Fed has become very mindful of the transmission lag of policy tightening during the course of 2023, downshifting the pace of rate increases contrary to data suggesting otherwise. The policy lag has been the main argument of the more dovish leaning FOMC members. Chair Jerome Powell falls into this camp.

Fed Set to Skip a September Hike, But Will It Flag One for November?_2

But with real interest rates turning positive as all inflation metrics drop below 5% and the Fed funds rate reaches the 5.25%-5.50% range, the hawks are also increasingly confident that policy is restrictive enough. Thus, regardless of whether the Fed hikes one more time or not this year, the end of tightening is just around the corner.

Will new dot plot embrace higher for longer?

The question now is if the economy will slow at an alarming enough pace to trigger a wave of rate cuts. Some indicators, such as the Chicago Fed’s National Financial Conditions Index imply that financial conditions may not be tight enough. This raises the possibility of a resumption of rate hikes at some point in the future, even without a fresh acceleration in energy prices. At the very least, there remains a strong case for ‘higher for longer’.

Fed Set to Skip a September Hike, But Will It Flag One for November?_3

However, markets have yet to be convinced as traders have about a 90-basis-point worth of rate cuts priced in. A pricing out of those cuts would not happen overnight and is potentially more of a 2024 story, but the process could start this week if FOMC members revise up their median projection of where they see rates in the next couple of years.

In the June dot plot, the median projection for 2024 was 4.6% and for 2025 it was 3.4%. If the Fed sees rates a lot higher in 2024 in the updated dot plot than in June, this would add more fuel to the US dollar’s latest uptrend.

Dollar’s bullish streak may not be over

Sending a clear signal on higher for longer would be one way for the Fed to possibly compensate for not committing to a final rate hike this year. The recent data has been neither too strong nor too soft, so keeping the option for a further rate rise on the table without pre-committing to it seems like a sensible middle-of-the-road approach.

For the dollar, the most bullish outcome is if the Fed hints at a good chance for another hike as well as raises its projected rate path. This could push the dollar index past the March peak of 105.88, extending its winning streak.

Fed Set to Skip a September Hike, But Will It Flag One for November?_4

However, the recent rally also exposes the greenback to a corrective selloff should the rate path not be revised up substantially, if at all, and Powell sounds upbeat on the prospect of inflation returning to the 2% target over the medium term in his press conference. The dollar index would be at risk of tumbling towards its 200-day moving average around 103.00 in such a scenario.

Source: XM

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Owen Li

Commodity

Refining, long one of the more predictable corners of the oil market, is caught in a climate bind.

Environmental pressure and questions over long-term demand are prompting global energy companies, financiers and governments to edge away from fossil fuel investments, curbing the world's oil processing capacity. And yet, today, appetite for everything from jet fuel to gasoline continues to grow apace, particularly in the world's large emerging economies.

The result is a mismatch emblematic of the challenges of the energy transition — one that has left prices more volatile than ever, and consumers perilously exposed to any supply disruption, including turmoil triggered by global warming.

"Any small, operational shocks will create large market shocks, which will find their way down to the consumer's pocket," said Janiv Shah, senior downstream analyst at Rystad Energy.

Oil demand growth has outpaced the increase in refinery capacity since 2021, and this will continue through 2027, according to industry consultant FGE. After 2028, there are no confirmed new refinery projects, it said, though there will likely be projects undertaken in Asia and the Middle East.

Of course, as the global vehicle fleet electrifies and oil consumption for transport eases, that supply-demand gap will close — but it will not do so fast and that leaves ample room for trouble.

All the while, long-term changes to the planet's climate, including more frequent spells of extreme heat that already hit oil processing this summer, are also reducing the industry's ability to cope with additional shocks, like Russia's invasion of Ukraine last year, which upended hydrocarbon markets. A Crunch in Key Corner of Oil Market Leaves Consumers Vulnerable to Heat and War_1

A Crunch in Key Corner of Oil Market Leaves Consumers Vulnerable to Heat and War_1

"The refining system is structurally tight," said Nikhil Bhandari, Goldman Sachs Group Inc's co-head of APAC natural resources and clean energy research. "That's because of the backdrop where we've had 4% to 5% of global refining capacity closing in the last five years." Global refinery processing rates this year are near record highs, according to the bank's data going back to 2006.

With refining seen as especially environmentally unfriendly, Europe and the US have been phasing out older plants, along with Australia, Japan, and New Zealand. Global majors have cut smaller operations. Refining investment has instead been led by Asia, the Middle East, Africa and Latin America, with massive refineries such as Pemex's Olmeca and Nigeria's Dangote, owned by Africa's richest man, Aliko Dangote.

But today even in China, long a net fuel exporter, there is little spare capacity to increase shipments significantly over the next two years to cope with strong demand.

Plants there are already running at about 88% utilisation, leaving little room for more, according to Parsley Ong, head of Asian energy and chemicals at JPMorgan Chase & Co. "Refineries are already running at the highest utilisation rates in recent history."

Globally, Ong estimates 1.9 million barrels per day of refining capacity will be added this year — but shutdowns will amount to 600,000. By 2025, she expects the capacity increase will be 1.4 million bpd of capacity, with shutdowns at 900,000.

"Nobody's really adding capacity. Everyone is getting rid of it, in order to build chemicals or new materials."

The strain is already showing. Europe leans on older facilities that have seen a spate of unplanned outages as they run higher-than-usual average operating rates, leaving nations facing the possibly of a winter with insufficient diesel. All this at a time when appetite remains strong, driving up prices. In the US, gasoline prices are at the highest seasonal level in more than a decade and diesel futures have just hit a record. Globally, the workhorse industrial fuel has outpaced crude.

Supply remains precarious. Across five key oil hubs across the world, inventories of light and middle-distillate fuels — the likes of gasoline, diesel and jet fuel — are currently below five-year seasonal norms, according to a report by FGE last week.

"It's hard to say if we're moving away from oil too quickly. From an environmental perspective, you can't move quickly enough," said Steve Sawyer, director of refining at FGE. "Politicians are doing their job to meet people's demands."

"But peak demand for oil may take longer than what these politicians would like."

Source: Bloomberg

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Chandan Gupta

Forex

Fundamentals

According to today's chart performance below, the overall trend of the EUR/USD currency pair is down.

This takes into account that technical indicators are heading towards strong sell saturation levels due to recent losses.

I expect the downward momentum to continue until the market reacts to this week's key events, particularly the announcement of policy decisions by the US Federal Reserve, and the reading of purchasing managers' indicators for the manufacturing and services sectors of the euro area economy.

Control of Bears, Critical Exchanging Ahead _1

Technical Analysis

According to the general downtrend, the next targets for the bears are support levels 1.0600, 1.0550 and 1.0480, respectively, and from the second last level it is best to return to buying the currency pair without risk.

On the other hand, there will be no initial break unless it moves towards the 1.0825 resistance level first.

The EUR/USD exchange rate has been on a sharp downward trend in recent months.A descending channel, shown in red, has formed.The pair has also formed a bearish flag pattern, which is a worrying sign for euro bulls.It also fell below the 50-period moving average and the MACD fell below the neutral point.A head and shoulders pattern was also formed.

Therefore, the pair is likely to experience a bearish breakout and the next level of interest is 1.0600.

On the upside, the next level to look at is at the top of the descending channel.

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Trading Direction: NO TRADE

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Thomas

Economic

Commodity

After finishing her latest rice harvest, Sripai Kaeo-eam hurriedly cleared her fields and planted a new crop in late August — ignoring a Thai government advisory to restrict further sowing of the grain this year to conserve water.

"This crop is our hope," said the 58-year-old farmer in Thailand's central Chai Nat province, pointing to her green paddy seedlings only a few inches tall.

Sripai, who is trying to dig her way out of more than 200,000 Thai baht ($5,600) of debt, is motivated by the global spike in rice prices, which are close to their highest level in about 15 years after India — the world's biggest shipper of the water-intensive grain — curbed exports.

Farmers across the agrarian heartland that makes Thailand the world's second-largest rice exporter should be poised to benefit.

Instead, the amount of land under rice cultivation in Thailand decreased 14.5 percent in August compared to the same month last year, according to previously unreported government estimates. The figure has declined every year since 2020.

Thailand's centuries-old rice cultivation system is under severe stress from climate change, unsustainable farm debts and a lack of innovation, according to interviews with two experts and a review of government data.

These pressures on the sector, reported in detail for the first time by Reuters, are squeezing debt-laden Thai farmers despite tens of billions of dollars in subsidies over the past decade.

The handouts came in place of boosting agricultural research spending, which hammered productivity, the experts said. Many farming families are financially burdened after borrowing to fund their crops, according to government data, with debt now spanning generations.

A drop in cultivated land could slash Thailand's rice output, adding to already rampant food inflation after drought conditions in other key rice-producing countries and hitting billions of consumers for whom the grain is a staple food, said agricultural expert Somporn Isvilanonda.

Thailand exported 7.7 million tonnes of milled rice in 2022 to countries across the Middle East, Asia and Africa, according to Krungsri Research.

"The cultivated area is down because of lack of rainfall and irrigated water," said Somporn, a senior fellow at the state-affiliated Knowledge Network Institute of Thailand (KNIT).

The water shortage is likely to worsen into 2024 as the dry El Nino weather phenomenon strengthens, according to government projections.

On the line for millions of farmers is not only their current crop, but a narrow window to escape a life crushed by debt. A good harvest could fetch prices that are up to double or triple that of most years, Sripai said. Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_1

Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_1

"Now I am dreaming," she said, "because India has stopped exporting."

The Thai government's rice department did not respond to questions sent by Reuters.

Rice is central to Thailand. A little under half its farmland is marked for rice cultivation, with over five million households involved, according to Krungsri.

Successive governments have spent 1.2 trillion Thai baht ($33.85 billion) on price and income interventions for rice farmers in the last decade, estimates Somporn.

"But the government didn't do enough ... to improve productivity," he said.

Though prices are now high, "farmers cannot take the opportunity to produce rice," Somporn said, adding that he expected output to drop around 30% over the next two growing seasons due to the water shortage. Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_2

Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_2

Debt And Drought

On a sweltering August morning, dozens of farmers and land owners protested outside a state-run agricultural bank in Chai Nat, where they had waited overnight to meet officials.

Danai Saengthabthim, 60, was among those at the hours-long meeting, where he sought to convince officials not to seize his land for failing to repay debts that have swelled over two generations.

The Bank for Agriculture and Agricultural Cooperatives said it does not have a policy of confiscating land from farmers who unintentionally default.

He is now pinning his hopes on Thailand's new coalition government for help. "The debt has just kept increasing over time," he said.

Even before the new government took office, Sripai and other farmers from the region made repeated trips to the capital, Bangkok, to lobby the agriculture ministry.

"All the farmers in our group have debts," said Sripai, who pays a rate of 6.875% on her loan. "We got the debt when we faced droughts, floods, and pests."

Thailand has one of Asia's highest household debt levels. In 2021, 66.7% of all agricultural households were in debt, largely from farming-related activities, according to government data. Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_3

Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_3

Prime Minister Srettha Thavisin said in his first policy statement before parliament last week that the government will seek to improve farm incomes.

"There will be a consolidation of water management resources, innovations ... to increase yields as well as finding new markets for agriculture product," he said, adding that there would also be a moratorium on some farm loans.

"Extreme weather patterns brought on by the El Nino phenomenon are creating risks for farmers."Rainfall this year has been 18% lower than normal and key reservoirs are filled to only about 54% of total capacity, according to the Office of the National Water Resources.

Climate change will likely exacerbate matters, with experts expecting a decline in average rice yield and wider fluctuations in production. Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_4

Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_4

'Trapped in our success'

The foundation for Thailand's rice sector was laid in the late 19th century during the reign of King Chulalongkorn, who promoted free trade and agricultural and land reforms, said Nipon Poapongsakorn, an agricultural expert at the Thailand Development Research Institute.

Decades of investment in research and infrastructure allowed farmers to switch to high-yielding varieties beginning in the 1960s, cementing Thailand's then-position as the world's largest rice exporter, said KNIT's Somporn.

"When you grow high yielding variety, you have to grow it in irrigated areas," he said.

Thai governments largely steered clear of market interventions until former prime minister Yingluck Shinawatra in 2011 rolled out a scheme that paid rice farmers above-market rates for their crop, both experts said.

That move kicked off a decade of handouts that stymied productivity in Thailand's rice sector, leaving average yields per rai (0.4 acres) lower than those of Bangladesh and Nepal, said Nipon.

Yingluck was sentenced in absentia to prison on negligence charges for her role in the scheme that cost the state billions of dollars. She has previously denied wrongdoing and did not return a request for comment sent through a representative.

In 2018, according to data provided by Nipon, Thai farmers produced 485 kg of rice per rai, compared to 752 kg and 560 kg in Bangladesh and Nepal respectively.

"We got trapped in our success," he said, underlining a drop in rice research investment from 300 million baht a decade ago to the 120 million baht allocated for this year. "Our rice variety is very old, our yield is very low."

Farmers can only legally grow varieties approved by the government and could face challenges finding buyers if they were to grow variants from elsewhere, which may not be suitable for cultivation in Thailand, said Somporn.

In recent years, countries like India and Vietnam made sizeable investments in research, pulling ahead of Thailand in terms of productivity and gaining traction in the export market, the experts said.

The average Thai farmer's income has dwindled. In the last decade, rice growers made positive net returns from their first crop in just three years, according to government data. Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_5

Soaring Rice Prices Sow Hope - and Trouble - for Indebted Thai Farmers_5

In the years since Sripai followed her family into the paddy fields, the challenges have multiplied, but current prices offer a rare opportunity.

"We're hoping we can clear our debts," Sripai said, sitting in front of a ramshackle wooden building where she lives. "We're keeping our fingers crossed."

($1 = 35.4500 baht)