Markets Look to Powell Amid Rising Tensions in the Middle East

Investors turn to the Fed amid Israel-Hamas turmoil

The Middle East crisis has put markets on edge, pushing up oil prices and driving demand for safe havens, like gold. A day after President Biden’s whirlwind trip to Israel, investors are focused again on their chief concern: whether stubbornly elevated inflation will force central banks to keep interest rates higher for evenlonger.

A key update comes Thursday at noon Eastern, with Jay Powell, the Fed chair, set to speak at the Economic Club of New York. Wall Street will be tuning in for Powell’s outlook on interest rates and for clues about the level that might be needed to nudge inflation closer to the Fed’s target of 2 percent.

In recent months, inflation has begun to ease, but the path has been bumpy as hiring remains robust and consumers continue to spend.

That’s fueled fears in the bond markets that Fed policymakers will keep their prime lending rate at around 5 percent well into next year. The conviction has prompted a mammoth sell-off in Treasuries in recent weeks, pushing the yield on the 10-year T-bill to a 16-year high.

Tensions in the Middle East are adding to the volatility. The price of Brent, the global oil benchmark, has climbed nearly 7 percent since the Hamas attack on Israel on Oct. 7. Iran on Wednesday called for an oil embargo on Israel, which sent prices briefly spiking.

“The window for a diplomatic offramp to avert a wider war in the Middle East appears to be closing,” Helima Croft, a commodities strategist at RBC Capital Markets, wrote in an investor note on Thursday. That uncertainty threatens to push crude prices up further, she added.

A wild card: The U.S. on Wednesday eased oil sanctions against Venezuela, a major producer.

Regional tensions remain high. Biden tried to walk a diplomatic tightrope during his trip, asserting American support for Israel and its right to defend itself while urging that harm to civilians in Gaza was minimized. Biden has announced $100 million in aid for Palestinians in Gaza and the West Bank, and he agreed a deal with Egypt to allow aid into the territory.

Tonight, the president will deliver a prime-time address from the Oval Office in which he’s expected to ask Congress to greenlight $100 billion in aid for the crises in Israel, Ukraine and elsewhere.

Save the date: The DealBook Summit will be on Nov. 29. Jensen Huang, Nvidia’s chief; Lina Khan, the F.T.C. chair; and Bob Iger, C.E.O. of Disney, are among the interviewees. You can apply to attend here.

HERE’S WHAT’S HAPPENING

Jim Jordan loses support in his bid to become House speaker. The number of Republicans opposing him grew by two in a vote on Wednesday, raising the obstacles for the hard-right Ohio congressman. It isn’t clear when another vote will take place; while Jordan has pledged to continue fighting, a bipartisan group of legislators is discussing giving Representative Patrick McHenry, the interim speaker, more power to run the chamber on a temporary basis.

OpenAI reportedly discusses a stock sale at an $86 billion valuation. The parent company of ChatGPT is in talks to sell employees’ existing shares via a tender offer, months after Microsoft invested at a $29 billion valuation, according to Bloomberg. At that level, OpenAI would become one of the world’s most valuable privately held start-ups, behind only SpaceX and ByteDance, the TikTok parent.

Pfizer more than doubles the cost of the Covid drug Paxlovid. The pharmaceutical giant raised the list price for a five-day treatment of the antiviral to $1,390, from the $529 that the U.S. government currently pays. Though health plans will probably pay less than that, Pfizer’s move is likely to draw criticism that the higher price will limit access to the lifesaving drug.

Country Garden is said to have missed a crucial debt deadline. Bondholders told The Financial Times that the embattled Chinese real estate developer didn’t make a $15.4 million interest payment that was due at midnight. Earlier in the day, Country Garden denied rumors that its top two executives had fled China.

Netflix is riding high

Shares in Netflix are up 13 percent in premarket trading on Thursday after the streaming giant announced eye-popping third-quarter results, including nine million new subscribers and a nearly 20 percent rise in net income.

The results are signs that, as many media giants struggle to make their streaming businesses profitable, the 800-pound gorilla of the industry has found a way to continue thriving.

What went right for Netflix: The company said that its crackdown on password sharing had helped bolster its subscriber base to a better-than-expected 247 million worldwide. And it reported an 8 percent jump in revenues compared with the same time last year, to $8.5 billion, despite Hollywood strikes that have brought the U.S. entertainment industry to a near standstill.

The company is looking to build on that success, including by raising prices for its ad-free offering in the U.S., Britain and France. (The most expensive, which allows for streaming to four devices, will go up 15 percent, to $23 a month.) It’s the latest instance of streaming services increasingly driving consumers to cheaper — and more profitable — ad-supported plans.

But risks lie ahead. Talks between the SAG-AFTRA actors’ union and Hollywood studios are dormant, and despite pressure from A-list actors to return to the bargaining table, it’s not clear when negotiations will resume. That could lead to an eventual drought of content that will hurt Netflix and others — though the company noted on Wednesday that it was working to license more programming from other studios, after the unexpected success on its platform of “Suits,” a years-old show made by NBCUniversal.

And some analysts warned that price increases might eventually backfire. “Overusing this marketing lever isn’t sustainable,” Mike Proulx of Forrester Research wrote in a report.

• In other earnings news: Tesla reported a 44 percent drop in quarterly profit, as price cuts and factory investments ate into the bottom line. Shares in the carmaker were down 5 percent in premarket trading. And Morgan Stanley announced a 9 percent fall in earnings, driven by a dearth of deal-making activity.

New York opens another crypto fraud case

New York State’s attorney general, Letitia James, just sued a trio of crypto businesses in a major fraud case. The S.E.C. is also investigating the firms.

The New York lawsuit accuses Gemini Trust, an exchange run by the twins Tyler and Cameron Winklevoss; the lender Genesis Capital; and Digital Currency Group, the bankrupt parent company of Genesis, of lying to investors as part of a $1 billion fraud scheme.

The companies’ troubles are tied to the collapse of Sam Bankman-Fried’s FTX. His federal fraud trial is in its third week.

The New York suit centers on a product called Earn, offered by Gemini to users in partnership with Genesis. Customers essentially lent out their crypto assets to Genesis at a high rate of return — up to 8 percent. But after FTX imploded last November, sending digital asset values plummeting, Genesis froze Earn accounts, leaving users unable to reclaim hundreds of millions of dollars of crypto.

Gemini had long known Genesis was a risky bet, according to the attorney general. Gemini did not share that information with investors, leaving at least 29,000 New Yorkers and hundreds of thousands of others vulnerable, James said. Gemini’s internal documents detailed the risk inherent in the Earn product starting from its inception in 2021 — namely, that it was highly leveraged with limited liquidity, the suit says.

The suit adds that Genesis loans were at one point tied up in Alameda Research, the bankrupt crypto hedge fund that is at the center of the Bankman-Fried fraud case.

Genesis and Digital Currency Group are accused of trying to conceal Genesis’s losses to current and potential investors.(D.C.G. owes more than $1.7 billion to creditors, including Genesis.) “This fraud is yet another example of bad actors causing harm throughout the under-regulated cryptocurrency industry,” James said in a statement.

In January, the S.E.C. sued Gemini and Genesis, citing the Earn product, for offering unregistered securities.

37 percent

— Growth in the median net worth of American families from 2019 to 2022, the largest jump on record, according to new Fed data. Pandemic-era stimulus payments and climbing stock and home prices helped bolster household incomes.

The face of Google’s antitrust defense

As Google defends itself in a prominent antitrust trial, it has called its first witness to make its case that innovation, not restrictive contracts with industry partners, explains its dominance in search.

Google turned to one of its own to lay out its history of breakthroughs. Pandu Nayak, a vice president of search who joined the company 19 years ago, ran the court through developments in machine learning and deep learning, and he described the improvements in the understanding of language that have made search quality better.

Those innovations, he argued, were more important than drawing upon huge troves of user search queries. In fact, he said, using a third less data led to “no meaningful decline in search quality.”

That runs counter to a central plank of the government’s case. The Justice Department argues that Google’s dominance depends on scale, including by amassing more data from user queries that then better inform the company’s systems, attracting more users, and so on.

Prosecutors say that the company illegally throttled competition by paying Apple and other companies billions of dollars to make its internet search engine the default on their devices. “When you see Google paying billions and billions and billions, there has to be a reason,” Michael Whinston, an economic expert for the government, said this week.

THE SPEED READ

Deals

• Carl Icahn sued the board of Illumina over the gene-sequencing company’s $9.1 billion takeover of Grail, a cancer-detection company. (Reuters)

• Chinese regulators may hold up Broadcom’s $69 billion bid to buy VWware after the Biden administration tightened Beijing’s access to high-end semiconductors. (FT)

• House lawmakers have asked Sequoia Capital for information about its investments in artificial intelligence and other cutting-edge technologies in China. (FT)

Artificial intelligence

• Universal Music sued the A.I. start-up Anthropic for “widespread infringement” of copyrighted song lyrics. (CNBC)

• Britain called for labeling artificial intelligence as capable of causing “catastrophic harm.” Separately, Yann LeCun, Meta’s top A.I. scientist, warned governments against moving too hastily on regulation. (Bloomberg, FT)

• Lawyers for Pras Michel, the rapper convicted in relation to the 1MDB bribery scandal, called for a retrial after claiming that his previous legal team had relied on A.I. to deliver closing arguments. (Insider)

Best of the rest

• Russia detained another American journalist, Alsu Kurmasheva, who works for Radio Free Europe/Radio Liberty, which is funded by the U.S. government. (NYT)

• Nokia will lay off up to 14,000 employees over the next three years. (CNBC)

• Pro sports teams are increasingly bringing their games back to free media. (NYT)

• “Effective Altruism Is as Bankrupt as Sam Bankman-Fried’s FTX” (Bloomberg Opinion)

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