🏛️ Is Commercial Real Estate In Trouble?

Good morning. US stock futures dipped in Tuesday morning trading as investors look ahead to the release of leading economic indicators.

🏢 Fears rise over commercial real estate

📝 Our report: Uh-oh, folks in suits are getting the jitters! Fund managers are losing sleep over the thought that a hiccup in the commercial real estate sector might pull the trigger on a credit crisis in the U.S., at least according to the latest Bank of America survey.  

 🔑 Key points:

• About 16% of participants in the global fund manager survey identified a "systemic credit event" as the top risk to markets in February, compared with just 11% the prior month. The most likely source of a credit event, according to the fund managers, is the commercial real estate market.

• Complicating the matter is the fact that small and regional banks are the biggest source of credit for the $20 trillion commercial real estate market, holding about 80% of the sector's outstanding debt. Regional banks were at the epicenter of the upheaval within the financial sector last year following the collapse of Silicon Valley Bank.

• About $1.5 trillion in commercial mortgage debt is due by the end of 2025, but steeper borrowing costs, coupled with tighter credit conditions and a decline in property values brought on by remote work, have increased the risk of default.

💡 So what: A collapse in commercial real estate could severely impact the US economy in various ways. It could trigger widespread defaults on loans and mortgages held by financial institutions, leading to financial instability akin to the 2008 recession. Overall, a commercial real estate collapse could have far-reaching consequences, affecting financial stability, employment levels, consumer confidence, and government revenues, and potentially leading to a broader economic downturn.

Tuesday - US Leading Economic Indicator

Wednesday - Minutes of Fed’s January FOMC Meeting, Fed Governor Michelle Bowman Speaks

Thursday - Existing Home Sales, Initial Jobless Claims

Friday - No Major Economic News

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📱 TikTok under scrutiny in the EU

WHAT: The European Union is playing detective, investigating whether TikTok has been playing by the rules in their digital sandbox. The European Commission, the EU's executive branch, just cracked open their formal proceedings to see if TikTok has been misbehaving under the new Digital Services Act.

WHY: The DSA is a sweeping set of regulations designed to keep internet users safe online, including requirements to make it easier to flag harmful or illegal content like hate speech, give users alternatives to algorithmic recommendations and ban ads targeted at children.

🤝🏽 Banking acquisition on deck

WHAT: Hold onto your credit cards! Capital One is apparently on a shopping spree, planning to scoop up U.S. credit card issuer Discover Financial Services in a colossal all-stock transaction worth a whopping $35.3 billion. The deal, which is expected to receive intense antitrust scrutiny, would also form the sixth-largest U.S. bank by assets and a U.S. credit card behemoth that would compete with rivals JPMorgan Chase and Citigroup.

WHY: In January, Discover and Capital One reported 62% and 43% falls in fourth-quarter profit, respectively, as banks increased provisions for losses from bad loans as rising interest rates raised the risk of consumer defaults on credit card debt and mortgages.

🤖 $80 billion valuation

WHAT: OpenAI, the artificial intelligence startup backed by Microsoft, just sealed a deal that gives the company a mind-boggling valuation of $80 billion or possibly more, according to a report from the New York Times. The report said that OpenAI would sell shares in a tender offer led by venture capital firm Thrive Capital. Under the deal, employees will be able to cash out their shares in OpenAI rather than a traditional funding round in which the company would sell shares to investors to raise money for the business, the report added.

WHY: The company has been a driving force in the rise of AI technologies in the public consciousness following its launch of AI-powered chatbot ChatGPT in late 2022.

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