Can equity bulls resist rising yields?

00:00:00: September starts on a bearish note.

00:00:02: Ladies and gentlemen, as rising oil prices revive inflation concerns around the world push global yields higher and pressure equity valuations now strong.

00:00:12: second quarter earnings remain an important cushion because S&P five hundred and stock six hundred companies delivered impressive profit growth in the second quarter of this year supported by energy industries banks and AI.

00:00:26: off course but how attractive equities remain as sovereign bond yields rise.

00:00:33: So welcome to Swisscoats.

00:00:34: daily market talk is Tuesday, the first of September.

00:00:39: I'm Ipega Skardishkea.

00:00:41: we will talk about macroeconomic factors that influence asset prices around the globe and evaluations in detail.

00:00:48: but before we do an as always please keep in mind that opinions are my own.

00:01:02: So yes, the month of September kicks off on a bearish note in the markets as renewed rally and oil prices continue fueling inflation expectations around the world.

00:01:12: And let our pressures yield higher obviously and that's waning on equity valuations this morning at mounting on worries that a prolonged period of higher energy prices will end up equating through other goods and services.

00:01:35: So the picture is a bit cloudy, but looking back August has been good month for the market really.

00:01:40: The strong earnings from both sides of Atlantic Ocean somehow counterweighed rising yields pressure even though second part was marked by an increased focus on intense pressure that we saw in long term yield especially in the US.

00:01:57: That pushed the U.S.

00:01:58: Third year yield to its nineteen-year high level and the latter encouraged Step in, announcing that it would increase its longer term bond by a bag to keep the long-term bargain cost at check.

00:02:12: And when?

00:02:12: what we see today is that U.S.-thirty year yield is about to return to levels that triggered the bold US Treasury announcement and that's bad news!

00:02:21: Now the good news is this, the S&P five hundred companies printed a fifty two percent growth in their earnings in second quarter of when the earnings growth was ninety-two percent.

00:02:37: The stock's six hundred on the other hand printed a twenty four per cent earnings growth in the second quarter, that it was strongest growth since third quarter of two thousand twenty-two and excluding post pandemic rebound the strongest in more than decade!

00:02:51: On both sides energy Mining, industrial stocks, AI enablers and banks contributed heavily.

00:02:57: Of course this performance on the back of high energy prices heavy AI build out And for the banks all these heightened market volatility and financing of that AI buildout.

00:03:08: Note that big technology companies like Amazon, Alphabet, Meta, Microsoft & NVIDIA also booked a more than one hundred sixty billion US dollar windfall last quarter from their investments in other AI companies flattering their earnings according to the Financial Times.

00:03:26: The latter didn't ease worries, obviously regarding the severe declines that we saw in their free cash flow levels due to massive AI investment which pushed them to double the amount of debt they had to contract over the past nine months.

00:03:40: no concerns that paper gains are overstating the strength of the AI boom but still the magnificent seven stocks managed to recover the May-June retreat.

00:03:51: almost.

00:03:52: So the question today that everyone is asking him or herself, whether the rising global yields will be a barrier for further gains in global indices when earnings are this strong.

00:04:03: I don't have the answer obviously, but diving into these numbers we can see where the valuations are at for the stock.

00:04:10: For example is trading around fourteen point six times as forward earnings and that gives us an index of earnings yield about six point eight to six point nine percent.

00:04:20: in comparison The German tenure yields five past a three point thirty-five percent level this morning was highest since two thousand eleven And the French tenure paper pays round four point twenty per cent today the highest since two thousand and eight.

00:04:34: But even with recent spikes that we saw in European sovereign yields, poor European economies' bonds yield have not risen enough just yet to compromise the SOC-Six Hundred returns.

00:04:47: For the S&P Five Hundred however, numbers are a bit closer because of the index trade at around twenty times as forward earnings.

00:04:53: today The earnings yield is about five point ten percent.

00:04:57: That's just a few points above the US ten-year yield that stands near the four point eighty percent level today and below the thirty year yields, which today stands near five point twenty eight percent.

00:05:09: In other words you can lock in at five point to an eight percent return by buying and setting on it boring us a thirty-year paper rather than losing your sleep at night thinking whether the S&P five hundred companies are just too expensive today, or if this is another financial bubble.

00:05:26: Whether AI investments make sense in current valuations?

00:05:29: Whether we will see a massive sell off and that it's going to be an underadaptive comprises

00:05:33: etc.,

00:05:34: you get to lock in a five point twenty eight percent return.

00:05:37: so thats exactly why Bessint is now trying to jump into making sure that this awkward risk reward mismatch doesn't lead off.

00:05:45: that could have broader economic implications for the US and the rest of The economic data obviously, especially the inflation metrics around a world that significantly influenced their central bank rate expectations.

00:06:02: Yesterday German CPI updates came in softer than expected but inflation near the three percent mark is never soothing.

00:06:11: no matter if it was softer then expectations and today Euro area aggregate CPI estimate for August confirmed spike in headline figure past.

00:06:19: the three-percent mark was slightly lower at two point four percent versus three and a half percent expected by analysts if that's any comfort, but the ECB officials are not comfortable with current levels.

00:06:33: of inflation in the euro area and even less with prospects for a prolonged period of heated inflation that could get them to fight more aggressively these price pressures.

00:06:43: The same applies to other central banks, of course event to Federal Reserve though many don't see Kevin Walsh raise his interest rates before midterms in US.

00:06:53: So this brings me to second thing.

00:06:55: everybody should be watching right now, how the saga between US Treasury and the Fed will impact the US yields.

00:07:02: It's funny because, The more I read and talk to people ,the more i realize that it was not only one half-convince regarding Kevin Warsh's Jackson Hole speech where he emphasized the importance of bringing U.S inflation back into Fed's two percent policy target.

00:07:17: Many of us actually won't clap until the fed walks that tall meaning it raises interest rates.

00:07:24: Until then, the hawkish expectations remain fridger.

00:07:28: But fragile or not, the hawkish beds will likely continue to pressure the short end of U.S yield curve higher but at some point should also have a softer impact on longer term yields.

00:07:39: hands could encourage a flattening off US yield curve On idea that the Fed is taking care of inflation and the latter would keep long-term yield curve quite in check.

00:07:52: So September can be a pivotal month as the feds next meeting do.

00:07:55: September will clarify whether the wash is worse turned into action and later we'll land just after.

00:08:03: The US Treasury will start a bigger bond buybacks, I promise in week ago to investors which will provide an interesting test of whether treasury intervention can meaningfully ease pressure at long-end of U.S.

00:08:18: yield curve or whether investors simply use resulting relief to sell into strength.

00:08:24: as Fiscal concerns, heavy U.S debt issuance and inflation risk continue to dominate the longer term outlook Again despite strong earnings and strong earnings expectations The S&P-Five hundred return today is lower than US thirty year paper And that person is a reason to navigate cautiously and perhaps look for original and cross asset diversification.

00:08:47: Be careful, however because gold is again not reacting reliably to the renewed Middle East tensions today.

00:08:54: Despite that we see in U.S longer term yields.

00:08:57: it's weighing heavier on appetite and desprecious metal.

00:09:01: The price of an ounce of Gold fell to a hundred-day moving average.

00:09:05: Today That's near forty three seventy two dollars per ounce level.

00:09:10: But the long-term outlook remains unchanged positive And thats at back off prospects a further debasement trade, meaning a further depreciation of the US dollar and a further loss off appetite for U.S.

00:09:23: Treasuries from international investors which would then lead to rising international appetite for subpronational and hard commodities that goal is part of.

00:09:32: so this could be interesting opportunities or long-term investors accumulate some more gold positions.

00:09:38: This all for today.

00:09:40: I'm Ipeco Skardishquia And thank you for joining me.

00:09:43: Thank You For All Your Beautiful And Supportive Com... I hope this episode of Market Talk has been helpful and it's insightful to you, so please do not hesitate to leave your comments, reactions or questions below.

00:09:59: Follow us on Instagram, on X on LinkedIn but also on Whatsapp, Threads, Telegram & Blue Sky for regular market updates.

00:10:06: Subscribe our YouTube channel daily!

00:10:09: market comments and please don't forget to hit the like button on these videos.

00:10:14: so let us know that you enjoy them.

00:10:17: So I will meet again tomorrow, until then good day

00:10:36: trading!