Can the equity rally withstand rising yields?

00:00:00: Hi and welcome to Swisscodes daily market talk.

00:00:03: It's Friday, the twenty-fifth of September.

00:00:05: moves across oil prices and global yields continue While investors wonder whether and for how long the earning strength could carry on when input and borrowing costs keep rising.

00:00:19: So we will talk about the macroeconomic setup of today, We'll compare today's yields with past Look at what happened to equities then And what would happen now.

00:00:29: Obviously discuss major points to watch moving forward.

00:00:33: But before we do as always Please keep in mind that opinions are my own.

00:00:38: This is not financial advice.

00:00:48: So a fresh rebound in oil and further sell off across global bond markets continue to sit on the investor's stomach.

00:00:55: Yesterday, the US Ten-Year Yield for example added twelve basis points in just yesterday's trading session and twenty eight basis points into sessions only.

00:01:07: In German ten year yield now hit three point sixty percent mark And Japanese Ten Year Yield is consolidating near to three point ten per cent level right now.

00:01:17: Absolutely crazy, those are the levels that we have not seen since decades.

00:01:22: Obviously equities are a bit worried.

00:01:24: they're under pressure though major US indices somehow managed to close the session yesterday somewhere near flat outperforming.

00:01:32: the SOC-Six Hundred Index from Europe for example that dropped point fifty five percent on higher yields and higher energy cost.

00:01:40: Meanwhile, the Eurodollar depreciated nearly five percent since the start of this year and the softer euro obviously amplifies imported inflation in the euro area especially from imported energy!

00:01:53: European stocks remain more vulnerable to further pullback than the technology-heavy US peers.

00:01:58: But concerns around energy goes beyond just crude mind you.

00:02:02: and beyond Europe, in the

00:02:03: U.S.,

00:02:04: for example Oracle did something quite important yesterday!

00:02:07: It's involved a force majeure close on massive AI data center project that has been built in New Mexico To provide computing capacity for open AI.

00:02:18: The problem here is electricity.

00:02:20: There are concerns that the site may not secure enough power to become operational on time.

00:02:26: And if that's the case, this clause could allow Oracle to delay its payments of.

00:02:31: the data center is delayed and would potentially shift some financial risks from Oracle towards developers as well as lenders who finance projects.

00:02:43: And that's very important thing because this project carries around eighteen billion US dollars of debt on its shoulders.

00:02:50: and what is happening right now, one is the AI where it should not only be about chip shortage or slower model development or leverage financing from big technology companies.

00:03:00: It also needs to have power availability construction delays.

00:03:05: who pays when things go wrong?

00:03:07: These are becoming major financial risks at the moment.

00:03:11: Now, good news is that oil is softer this morning and the selloff in bonds seem to have slowed down.

00:03:17: But rapid rise we saw in global yields was quite alarming as we are approaching end of week So it's time to look back at what happened this quarter.

00:03:30: in looking back.

00:03:31: Well, the third quarter of this year was marked by two major themes, volatile energy prices and rising global yields being one theme obviously but It was also marked by strong corporate earnings because these volatile markets especially the volatile energy market and annual investment somehow explained a big part of the earnings growth In some sectors.

00:03:52: as a result The key takeaway Was that elevated energy prices?

00:03:56: global yields have been mostly absorbed by equity markets last quarter.

00:04:01: And that was thanks to the strong earnings growth, especially in some sectors.

00:04:05: now of course we saw a notable diverges across sectors and Energy and technology names post strong results, while more defensive and rate sensitive sectors such as consumer staples utilities.

00:04:19: And real estate obviously lag behind in the US.

00:04:23: mortgage rates for example surpassed a seven percent level this week Last year, nearly one it has said.

00:04:32: One in five U.S.

00:04:34: homes for sale had a price cut in August and there are forty-six percent more homes for sales today than back in two thousand twenty three according to Bloomberg News and us living the space vulnerable too further.

00:04:48: Yeah, overall US long-term yields rising above the five percent mark did not really prevent S&P.

00:04:53: Five hundred nor Nasdaq hundreds from advancing to fresh record highs.

00:04:58: NASDAQ hundred just hit a fresh record this week and in Germany five leading economic research institutes there more than double their two thousand twenty six growth forecast for Germany Thanks to major fiscal expansion in defense and infrastructure spending, but also stronger exports & AI related demand.

00:05:22: So there is no doubt today the macroeconomic backdrop, macroeconic data and outlook remain supportive of further monetary policy tightening in major economies.

00:05:32: And that includes the United States and the Euro area.

00:05:35: these economies have been resilient to higher price pressures and rising borrowing costs.

00:05:40: I don't see that trend reverse until more clarity in the Middle East and Ukraine set up.

00:05:45: But on the other hand, earnings expectations remain high.

00:05:48: they keep rising and that despite the rising borrowing costs.

00:05:53: Again ample fiscal spending an AI investment have kept growth in check helping growth driver sectors defy higher cost.

00:06:01: so The question today is could this equity strength extend?

00:06:05: Despite rising yields?

00:06:07: And the answer it depends.

00:06:08: It depends on the pace at which yields are rising because yields rising at this week's speed will inevitably put pressure on companies' bottom lines.

00:06:17: Hence, the rate of change in yields will be crucial in determining how smoothly equity markets will be in a position to absorb higher bargain costs moving forward.

00:06:32: and I think that's important because if history is any guidance when US ten-year yield last approached was in the middle of a ten percent correction.

00:06:46: This time, the ten-year yield has crossed the same threshold while the S&P five hundred remains close to record high levels and up double digits this year.

00:06:55: And if you consider other factors equal one important difference between then and now is that the rise in yields have been more orderly this time except from this week obviously and as considered with exceptionally strong earnings growth.

00:07:08: I think thats very important Strong Earnings Growth.

00:07:12: And if you look further back down the road, two thousand seven offers an interesting probably more interesting precedent.

00:07:18: The ten-year yield back then was rising about five percent mark while the S&P Five hundred in U.S continued to advance into first half of their year and that really also supported by strong earnings and strong economic growth.

00:07:32: at that time this S&p Five hundred just kept rising along with US yields.

00:07:37: it's only later as credit conditions deteriorated subprime crisis intensified that the equity picture changed, obviously.

00:07:46: So this brings me to the conclusion that things could continue to go well until they don't and AI looks like it's the centerpiece in our picture today.

00:07:54: because AI investment may have gone or in the process of going beyond itself, credit is spreading.

00:08:01: Oracle's warning yesterday is a reminder that AI-specific risks could shift into financial markets very rapidly.

00:08:08: and more importantly Broke Index and Retirement Funds today are very much tied to this AI boom.

00:08:16: Technology stocks make up around forty percent of their S&P five hundred index A big share of bond issuance and venture funding AI and AI investments, and only three chip makers.

00:08:29: TSMC, SK Hynex & Samsung account for more than twenty-five percent of the MSCI EM index.

00:08:38: As such, AI is a cornerstone that must not crack today.

00:08:42: So let's finish this week on a sunny note.

00:08:45: For the next three months to come, US equities will actually have seasonal winds behind their backs.

00:08:53: so should earnings growth remain robust we may see the equity really extend into year end provided that rising yields remains orderly.

00:09:01: In the best case scenario here, a decline in energy prices could tame central bank hawks and give an additional boost to their equity markets.

00:09:15: bullish and that despite risk.

00:09:17: So let's cross fingers, an end this week.

00:09:20: on this beautiful note I'm Ipek Oskar Deshkir and thank you for joining me And Thank You For All Your Beautiful And Supportive Comments!

00:09:28: I hope This Episode Of Market Talk Has Been Helpful And It Has Been Insightful To You.

00:09:34: so please do not hesitate to leave your comments, reactions and questions below.

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00:10:00: so I will meet again next week and until then good day trading.

00:10:04: have a lovely weekend!

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