Record highs masking risks

00:00:00: US stocks remain near record high levels and that despite rising Treasury yields, especially on the long end of the yield curve.

00:00:07: A strong AI demand continues to support growth expectations and help keep appetite strong.

00:00:14: Europe looks more vulnerable though with limited technology exposure and mounting concerns over France's finances and brother euro debt concerns.

00:00:23: meanwhile raising Japanese yields and doubts about French and brother Euro area bonds could encourage Japanese investors to bring capital back home and that would increase the risk of yen carry online, potentially keeping appetite for broader risk assets.

00:00:39: And maybe even for technology.

00:00:41: So, welcome to Swisscouts daily.

00:00:43: Market Talk is the sixth of October.

00:00:46: I'm Yipega Skardishkeya and we will dive into market dynamics then try to dig in potential rest to actual equity rally.

00:00:53: but before we do as always please keep in mind that opinions are my own And this not financial advice.

00:01:06: This show brought you by SWISQUOTE

00:01:08: so an interesting setup is unfolding right now.

00:01:11: The US longer term yields keep pushing higher to multi-decade high levels, but the major U.S.

00:01:18: indices are unfazed by rising yields because the US ten year yield reached a five point thirty five percent level yesterday.

00:01:26: But the S&P Five Hundred traded just shy of an all time high level and yesterday even equal weighted version of this S& P Five Hundred rose Suggesting that the rally was not only shouldered by the technology stocks other sectors also rally.

00:01:41: Meanwhile, the technology sucks.

00:01:43: advanced to fresh all-time high levels as Nasdaq hundred hit a fresh record high and that despite latest warning from SoftBanks.

00:01:51: Masayoshi Sun who is firm tech believer mind you The man warned that super intelligence in wrong hands could become super dangerous.

00:02:01: joining other technology leaders Who?

00:02:03: In previous weeks call for slowing down progress of their most powerful models.

00:02:08: AI models remember The last AI companies are somehow stuck with debt and liabilities, but they cannot slow down much.

00:02:20: And data shows that AI demand remains robust anyway because Honghai Precision, a supplier to NVIDIA & Apple announced better than expected quarterly revenue yesterday.

00:02:31: The news came just as another confirmation that an AI builder is growing fast enough to maintain related companies and related industries shielded from the rising yields, at least for now.

00:02:44: Now how high should the yield must rise?

00:02:47: To challenge growth an investor's appetite is to be seen but for now U.S technology stocks seem un-worried.

00:02:52: They could maybe take another fifty to hundred basis point rise in yields perhaps.

00:02:57: But of course The higher the bargain costs move the higher the pressure on their profitability outlook For these companies will be a tipping point when investors say ok, we are done and going into the bonds.

00:03:12: Especially given that the bond yields rise mainly due to real yields as long term inflation expectations in the US remain mostly anchored near Federal reserves' two percent policy target.

00:03:22: Now this feeling is quite different here in Europe.

00:03:25: The rising yield's due to elevated inflation and widening yield spreads between Germany & other European countries led by France of course Due to debt worries are waiting on European stock markets.

00:03:38: The Stocks-Six Hundred Index was slightly up in yesterday's trading session, but the index has retreated around five percent since this summer.

00:03:47: peak and a limited technology exposure more vulnerable to rising energy prices and rising yields, rising borrowing costs as a result of it than the U.S peers that are in better position today to absorb higher borrowing cost thanks to robust AI-backed growth.

00:04:08: I expect the European stock to underperform US peers and global technology heavy pears as yields continue to rise.

00:04:16: Speaking of yields, looking deeper... The French-German ten year spread narrowed to one hundred thirty six basis points yesterday from above one hundred fifty base points reached last week.

00:04:29: Good news is that France raised six point seven billion euros at yesterday's Treasury Bill auction for around three, six and twelve months!

00:04:37: That's the good news.

00:04:38: The auction went quite smoothly, but it didn't change the fact that longer term funding remains expensive.

00:04:44: Last auction France paid almost five percent to borrow for ten years.

00:04:48: So yes friends can still find buyers for its debt But the buyers are demanding a higher return due to the budget concerns And I'm afraid the headache is far from being over.

00:04:59: Friends still needs to convince investors that It can rain and on as growth in deficit while next year's presidential elections could undo whatever is agreed today as far left and far right party candidates are the main.

00:05:14: The favorites, and both don't look like they would go for a budget Discipline.

00:05:19: Alas, the market can decide otherwise anyway.

00:05:21: but that would be painful and Europe's bond troubles could have consequences well beyond Europe as well.

00:05:28: I'm sure you read on the news recently because everybody shared it.

00:05:31: A global fund manager base in Tokyo called Sumitomo Mitsui DS has sold his entire French government-bond positions on fiscal concerns.

00:05:41: He didn't trim positions he sold an entire position Here reported.

00:05:44: this shifted money mostly into German bonds but also into short-term Japanese government debts.

00:05:50: Now, German loans is not the issue.

00:05:51: The part that interests me Is what happens if more Japanese investors decide to bring their money home.

00:05:58: Not most of Germany from France But HOME Because Japanese investors reportedly hold around twenty five trillion yen One hundred and forty one billion euros worth in French debt.

00:06:09: There's a sizable pool of capital whose direction matters.

00:06:13: And rising Japanese yields are increasing, the risk of capital repatriation and a further yen carry unwind.

00:06:19: because remember we were discussing that risk when the Japanese ten-year yield reached around one point seventy five percent level.

00:06:26: Remember?

00:06:27: That was never an automatic trigger but it leveled at which domestic bonds where becoming attractive enough to encourage money return home.

00:06:34: We are now well above that level, near three point ten percent for the Japanese ten-year yield this morning at Now.

00:06:43: the reason we have not seen a massive unwinds due to rising Japanese yields over the past year is perhaps an ample global liquidity.

00:06:50: that's how cushioned adjustment.

00:06:52: The AI investment also kept growth outlook sweet and encouraging for investors, and investors had been reluctant to buy Japanese bonds while yields were still rising.

00:07:02: Hope it wants to buy today what could become cheaper tomorrow right?

00:07:05: But France's fiscal and political troubles add another reason to reconsider overseas exposure for the big Japanese investors as they no longer have just a more attractive alternative at home.

00:07:17: They also have growing concerns about what they own abroad, and higher yields elsewhere may not be enough to compensate for that loss of appetite.

00:07:25: So if Japanese investors start moving capital back home or that repatriation accelerates the fund repatriations could support the yen particularly where overseas holdings are unhedged And stronger yen would squeeze investors who borrowed in yen To buy higher yielding assets elsewhere the carry trade.

00:07:42: As such, a new episode of Yen Carry Online could pull the rug from under the feet of global risk assets.

00:07:48: even the technology stocks would suffer from that.

00:07:50: And longer term implications also matter.

00:07:52: as four bonds mind you German bonds and US Treasuries may initially benefit from investors leaving friends but if Japanese Investors increasingly favour their domestic debt both bonds and us treasuries could face less buying over time!

00:08:06: That will keep their yields in higher regimes short run or episodes of carry unwind and that would be a longer term implication of hire.

00:08:17: else if the Japanese start repatriating their money back home.

00:08:20: So let's hope that appetite for US and European bonds doesn't tumble that fast, I'm further!

00:08:26: And hope that the Japanese don't pull the rug from under the feet of global risk assets.

00:08:31: This is all for today... leave your comments, reactions and questions below as usual.

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00:09:10: I will meet again tomorrow.

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