High valuations, uncomfortable questions

00:00:00: Crude oil rises, yields climb and the borrowing never stops.

00:00:04: Governments need money AI giants needs billions more but how much that can investors digest before losing their appetite?

00:00:12: So far technology has been holding up But rest of the industries The rest of market looks increasingly uncomfortable with rising yields And rising risk.

00:00:24: Who will keep buying at what price?

00:00:27: We are here to discuss.

00:00:28: Welcome to Swisscouts!

00:00:29: Daily, Market Talk is the eighth of October.

00:00:32: I'm Ipeko Skardeshkaya.

00:00:34: we will talk about the latest market moves and possible next direction.

00:00:38: but before we do as always please keep in mind that opinions on my own this isn't financial advice.

00:00:53: Renewed tensions, or I want to say the increasingly crowded headlines regarding existing and persisting Middle East Tensions weighed on market sentiment in yesterday's trading session because crude oil fluctuated up-and down but Brent has extended its gains above the one hundred two dollars per barrel level this morning with risk of further upside potential.

00:01:16: And the latter is pressuring global bond markets lower.

00:01:19: The global bond yields continue their upside trajectory pulling stock prices lower.

00:01:24: So the cyclical Stocks lost more than one percent in yesterday's trading session in Europe, versus a point twenty-two percent retreat in the technology heavy S&P five hundred on other side of Atlantic Ocean this morning.

00:01:39: Asian equities are under pressure on the back of rising oil prices and rising global yields.

00:01:46: Now looking to the bonds front, the closely watched thirty-nine billion dollar US ten year bond auction drew strong demand at five point thirty percent yesterday helping yields retreat from their highs in this session.

00:01:58: but a relief remain short lived.

00:02:00: unfortunately The ten-year yield is pushing higher again this morning ahead of a twenty two billion dollar thirty year bond auction due to show whether appetite extends through the longest maturities later today.

00:02:13: But even then, as we saw in yesterday's tenure auction there was no guarantee that yields will sustainably come lower or pose their climb as many factors continue to support higher government yields for its first the rising government debt, inflation worries and avalanche of corporate borrowing.

00:02:31: We will talk about all that later in today's episode but let us continue with the latest FOMC minutes for a minute.

00:02:37: They struck a hawkish tone yesterday.

00:02:40: All Fed officials backed their decision to hike interest rates by twenty-five basis points last meeting And most judge another rate hike would likely be appropriate before this year ends.

00:02:51: The menace also show that several believe race were still doing little to restrain the economy while strong demand and persistent inflation risk justify further monetary policy tightening.

00:03:02: As expected, the message is that September's hike may not be last for US but latest PC inflation & jobs data help softening language buying time before feds next move because these menaces belong to a meeting BEFORE THE LATEST DATA.

00:03:20: the Fed Ministry yesterday gave a fresh boost to U.S.

00:03:23: dollar, pushing the year-dollar below the one twelve mark again for second time over past week.

00:03:30: The pair has recovered to one twelve marks this morning in Asia but appetite full euro remains weak as well!

00:03:38: The pair is under pressure of stronger US dollar broadly on more favorable growth outlook for the US economy than the euro area economies.

00:03:47: And two, as European debt issues become a growing headache obviously for investors with a contagion risk to other european countries.

00:03:55: that cannot be ruled out.

00:03:57: In this context, The French-German yield spread spiked again To nearly one hundred and forty basis points.

00:04:03: yesterday After few days of spike I started hearing more bond investors tilting toward the short side of the peripherals trade against German bonds.

00:04:13: That means that they're selling Italian, Spanish, Portuguese and Greek bonds!

00:04:17: It's funny because right now we can no longer talk about core and peripheral countries in the euro area... We talked about Germany AND the peripherals but the situation in Germany is not necessarily rosy either.

00:04:29: Germany has its own issues too.

00:04:31: it IS ramping up defense & infrastructure spending.

00:04:34: some of this spending is financed through special funds outside regular federal budget benefiting from exemptions from the usual borrowing limits, but that still counts.

00:04:44: Off-budget doesn't mean off-the-government balance sheets.

00:04:47: German debt to GDP ratio is rising and it's expected to rise further in their coming years as that borrowing fades through.

00:04:55: As such Yes, there is no doubt.

00:04:58: Germany's relatively lower debt burden and reputation for fiscal discipline make it a less bad option for European bond investors.

00:05:06: I am not sure if this is the right choice for foreign investors.

00:05:10: From a growth perspective, the skies look cloudier in Germany by today.

00:05:15: Energy pressures hit its industrial economy harder than more service-oriented peers.

00:05:20: International competition challenges industries that once made Germany an export champion.

00:05:27: Here I'm specifically talking and focusing on German car makers, which are slow to embrace the EV shift.

00:05:33: they now face fierce competition particularly from China and slapping tariffs on Chinese EVs will only buy time for Germany but it won't save industry forget.

00:05:43: so my opinion My take is that fiscal spending may offer some support to growth in Germany But It Will Not on its own restore Germany's industrial competitiveness.

00:05:55: nor is growth potential, nor improves debt to GDP ratio.

00:05:59: So in a few years from now the German debt may no longer be what it used to be.

00:06:04: so What does this mean?

00:06:05: Well that means there are limited options and alternatives for US debt in the medium-to long run even though the U.S has his own debt issues too obviously.

00:06:15: but here at least growth expectations remain robust.

00:06:21: servicingly and heard suggesting that the Federal Reserve is actually doing pretty good job at the rising U.S.

00:06:28: debt and rising corporate debt to finance massive AI build-out.

00:06:32: that explains why we have such strong growth.

00:06:34: expectations are obviously bringing competition to the market, And that AI borrowing is nowhere new Slavic.

00:06:41: That's good news actually because well thats what keeping the economy together but its just.

00:06:46: these companies need money.

00:06:48: Earlier this one reports suggested that Broadcom would backstab a forty two billion dollar or sixty billion dollar AI financing package to support Anthropig and yesterday we learned that SpaceX is looking for another US USD to buy NVIDIA chips, an investment great debt.

00:07:10: Apparently the US USD raised in June was not enough!

00:07:16: I mean, these are extraordinary sums ladies and gentlemen And yet there always seems to be another financing round around the corner.

00:07:25: There is simply no end-to this financing appetite.

00:07:28: All that borrowing could keep pressure on long term government bond yields obviously As they increasingly compete with technology companies offering investors an extra yield To finance next chapter of the AI race.

00:07:41: Of course These deals do not mechanically push Treasury yields higher is important to note that the financing structure, timing and appetite for investors all matter.

00:07:52: But we know they help keep barbing costs elevated corporations, and also governments.

00:07:59: So given this decreasing appetite for Western bonds the Japanese funds could be repatriating their funds back home.

00:08:07: that would pull the ample Japanese liquidity from under the feet of global financial markets.

00:08:13: Now so far we have seen that ample liquidity elsewhere could counter the eventual Japanese gap.

00:08:19: I wouldn't be much worried about that today.

00:08:22: but in the West scalable and low risk options are running low.

00:08:26: So the question is, could gold step in at some point to be seen?

00:08:30: For now we know that the rising global yields are pressuring.

00:08:34: Gold prices lower on a short run as increased opportunity costs of holding non-interest bearing gold spooking investors and some of them actually cutting exposure even though the risks in global risk markets or increasingly higher end demands some portfolio diversification.

00:08:56: potential period of agitated waters there.

00:08:59: So I'm very interested to see where investors will be going next.

00:09:02: for now, technology and AI still look like that place where investors are seeking comfort but provided them.

00:09:08: more of the AI build out now relies on debt.

00:09:12: The question becomes sharper regarding whether the revenues will arrive quickly enough to paid interest bill A certain thing that higher yields did not slow the spending spree so far nor the stock prices AI related companies, but they made eventual payoff increasingly important.

00:09:30: as such.

00:09:30: The next earning season that will soon start will remain very important in determining whether the technology rally has more room to run despite the unideal macroeconomic conditions or not.

00:09:43: I hope it does though, because any disappointment and or downside correction in technology valuations all their earnings expectations would be catastrophic for brother risk markets.

00:09:54: So God save AI.

00:09:56: This is all for today.

00:09:57: I'm Ifeka Skardishkaya and thank you for joining me, And Thank You For All Your Beautiful And Supportive Comments!

00:10:04: I hope this episode of Market Talk has been helpful... ...and it's been insightful to you.

00:10:10: so please do not hesitate to leave your comments, reactions or questions below.

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00:10:34: So I will meet again tomorrow.

00:10:37: until then good day trading.

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