Yield Blind

00:00:00: Hi everyone and welcome to Swiss Codes Daily Market Talk.

00:00:04: It's Friday the fifteenth of May, what a week it has been again!

00:00:08: The data released this week confirmed that inflation is rising globally and rising faster than expectations.

00:00:15: Bond deals are reacting by screaming higher as well.

00:00:18: Oil console days above one hundred dollars per barrel level with no major progress in the Middle East conflict.

00:00:24: but none off seems too meta for equity investors.

00:00:28: The S&P five hundred NASDAQ hit fresh record highs again yesterday as investors continue to throw money at the AI trade.

00:00:37: The question is, are investors missing something?

00:00:40: So we will talk about that and more but before Now.

00:00:58: let's start with this week's summit between Donald Trump and the Chinese President Xi Jinping.

00:01:03: Well, The Summit went pretty well except a few sticky points around Taiwan!

00:01:27: But at the end of today, The two countries somehow agreed to ease trade tensions.

00:01:32: mostly on non-critical sectors, agreed on some investments.

00:01:36: China even said that they would help with the Iran negotiations to open the strait of

00:01:41: wholeness.".

00:01:42: So Marcus Reilly with joy ignoring the ongoing Middle East sanctions somehow their impact on oil prices and inflation figures.

00:01:50: because yes, inflation data released throughout this week confirmed rising inflationary pressures in the Eurozone And warned that inflation on both consumer and producer and were accelerating faster than expected in the US as well.

00:02:03: The latest U.S.

00:02:04: PPI data jumped to six percent in April, the highest in more then three years!

00:02:09: The Japanese PPI print this morning echoed a similar rise.

00:02:12: it came in at an eye-watering five per cent level – the highest since mid-summer of So rising inflation kept pushing bond yields higher around the globe, reflecting the continued hawkish pricing across global central bank expectations.

00:02:28: In this context a US two year yield that best captures the Fed rate expectation spiked past four percent level.

00:02:35: and wait!

00:02:35: The Japanese ten-year yield spiked more than three point eighty per cent just today to nearly two point.

00:02:43: seventy five percent levels in Japan are above the one point.

00:02:50: seventy five percent mark pointed as the level where Japanese institutional investors like life insurers, pension funds and banks could start seriously preferring domestic bonds over the hedge foreign debt to remember.

00:03:04: And that's quite dissquitting to say the least.

00:03:06: US crude on the other hand is pushing higher again this morning above the one hundred and two dollar per barrel level as traders are swinging between clashing announcements from Donald Trump today, saying on One Head That The U.S could live without the Strait of Hormis a few hours before urging reopening the strait off Hormes.

00:03:24: Meanwhile, the u.s oil inventories fell four point three million barrels last week at around twelve million barrels over the past three weeks are rising due to the Middle East's tensions filling the gap.

00:03:38: And energy prices will likely remain elevated in the foreseeable future, given the little progress that we see on the Middle-East stocks and many consumers facing companies like McDonalds for example have been insisting that US consumers run out of money at retail.

00:03:53: sales.

00:03:54: data released yesterday hinted at resilience again in April but underneath the surface.

00:04:00: Thirteen point one percent of US credit card balances are now ninety plus days delinquent and that's the highest level since two thousand and eleven.

00:04:10: It simply means that Americans today borrow to spend, And they're delaying their credit repayments.

00:04:16: That sounds like a ticking bomb.

00:04:18: But guess what?

00:04:19: The S&P five hundred Nasdaq didn't care at all.

00:04:22: Both hit fresh record high yesterday No matter What?

00:04:27: And indeed, technology has done amazingly well since the beginning of the war in Iran.

00:04:33: Somehow getting away with rising energy costs and supply chain disruption risks.

00:04:38: It's not that these companies are buying stuff from Middle East or they're not paying for energy but AI growth outlook.

00:04:44: An optimism that the latter will accelerate revenue generation is outweighing digital political challenges.

00:04:51: Simply Brown Hills Magnificent Seven ETF For example rebounded nearly thirty percent since the war did to a fresh all-time high level again yesterday, supported by strong earnings and even stronger guidance.

00:05:04: Cerebras for example which is an AI chip company that went public yesterday served on a giant wave jumping around seventy percent in his first day as publicly traded company giving it market cap of about ninety five billion US dollars.

00:05:19: It's been biggest IPO after years so far.

00:05:22: So globally, investors totally brushed aside the circular deal worries.

00:05:26: Remember those?

00:05:27: And their frustration with massive AI spending from technology companies increasingly financed by debt.

00:05:35: But no one cares about that and no-one cares either!

00:05:38: That's curious and somehow dissquitting.

00:05:41: Because yes, the technologies stocks have done very well during the latest Federal Reserve tightening cycle post-two thousand twenty two to fight the post covid and a post Ukrainian war led energy crisis.

00:05:54: And one of the reasons for that was because the big technology companies like Microsoft, Google or Meta had ample free cash in their hands and relatively lower debt compared to other companies which made them less sensitive to interest rate hikes.

00:06:09: also defying the theory that growth stocks would be hit harder by higher interest rates as they're valuation is highly dependent on future revenues when discounted to today would be smaller if interest rates rise.

00:06:23: Today, investors treat the technology stocks in the same way thinking that technology stocks could simply defy the Iranian war, the rising energy prices and inflation expectations as well as the prospects of tighter than otherwise monetary policy from around world.

00:06:39: The problem is this!

00:06:40: The massive capital expenditure is tapping into their free cash flow and oblige these companies to seek funding through bond markets.

00:06:49: That kind of sucks because that makes the big technology companies more vulnerable to interest rate hikes compared earlier cycles.

00:06:57: Take Amazon's one-and a half percent coupon bond due June, two thousand thirty for example.

00:07:02: it now yields around four point forty percent.

00:07:04: It still covers US inflation and offers a certain premium but the price is falling as inflation expectations push the U.S.

00:07:11: yield higher.

00:07:12: That means that cost of borrowing is rising for technology companies, that are together expected to spend up to one trillion US dollars in AI infrastructure this year.

00:07:23: And what happens if these companies just back down?

00:07:25: What happens If they decide to reduce their AI spending?

00:07:29: well it will be worse because the actual valuations are fueled by the prospects or future AI led revenue but if the company stopped investing They would hurt capacity constraints that could limit income potential scenario that's not favorable for valuations.

00:07:44: Or maybe it is me, but I feel today that Microsoft services are somehow slower to react and ask exactly what these companies are trying to avoid.

00:07:53: Second the circular nature of this deal suggests if one company backs down its could trigger a domino effect across all other companies in the same circle.

00:08:03: You know the anthropic circle.

00:08:04: The open AI circle.

00:08:06: So, big technology today is at an important crossroads.

00:08:09: Investors have digested massive AI spending, circular deals and high valuations.

00:08:16: For the rally to extend further, the macroeconomic context should also remain supportive.

00:08:21: And today, looking at the global yields.

00:08:23: The macro context is not supportive.

00:08:25: and longer the Middle East war prolongs the higher energy prices rise and fuel inflation expectations and borrowing costs to hire the cost of building that extra data center will be.

00:08:36: This, I believe is a red flag that many technology investors have been completely ignoring today.

00:08:41: Certainly blinded by the shiny earnings and even shinier earnings expectations.

00:08:46: but i would still keep in mind at these expectations do not fully reflect the risk of another period of sticky inflation.

00:08:53: And this time around The big technologies got less cash In their hand to temper the stormy oceans.

00:08:59: LL there's one more possibility Of course That Iran war will end The inflationary yields Will come down and Marcus will further rally on belief.

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00:09:49: So I will meet again next week.

00:09:52: Until then Good day trading and have a lovely weekend.

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