Those who have been in markets for a long time know that credit markets lead the equity markets.
A few weeks ago, we showed how rising widening IG spreads for hyperscalers are raising investor concerns about ballooning off-balance-sheet debt and rampant circular financing in the AI ecosystem.
After Jensen announced raising $500 billion from Wall Street giants and backstopping 25% of the chip value, NVDA’s CDS has risen sharply.
This week, we saw Broadcom seeking to raise $100 billion via an SPV.
While the short-term stock price moves are noise (especially as we head into earnings), the credit markets are unhappy.
Undoubtedly, credit markets are nervous about the scale of circular financing, and it’s inevitable that the risk will spill over to equity markets sooner rather than later.
Furthermore, a new stealth model, Ox Alpha, was released this week, which, according to experts, is beating Sol and Fable on coding.
The astounding fact is that nobody knows who built the model.
The progress open-source models are making will create significant challenges for frontier models.
We continue to hover around YTD highs. Slight underperformance is due to high cash holdings and underperformance of China & India, which we believe will fade away before the end of the year.
Let us take a deep dive into the macro universe and comprehend the cross-asset price action.
US/Equities/Bonds/Gold/BTC/Oil/Dollar!
It was a data-light week in the US.
Industrial Production grew 0.2% MoM in July (slightly below expectations) v/s 0.3% MoM in June.
When we zoom out, semis and electronic components output has nearly doubled since 2017 while the overall industrial production has grown by just 3% since 2017.
We will now do a short analysis on the bond markets.
As of yesterday, the bond markets are pricing in roughly one Fed hike before the end of 2026 (22 bps).
However, at the short end, the 2Y is 59 bps above the EFFR (Effective Fed Funds Rate).
Historically, the next policy move was a rise in 12 of the 14, with a median of three months. Twelve-month yields were higher in 8, lower in 2, and barely changed in 4.
The short end is being pulled away from the EFFR as the bond market mutiny continues, and it’s screaming that it’s time to hike rates.
PS: January 1993 wasn’t the 2-year being wrong; it was the Fed being slow: the gap stayed open 14 months, and then the Fed raised 264bp in a year.
The curve is steepening, led by the long end.
While we are at two-decade highs for the long end, the term premium is still at 90 bps.
Note that pre-2007, the term premium was constantly above 100 bps.
So, we are witnessing normalisation after two decades of excesses.
Equities!
First, the equity sentiment index: