Stocks & Bond Yields at Record Highs...Something Must Break

The Art of Investing

The episode examines recent volatility in global markets, specifically focusing on the surge in US bond yields following unexpectedly strong

Key takeaways

• US Treasury yields have risen sharply, with the 30-year bond reaching 5.42%.
• Strong US PMI data (Manufacturing at 57 and Services at 58.7) has increased market fears of further interest rate hikes.
• Meta's new 'Muse' AI agent app is impacting the financials, insurance, and travel sectors by automating price comparisons.
• SoftBank is raising significant capital in dollars and euros at high yields between 9% and 10%.
• The concept of 'fiscal dominance' is discussed as a risk where high government debt levels may compromise central bank independence.

Main topics

• Bond market volatility
• US economic PMI data
• AI and agentic technology

Notable quotes

What is going to be the straw that breaks the camel's back in the bond market.

Conclusion

Investors face a complex landscape where strong economic growth and AI

Transcript preview

Speaker 4 (0:00) Cracking show coming up. We've got Stu Thompson, our resident strategist, questioning what is going to be the straw that breaks the camel's back in the bond market. And then Chris CJ Fellingham, he's sitting on the fence. Will we, won't we see a decision on the portfolio from the chairman? And what about this man? What is it going to take to see him reduce some exposure to equities? Is today the day with the bond market explosion? in the last 24 hours. Back for another episode of your favorite podcast, The Art of Investing, brought to you by IG, the global investment platform. Joining me as always, we've got Mark Spiceholden. Hi, Rich. Chris CJ Fairlingham. Hey, Rich. And our resident strategist is back. Yes, it's Stewie Thompson. Hi, Rich. So let's take a quick look at the model portfolio performance then. A reminder, the three of us run this to put our money where our mouths are each week. It's looking good, up 2.2 % on the week. That leaves us up 25.5 % since inception and up 13 % on the year. Slightly flattered because we're recording this on the Thursday. We snap it on a Wednesday evening, but the bond market erupted yesterday, which is going to be our main discussion on the show. The macro implications of what is going on right now with interest rates, three big decisions. last week. We're going to cover all of that and what are the implications for your portfolio at home. So without further ado, let's get into the Spice Market Update. Speaker 1 (1:42) Right. Well, thanks, Rich. Just a reminder, it's been nine days since we last updated you, so there's a lot to pack in. I'll try and run through it very quickly. The main events, really, that we've had, as Rich mentioned, three of the major central banks have had their meetings and their press conferences and their interest rate decisions, and that's now behind us. The oil prices had a big fall, down about 8%, although overnight it's had a bit of a rally. And that's because Trump and the Iranian president have had a bit of a conversation, apparently, that was very productive, in his words. But then straight after that, Iran came out and sort of said, well, we're not so sure about that. But that's why the oil price went up again overnight. But it's still nevertheless hanging around just below $100. And the last time we updated you, it was $108 at Brent, that is. So with the oil price down about 8%. There's been some all-time highs, believe it or not. I haven't been able to report those for a while. NASDAQ 100 takes out its all-time high. It took a while coming. From June, that took the last time. So, yeah, there's a decent move. It was Speaker 4 (2:41) by about three points and then collapsed. Speaker 1 (2:43) Yeah, but every little catch. Every little catch. Speaker 3 (2:46) The Speaker 1 (2:46) high is a high. Speaker 3 (2:47) It's getting in the way of a good story. Speaker 1 (2:50) And part of that NASDAQ rally was led by the Magnificent Seven. But also, copper also took out its high. And we've talked about that now. The last month has been sort of up a lot and down a lot and up and up, but it's taking almost one step backwards and two steps forwards. So that's more positive. And you'll see that's the major contributor to our portfolio later. In the background, the chip sector has been leading the sort of markets higher, particularly NASDAQ and the Magnificent Seven. That was led by NVIDIA. Their shares are up about 7 % over the week, very near their all-time high, not quite there. And they said they were basically going to sell twice as many chips next year. as they are this year. And that was a small positive that wasn't expected. So Intel shares went up 23%. Micron shares went up 17%. Micron have got results this week on the 30th of September. So we'll see what they've got to say. Let's hope they keep the positive momentum. Apple nearly hit an all-time high as well. Basically, if you try and buy the new iPhone 18 in the UK, they're pretty much sold out. But the biggest news really was probably from Meta, who obviously owned Facebook. They launched a new iPhone. app called Muse, which is basically like an AI concierge, an agent in your pocket, who goes around price checking for you, things like insurance, your banking rates, savings rates, etc. And actually, that really hurt the banks and insurance companies, and the travel companies as well, because obviously, competing for lower costs of hotels and a bit like you would do on booking.com, whatever it must be. But at the end of the day, so... Over the week, the technology sector was the best all around the world, up about 7%. The worst was the oil sector, down about 7%. But the financials hit by that new app from Meta was down 4%. And it also didn't help that Goldman Sachs also had a profit warning, saying that their profits in their bond trading division... We're disappointing. And we'll talk about that now. Maybe they're a bit too bullish. Funny old game. Speaker 4 (4:44) Now, just to warn anybody that tries to go straight onto their app store and download the Muse app, I did exactly that on Monday. One of the biggest ever launches and one and a half million Americans downloaded it on Monday. And that's had the stock up 11%. So on I go, download it, search Muse, and I get Meta AI. So yeah, that must be it. And I spent an hour trying to get this thing to do all my jobs and sort my emails. And it wouldn't do it. I thought, this is ridiculous. You've got to short this stock. It was the wrong app. So Speaker 2 (5:17) Muse is not available in the UK yet. Speaker 3 (5:20) So you've just given all your bank details to a firm in South Korea, sorry, North Korea, who are now emptying things as we talk. Speaker 2 (5:28) But Speaker 3 (5:28) never Speaker 2 (5:29) mind. Speaker 3 (5:29) It is all great, this stuff. It's all good. It's just the Speaker 4 (5:32) metaverse. Speaker 1 (5:32) Yeah, it's just the metaverse. Yeah, I think the reason it's caught people's attention because actually the downloads, I think, in the US are 3 million by the end of the first week or so. And that's nearly 50 % higher than ChatGPT got when it first downloaded. So, you know, the signs are good still that AI people want to get involved. And that's very positive. Speaker 3 (5:52) Can I interrupt just for a second here? Because I asked Spice about this today. Now, I understand that I'm a dinosaur. I'm a bit old. I don't want to give people my bank details, my passwords to get into my accounts. Does everybody feel happy just to do that? Am I just unusual? Speaker 4 (6:08) No, it is incredible. So I have set up ChatGPT linked to my email and the productivity of everything, all the jobs that are sitting in your emails there that are just mundane. Give us Speaker 3 (6:22) an Speaker 4 (6:22) example. Don't talk in generalities. Give us a bit of detail. You get an email through and you have to fill in a form, right, of a checklist of everything. Your chat GPT knows all that details. It can go on there and it can click onto a website. It can fill everything in, gives you a final check, and then you just hit go. And then I had to send all my VAT receipts onto an app. So then it goes to the accountant and the accountant can check all that. I don't even have to do that. It checks your whole email inbox for business receipts, loads them onto the app, and then writes an email to the accountant telling you that it's all up to date. But Speaker 3 (7:04) you don't need to give any of your passwords or anything like that. I haven't done that Speaker 2 (7:07) yet. Speaker 3 (7:07) I Speaker 2 (7:07) suppose Speaker 3 (7:07) if you're going to use it to Speaker 2 (7:10) pay bills, like, you know, find insurance Speaker 3 (7:12) and sort it out for me, you will have to give them those details. I'm just a bit nervous about it, to be honest. Speaker 4 (7:18) And that is an interesting... Amazon have actually banned Muse. So you cannot get... Speaker 4 (7:24) your agentic AI to go onto Amazon and buy stuff for you because they blocked it. Okay, that's interesting. Thanks, Rich. I feel educated. Speaker 3 (7:32) As this show always does to me, I feel I understand a lot. Speaker 1 (7:37) Well, one of the other things in talking of education that Trump is desperately obviously trying to get the oil price down. Sorry, we're talking about education? Yeah, exactly. Sorry. Noxiemoron, I know that. Sorry, Voldemort is basically trying to obviously get the oil price down and therefore the petrol and the diesel price down in the US. But the diesel price has pushed on up again this week, despite the fact that the oil price itself fell. So it's now at a record all-time high of $6.50 a gallon in the US. But just to make us feel a bit worse, that's still nearly 50 % cheaper than it is in the UK. Nevertheless, he's failing in that sense. And that's because the... the refiners are not being able to get the product in time. And so they're running behind the demand and that's pushing the price up. The only other thing I want to talk about really this week of major importance in this sort of broad asset sense is that the US dollar has had another very, very strong week. And we'll talk about that. That was partly due to the Federal Reserve and some very strong economic data that came out of the US. But there's an index that sort of tracks the big dollar sort of... foreign exchange crosses, as they're called. One's called the DXY, the dollar index. And that was up 1.3 % this week. Now, that was set up in 1973 after the Bretton Woods, the end of the sort of gold standard and the fixed exchange rate that ended in 1973. And so as a result, the euro is about 58 % of that index. So it's a huge sort of driver to what happens to when we say the dollars move 1.3%. A lot depends on what's happened to the euro. 58 % of that index is the euro. 14 % is the Japanese yen. And guess what? The pound sterling is 12%. Totally different to if you were weighting on gross domestic product around the world. We're much smaller than that. And then in Asia, they have this thing called the Asia dollar index. And that's much more modern in the sense that it actually goes with the weightings of the economies in that area. Asian dollar index basically is dominated by the Chinese renminbi, the Chinese currency. That's about 48 % of that index. The Korean won is 12 % and Singaporean dollar is about 12 % as well. Indian rupee about 10. But both those indices have had a big move in the last week. And that's, you know, in the background, you know, people have sort of bearish of Trump and expecting the dollar to come under pressure. And actually, the opposite is true at the moment. And the US seems to be pulling in quite a lot of capital. No doubt something we'll talk about later on. The only other thing I want to talk about, which we've had a bit of a quiet spell, but there's been some big money raising to put into AI, this time from SoftBank in Japan. Now, a few weeks ago, we were talking about the fact that they wanted to raise about a trillion Japanese yen, which is about $6.3 billion. And they raised that money. through retail investors in Japan in local Japanese currency. And they paid an interest on that of 4.75%. And that was, you know, that's considered quite sensible. And that's what we call investment grade. So it's quite high quality. Well, this week, they've announced they're raising $10 billion and 1 billion euros, but this time issuing it in dollars and in euros. And they're paying... between 9 % and 10 % interest on that debt, which is a big, big difference. It's being rated by the rating agencies who can tell you the sort of quality of this debt and where it stands in the pecking order if the company goes bust again paid back. And it's coming in at what you call a high yield. So it's not investment grade. It's the one below that. Junk. Almost junk, Speaker 3 (11:21) what some people say. If it's not investment grade, it's junk. Speaker 1 (11:25) Okay. But anyway, basically, they're raising lots of money because they're investing in, well, part of the reason they want to invest more in OpenAI, which they obviously own ChatGPT. They've got a 13 % stake in that business and they want to keep up with the funding rounds that are going on. Speaker 4 (11:39) That's why it's junk. Speaker 3 (11:39) Yeah. I think it's a good thing to just remember for our discussion later, but they're happy to pay returns of 9 % to 10%. which means they're expecting returns on their investments a lot, lot higher than that to make it worthwhile. And you wonder if that's the case, how many other businesses out there are confident enough to borrow at 9 % and 10 % because they think that their returns are higher. And that's going to be a classic example of the cost of capital, the competition for capital, which Stu will talk about a bit later on. But that is really interesting stuff. And Speaker 4 (12:10) Stu, just remind us what this term, the competition of capital, where did that come from? What does it mean? Speaker 2 (12:16) Competition for capital. is the idea that the higher yields go, they start to take capital, sucking capital away from other markets. Because government bonds, they're the safest instrument. So if you can get a good return on your safest instrument, why take the risk? And that tends to take money away from the riskier markets. They tend to weaken up and that tends to balance out competition for capital. Speaker 1 (12:46) Okay, so the final thing I wanted to mention in the market update before we go on to talk about the other stuff is that we've had some very strong economic data out the US again, and that had a big bearing on some of the bond yields that we're about to talk about. So they have what are called the PMIs, the Purchasing Managers Index. They were expected to be at about 56, a number of 56. Anything above 50 means that things are positive and expanding. Anything below 50 means things are contracting and maybe... getting tougher. So we expect if the economy is growing for numbers to be above 50. Well, the composite between they have services PMIs and they have manufacturing PMIs, both of which are very strong. So the manufacturing PMI was 57. It was expected to be 53.7. The services PMI was even stronger, 58.7, expected to be 56.5. So overall, it came out at about 58.4 against an expectation of about 56. And that's the highest since 2021. So for five, that's the highest in five years, showing the US economy is beginning to accelerate again. Now, within that, they point out what they need. They have a new orders price input, input prices index as well. And that came in at 66.4 against last time it's 59.9. And that is what spooked the markets yesterday, along with some of the central banks. Because as soon as that number came out, people drove down into it and bond yields started rising, bond prices started falling, and equity markets came off pretty heavily on the back of that as well. Speaker 4 (14:24) So the economy is strong, but prices for new orders were especially higher. Very Speaker 3 (14:31) strong, Speaker 1 (14:31) much higher than expected. Speaker 3 (14:32) And back in the old days when I was a trader, The series that we talk about here is the National Association of Purchasing Managers. We used to call it NAPALM because it affects all markets. Could be a bit like that. And yesterday, that's exactly what happened. It Speaker 4 (14:46) burnt up those bond yields. Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance Speaker 2 (14:59) is not an indication of future results. Speaker 4 (15:02) Well, let's look how... It was looking because it's the prettiest picture that you might see for a while. And this was when the squeeze was happening. And you can see the effect on the week up 2.2%. But copper, as Spice mentioned, a really strong week up over 8%. The Nasdaq 100 up 6.4%. And then emerging markets up 4.3%. And the Nikkei up 3.8%. Just really... risk on. So was that because of a really positive message coming from the Fed? Or was that everybody was hedged, maybe even short, and risk had been taken down going into last week? Speaker 1 (15:43) I think we talked before about the way that a high oil price had been sucking in capital from governments and central banks who were having to pay a higher price for oil, so couldn't invest in other commodities. But as I mentioned, you know, the oil price is down about 8 % over the period we're talking about. And that meant that there was some sort of relief for those central banks to go and buy some other sort of commodities. And copper, as we know, is an integral part of the AI boom. And that's one of the main reasons it went up, I'm sure. But also the fact that we had such positive news from the AI market with Meta and NVIDIA. Intel, et cetera. And so I think the combination of a lower oil price and stronger AI definitely