ROI-Three midweek thoughts — cresting capex, Burnham bounce and Ukraine-Iran: Mike Dolan

Former Manchester mayor Andy Burnham has been British Prime Minister for little over a week and already the ruling Labour Party has overtaken the right-wing Reform UK party in some opinion polls for the first time in well over a year. Is this just the honeymoon period or something more durable? Burnham has packed his first week with new cabinet appointments and a range of policy announcements. Despite the backdrop of renewed tensions in the Gulf and another energy price spike, UK financial markets have reacted calmly to the change of prime minister and everything he's said thus far. Looking at UK government bonds and sterling as a key test of that sentiment, they have both held broadly stable. Bigger tests lie ahead, though, with an autumn budget that's expected to outline Burnham's longer-term fiscal policies. But gilt investors will now have to gauge whether Burnham's success or failure in the polls is as much a factor as any of the numbers in his budget, given the huge uncertainties that would come with a government run by the untested Reform party. This week's headlines have been packed with Big Tech quarterlies, central bank meetings and relief from a triple-digit oil price squeeze, but strategists looking beyond these are also considering the potential cresting of the AI capex boom next year, an entangling of the wars in Iran and Ukraine, and a polling boost for the ruling UK Labour Party. With all the attention on this week's AI "hyperscaler" earnings, market anxiety is now squarely focused on their cash burn and the debt being raised to fund the gigantic capex cycle that's building out AI infrastructure. How long can it keep going and when will it all pay off? U.S. equity market bulls reckon that the cresting capex wave will not be a story until next year. Even though this means the cash burn would go on until the middle of 2027, the payoff will arrive without the type of slowdown in investment spending that could dampen the broader market's earnings outlook or sow a recession, they argue. In the interim, though, even the bulls say you should watch debt levels and credit default swap spreads for indications of any stress, or so argues Societe Generale's Manish Kabra. He reckons that the increase in credit spreads has depressed hyperscaler valuations to just 18 times forward earnings — the lowest since ChatGPT was launched in 2022. Even if the AI capex spending continues through 2028, its growth rate is expected to flatten out from early next year, and the related drop in free cash flow isn't projected to trough until the second half of 2027. "Credit markets are beginning to price the resulting extended funding requirement," Kabra wrote, explaining that SocGen is underweight hyperscalers but still bullish on the wider market and doesn't see this as a "big top" just yet. For the bears, however, the game is on already. Famed short seller Michael Burry last week upped his bets against chip stocks such as Nvidia and Micron and a range of other tech bellwethers from Tesla to Palantir. To date, geopolitical and investment analysts have viewed the raging wars in Ukraine and Iran as two very separate events with different aims, goals and protagonists — even if both have had an outsize impact on world energy supplies, global fuel prices, inflation and borrowing costs. But there was an intriguing overlap between the two last weekend as Iran condemned a Ukrainian attack on one of its commercial vessels in the Caspian Sea, accusing Kyiv of trying to expand its war. Ukraine counters that Iran has been directly involved in its war with Russia for much of the four-year conflict, claiming that Tehran designs and supplies drones deployed by Moscow. Kyiv, for its part, has offered drone interception technology to Middle East countries under fire from Iran since the U.S. and Israel attacked the country in February. Ukraine's President Volodymyr Zelenskiy, in Washington this week to meet U.S. President Donald Trump, claimed Russia was passing on its satellite observations in the Middle East to Iran. The seemingly intractable conflicts in both regions offer little hope of early resolution as it stands. If they were to be entwined in a deeper way, then the stakes for world energy markets and financial markets more broadly could be magnified greatly — in both directions.

ROI-Three midweek thoughts — cresting capex, Burnham bounce and Ukraine-Iran: Mike Dolan

Burnham bounce?

Crest of a wave

Two wars as one

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