SPY•What could move markets tomorrow?
Today's Key Market Moves
European and U.S. stock markets on Tuesday shrugged off a deep slump in Asia earlier in the day, following another sharp fall in oil prices and growing optimism around peace talks between the U.S. and Iran, while investors also awaited key tech earnings and the Federal Reserve's policy decision.
In my column today, I look at whether high and rising bond yields will slam the brakes on Wall Street. Intuitively, there's a good chance. But if rising borrowing costs are a reflection of stronger nominal growth and a healthy economy, then not necessarily.
Today's Talking Points
AI CDS
The cost of insuring against many of the biggest of the Big Tech firms defaulting is soaring to the highest in years. In some cases, like Meta, Oracle, Nvidia and Amazon, the highest on record. Granted, some of these companies had no debt on their books at all until recently, but the speed and magnitude of the move is quite something.
Will these firms ever default? Unlikely. Despite the growing debt load to fund AI spending, they're still massive cash-generating enterprises. Microsoft has a triple-A credit rating, higher than the U.S. federal government. But the signal CDS traders are sending is clear — AI capex is reaching bubble territory.
Rotation, rotation, rotation
The U.S. semiconductor index is technically in a bear market, down 25% from its high on June 22. Yet the Dow is less than 1% from its record high, and the S&P 500 is 2% away from its peak. The resilience is impressive, especially considering the churn and selling is most pronounced in the sectors and megacap names that have powered Wall Street's rally until recently.
Rotation has kept the main U.S. indices afloat. Financials and healthcare hit record highs on Tuesday, while industrials, consumer staples, utilities and materials are performing strongly. The Russell 2000 small-cap index, only 3% off its record high from earlier this month, is up 19% so far this year. Earnings growth expectations, however, are still heavily skewed towards tech and related sectors. They could still exert a strong downward force on the broader market if they disappoint.
Fighting the good family fight
We're less than 24 hours from one of the most uncertain Fed rate decisions in years. The probability of the Fed staying on hold vs raising rates has shifted to 70-30 from 60-40 on Monday, but even pricing a 30% chance of a hike on the eve of the decision is pretty extraordinary.
That's one consequence of abolishing forward guidance and wanting to make every meeting "live". Fed Chair Kevin Warsh said the debate around the FOMC table in June was like a "good family fight" — a robust, frank and no-holds-barred exchange of views can be expected again, although whether they all still love each other at the end of it is an open question.
