•Meanwhile in markets, bonds are rallying hard. And at the same time, several key equities that are at the forefront of the AI investment boom/bubble are taking a beating;

•Overnight, the US 10y Treasury yield dipped below the key psychological level of 4.00. Furthermore, the 10y Treasury yield is now way below the 50, 100, and 200 DMAs. The yield curve has bull-flattened aggressively, with the 2y10y spread having narrowed by about 15bps over the past weeks. The low point of the USD OIS forward curve points to two to three Fed cuts in the next twelve to fifteen months or so;

•At the beginning of the year, I called the 10y Treasury yield at about 4.25% fairly valued and a good buy with a real yield of about 1.75%. The real yield has shriveled to 1.6%. Though clearly less attractive than before, the 10y is still investable;

•Regarding the AI side of things, Coreweave, a tech company that rents out computing power for data centers, was at one point down about thirteen percent in the wake of its quarterly earnings release last eve. The driver of the sell-off in the stock is all-too familiar: worries that massive investment spending might never pay off.

•Furthermore, earlier in the week, markets gave a lukewarm response to Nvidia’s earnings. Despite both the earnings and the outlook soaring past expectations, the market has focused on other stuff like circular financing. It spent more than $70 billion on acquiring shares of its customers last fiscal year. According to the wires, that’s a big increase compared to the prior fiscal year, though comparable numbers aren’t mentioned. Regardless, Nvidia spends a huge chunk of its operating cashflow of a hundred billion dollars on propping up its customers;

•Then there’s Oracle, the bellwether for AI-related credit stress. Its CDS spread edged up to 161bps, a post-Great Financial Crisis high. We should not get too carried away by AI-doomism though. Our AI index, which contains the big names like Nvidia and Google, is trading flat for the week;

•I think the bond market is very sensitive to the AI boom/bubble for the simple reason that the massive investment spending is propping up headline growth. Without AI, and with the US consumer running on fumes (dissaving massively), growth would be mediocre, soft, or even meagre. Then there’s the dreaded R-word. Remember that historically, a collapse in business investment – not consumer spending – has triggered recessions;

•Bond market-adjacent stocks – that is: defensive sectors – continue to outperform. While the Stoxx 50 is up 0.5% for the week, defensives like utilities have gained almost five percent this week, boosting the YTD gain to more than sixteen percent. AI losers are staging a (dead-cat?) rebound. For the week, our European AI losers index is up more than two percent. Salesforce, a US stock that got caught up in the AI displacement narrative, has gained almost eight percent this week. Still so-called AI losers are nursing stiff losses, and the recovery is thus only partial;

•Elsewhere, Brent crude has managed to stay above $70 a barrel as the US-Iran nuclear standoff continues. Oman-mediated bilateral talks in Geneva were successful if you believe the Omanis. Regardless, ‘technical discussions’ between the two sides will take place in Vienna next week. Gold is up a percent or so for the week while broad commodity indices are near the highs of the year. The broad dollar is down a tenth of a percent or so for the week. Keep an eye on CNH as the PBOC has removed reserve requirements for holding short yuan positions in the forward market. That’s another attempt by Beijing to slow the yuan’s appreciation;

•Looking ahead, the calendar isn’t very exciting with just Eurozone member states CPI readings for February and US PPI for January on tap. Next week, we have quite a few ECB-speakers, which we will gauge for support of a rate cut – remember that President Lagarde has suggested that the central bank might exit its ‘comfortably on hold’ position. The main event next week is the monthly US labor market report to be released next Friday.

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