Several market warning signals sit close to crisis levels as investors grapple with high oil prices, Middle East conflict and a sputtering AI trade. Margin debt hit a record $1.5 trillion in June, and 30-year Treasury yields have held above 5% for their longest stretch since 2007.
Several crucial market warning signals are close to crisis levels as investors grapple with high oil prices and Middle East conflict, while the AI engine that has powered the stock market sputters. A pause in attacks in the Gulf has pulled oil back from the $100 mark, but prices remain elevated enough to threaten a pickup in inflation. Those inflation worries are keeping long-term government borrowing costs at levels that typically spell trouble for risk assets.
The AI engine sputters
The rally in shares tied to AI is hitting a wall of concern about profitability, cash burn and an erstwhile scarcity of semiconductor chips giving way to a damaging glut. Tech earnings are coming in hot, but investors are looking for revenue and profits that will justify the cost of the AI buildout well into the future.
With markets anticipating U.S. rate increases this year, AI hyperscaler bond yields are climbing faster than those on Treasuries, and the cost of hedging a deterioration in creditworthiness has soared as the rally in semiconductor stocks falters. Positioning points the other way: the ratio of bullish to bearish positions on Nasdaq futures is at a 17-year low after investors ditched tech stocks, suggesting room for money to return.
Record margin debt leaves investors in deficit
That said, the equity-market bull run is fuelled by record borrowed money, which grows along with the market itself. Margin debt hit a record $1.5 trillion in June, according to the Financial Industry Regulatory Authority, leaving investors’ net balance with their brokers in a $1 trillion deficit for the first time. Investors who owe more than they have in cash are far more likely to sell into declines in stocks than to buy them.
The 5% test on 30-year yields
U.S. 30-year Treasury yields have remained above 5% for the longest stretch since the early days of the financial crisis in 2007. This level is not necessarily a trigger for a market selloff, but higher long-term rates can raise the costs of loans such as mortgages, squeezing consumers and possibly undermining President Donald Trump’s affordability push ahead of the November midterm elections.
Raymond James Chief Investment Officer Larry Adam says spreads on some of the riskiest corporate bonds had reached a 15-month high, suggesting markets are demanding more compensation to lend to weaker borrowers. He links that to markets pricing in tighter Fed policy and a more challenging environment for the weakest borrowers: “Investors are increasingly more discerning”.
Oil and the yen flash red
Oil has retreated from $100, but it is still up 27% in dollar terms on an annual basis — positive for U.S. producers, punishing for non-U.S. consumers. Euro zone and UK importers are paying nearly 30% more than they were a year ago. Indian refiners are paying 40% more for Brent-linked crude, although they have been big buyers of heavily discounted Russian oil for the past few years.
The yen, trading at almost 164 per dollar, has slumped to four-decade lows, and investors are on edge for potential intervention by Japanese authorities to shore it up. Low interest rates and historically low volatility have made the yen a popular funding currency for carry trades — borrowing in yen and investing in higher-yielding assets such as U.S. stocks and bonds. A sharp appreciation in the currency in the case of intervention could force investors to unwind those positions quickly, as was the case in August 2024.
Source: Investing.com
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