Weekly Comment: Who’s the house now?

7 minute read

Back in September, US Treasury secretary Scott Bessent declared “I am the house now”. The metaphor was borrowed from the gambling industry—the casino always wins! At the time, Bessent was looking to convince markets not to bet against the Japanese yen. After the US had intervened alongside Japanese authorities to support the yen and after claiming he had asymmetric information to hand, he challenged markets to “bet against me if you want”.

A widely held view was that Bessent’s real aim was to support the US Treasury market. For yields on US government bonds have risen strongly this year for a number of reasons, including high inflation, ever-rising national debt levels and robust economic datasets. And with Japan being the biggest holder of US Treasuries, the fear was the country would sell down its US government debt holdings to prop up the yen putting further pressure on yields. Around the same time, Bessent’s department announced it was upping its Treasury buyback programme from US$4bn to US$6bn. The signalling seemed clear: the rise in yields had gone too far. So, has Bessent’s ‘house’ posturing done the trick? Certainly not immediately as the yield on the 10-year Treasury hit 5.31% on 5 October having been 4.83% at the time of the quip. By 16 October however, the 10-year yield had fallen to 5.08%, almost back to September’s levels. So, the question is…

Market overview

Is Bessent really “the house”?

A closer look at last week’s drop in yields reveals that a large part of the move occurred on 14 October—the 10-year yield fell nine basis points. True, that was the same day the US Treasury announced its latest US$6bn buyback. But before declaring Bessent is indeed the house, it’s worth bearing in mind that the US$6bn buyback is but a drop in the US$32tn ocean that is the US Treasury market. Also, the latest buyback was just the latest in a series, raising the question why should yields have dropped meaningfully this time round?

A more plausible explanation

More likely is that yields fell as part of a wider risk-off move in financial markets. For last week the wings of the previously high-flying tech sector were clipped as doubts surrounding the sustainability of the artificial intelligence (AI) trade weighed on sentiment. The cause? A series of negative news stories. There was the pulling of the Initial Public Offering (IPO) of Firmus, a data centre operator backed by Nvidia and Blackstone that, at A$44bn (US$30.5bn), would have been Australia’s second-largest IPO. This was followed by fellow Australian data centre company AirTrunk pulling the plug on a Singapore listing. Then there was leading frontier lab developer Anthropic’s 50% jump in Q3 revenues to US$16.8bn—turns out 50% was below expectations and represented a slowdown on growth rates seen earlier in the year!

The above fed growing concerns over how the great AI infrastructure roll-out required to power the technology would be financed and connected to this, whether AI usage and returns would reach the levels required to justify the trillions of dollars being invested. Cue a risk-off week. Demand for the relative safety of government bonds triggered a drop in yields; while in the world of equities, technology names found themselves shunned. Such has been the leadership of the AI trade that this was enough to drag the overall global index lower. Not all stock markets were down, however. Those with less AI-exposure ended the week in positive territory (step up Europe and the UK).

AI-heavy stock markets down. AI-lite ones up. Government bond yields lower (despite stronger-than-expected US inflation data). If anyone, or rather anything, is ‘the house’ in today’s markets, it’s the AI-trade, as if we didn’t know. Trouble is, ‘AI am the house’ works both ways.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week 1.6% lower. The year-to-date (YTD) gain now stands at 12.9%.

United States:

US stocks underperformed courtesy of a 1.9% decline (+13.2% YTD). Home to the world’s biggest technology names, US benchmarks were always going to struggle with the AI trade in retreat. Not even a decent start to the Q3 reporting season helped. True, only 9% of US large cap stocks have so far reported but of these 84% posted a positive earnings surprise and 67% better-than-expected revenues (source: FactSet). Given the AI weakness it was no surprise then that growth stocks were on the backfoot, ending the week down 5% (+3.1% YTD). Value by contrast managed a 0.9% gain (+23.0% YTD). Small caps were somewhere in between, falling 3% (+10.8% YTD).

The risk-off sentiment saw US Treasuries shrug off a stronger-than-expected consumer price index (CPI) print. At 3.7%, September’s year-over-year (YoY) reading was above forecasts of 3.6% and an increase on August’s 3.4%. Notably, core CPI, which strips out food and energy, came in at 2.6% YoY compared to expectations of 2.4%. It was a similar story with the producer prices index (PPI) which showed wholesale prices up 6.3% YoY in September, comfortably ahead of the 5.4% expected. Risk-off forces trumped inflation worries, however. The yield on the 10-year Treasury fell 16 basis points to 5.08% (up 91 basis points YTD); while the 2-year Treasury yield ended the week eight basis points lower at 4.71% (up 123 basis points YTD).

United Kingdom:

For the second week in a row, UK large caps outperformed their global peers. A 3.2% rise was enough to bring the YTD gain up to +12.5%, almost exactly in line with US large caps and the MSCI global index. An impressive outcome given the UK’s dearth of AI names. It was a similar story with UK midcaps which ended the week up 1.4% (+12.1% YTD). The UK market’s credentials as an AI diversifier coming to the fore then. Sterling too had a good week, rising to US$1.33 compared to US$1.32 previously. The gilt market followed the global lead with the yield on the 10-year note falling seven basis points to 5.37% (up 89 basis points YTD). That was despite news that the UK economy unexpectedly expanded by 0.1% in August thanks to manufacturing and industrial production clocking up month-on-month increases of 1.2% and 0.8% respectively. The market had been expecting a 0.1% overall decline.

Europe ex UK:

Like the UK, the MSCI Europe ex-UK Index outperformed with a 2.1% weekly gain (+11.5% YTD). That was despite the AI jitters as well as continued elevated energy prices as a result of the Middle East conflict. At the national level, Switzerland’s large caps stood out with a 4.4% gain (+11.8% YTD), a nod to the country’s safe-haven status. Germany’s main stocks were up a healthy looking 2.1% too (+4.6% YTD), while Italy’s could only muster a 0.2% gain (+14.4% YTD).

As for France, the country’s main benchmark ended the week 2.0% higher which was enough to tip the YTD performance into positive territory (+0.6%). Despite the positive weekly outcome, French stocks are trading at a steep discount relative to their European peers. The premium which French equities have traditionally enjoyed is no more. The sharp turnaround reflects growing concerns over the state of the country’s finances which have already pushed French government bond yields higher to levels not seen since the turn of the century.

Finally, the euro was unchanged against the US dollar at US$1.12 while the 10-year German Bund yield ended the week six basis points lower at 3.42% (up 57 basis points YTD).

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