AI leading equity market nosedive. Also: USD no safe haven?
Summary: Today, we cover the very ugly day for US equity markets, with the selling quite broad, but most concentrated in AI-related and crypto-related names as the latter is in a real funk and suggests poor liquidity. With Saxo Equity Strategist Ruben Dalfovo, we pick out several names to discuss including Oracle and Disney. Also, we look to next Wednesday's Nvidia earnings report as the next critical event risk for this market, noting other big retail names reporting in the US as well, including Walmart. Macro, FX and more also on today's pod, which is hosted by Saxo Global Head of Macro Strategy John J. Hardy.
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Today’s Links
The FX Trader from yours truly today - while the US dollar did not serve as a safe haven in yesterday’s sell-off, I am still not entirely willing to write it off as a safe haven on an aggravated further deleveraging across global markets - did not mention that in today’s piece.
On the other hand, times are changing in a gradual sense for the US dollar and US markets, possibly, according to Tavi Costa, who says that US markets are overvalued and that the US behaving more like an emerging market when its bonds lead bond market weakness on a risk-off day. Great chart on his X post on this.
I missed this one from Cory Doctorow on the whole “10% of Meta profits from fraudulent ads, etc” - Meta: too big to care. Indeed, as my employer hires an outside agency to detect when our names are being abused and has in recent days come across a fresh set of impersonators gearing up on Meta’s platforms using one of my colleague’s identities for who knows what kind of shenanigans.
Weekend downtime hearty reccos
Book recommendation - Don’t read the blurb - just get it and listen/read it. I listened to this on Audio book format. That, and the fact that I had no idea what it was about (someone whose taste I trust in recommended it and I simply downloaded and started listening) made this thing doubly impactful and thought-provoking. There is a financial market angle to it, for sure, but so much more - a tour de force. The less you know about it, the more you will like it: just trust me on this one - if you have access to audiobooks, make this your next listen.
Weekend downtime listen: Philip Glass’ Akhnaten is genius, covering Akhnaten’s (originally Amenhotep IV) ascension to the throne in Ancient Egypt and his marriage to Nefertiti and then downfall - it’s a fascinating story and an amazing, ethereal opera - the Akhnaten appearances, especially the scene with Nefertiti, are spellbinding.
Chart of the Day - Oracle and Oracle BondsOracle stock has been the poster child of of the AI data center buildout and capital expenditures boom and bust mentality in recent months - zooming to incredible heights on its over-the-top earnings call in early September as it boasted of its intent to invest hundreds of billion in new AI data center capacity. The stock has since erased all of the enthusiasm and then some on concerns that assets in these data centers have a very short life expectancy, not to mention whether the AI training and inference spend from by the data centers’ customers will yield the hoped for productivity gains and profits. The “circularity” problem with investing in OpenAI is also an issue. Oracle is the most aggressive among large listed companies in pouring funds (and borrowing funds) for investment in AI infrastructure and bears close watching. While its old core business is very profitable - if stagnant to slightly shrinking - and it is hard to imagine Oracle going belly up, even with its now enormous USD 100 billion in debt, it is worth noting that not only is the enthusiasm for its share price gone, but concerns about the quality of Oracle bonds is rising. This can be seen in the spiking CDS price, which shows the odds of a default rising, if still fairly modest. For perspective, a price of 100 for 5-year CDS suggests an approximate risk of default of 7-9% (with the important assumption that the recovery rate is 40%.). If a company on the scale of Oracle either gets in trouble financially on its commitment to AI spending, or merely even changes its tune or intentions on spending to avoid digging itself into further trouble, there is the risk of network effects driving a reduction in the overall AI capex rate, which in turn is a powerful risk for the very AI-exposed equity market and even to the very AI-exposed US economy as well. Below: the Oracle share price in blue (200-day moving average currently near 209 BTW), the CDS price in salmon/coral and the yield on 2053 (!) Oracle 5.55% coupon bonds.
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