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London Quick Take - 28 Sep - Housebuilders rally on Help to Buy revival, Trump rejects Iran proposal, OpenAI pauses training
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
The fact is that market has been at the index level remarkably resilient, but under the hood things are happening. When the 10yr yield rises this far this fast something bad usually ensues. Regional US banks are where it will show up and already the KRE Regional Banks ETF is 10% below its recent high. These tend to need strong markets and good liquidity to do well. Stress is starting to show up in the weaker end of the US corporate credit market as higher rates increase refinancing risks, widening credit spreads. Utilities are also showing stress. XLU, the State Street Utilities Select Sector SPDR ETF is almost 20% lower since it made its recent peak.
Whilst I have written before that the 10yr at 5.25% is when things get tricky for broader markets, it's less about the absolute level for yields and more about the volatility. Until this volatility in bond markets subsides investors will be reluctant to load up on riskier bets. For now markets continue to reprice for higher rates as loose US fiscal policy and the AI capex boom drives supply in the bond market. Strong underlying demand in the economy is pushing up inflation expectations. The US PMIs hit 5-year highs last week and the Atlanta Fed GDPNow model has growth running at +5% and input cost inflation running at levels not seen since October 2022, when there strong demand met a supply shock and higher energy prices. The University of Michigan sentiment readings came in above estimates and one-year inflation expectations rose to 4.6%, up from 4.0% last month.
Whilst the Fed's rate hike delivered what the market was asking for, it has not yet acted as a clearing event for risk appetite. Fiscal and corporate are driving the macro much more than monetary policy. This means the Fed will need to hike a couple more times this year to get in front of the AI capex and government's 6% fiscal deficit juggernaut. The market is not looking at the price as much as it is looking at the absolute amount of issuance it needs to absorb.
This week has a lot on the slate. US inflation data on Wednesday is the big one – Cleveland Fed nowcasting indicates it's running hotter than the Fed would like (ie above the Waller Line) at +0.3% rounded month-over-month. Markets currently estimate the chances of the Fed hiking again in October at around 70% but a further hot print would likely the odds shorten further and could push the 10yr above 5.25%. You'll find a full rundown of the week's big events here.
Finally, SpaceX launches Starship today for its first orbital flight...lots hinging on this going well.
Housebuilder heaven: Prime Minister Andy Burnham has announced a new Help to Build Buy scheme to support young people onto the housing ladder. It's not a great surprise; only last week I'd written this was an option on the table for the Chancellor in the forthcoming Budget after a government audit reported the original iterations of the scheme were great value for money. It's a big shot in the arm for housebuilders as much as first-time buyers, coming as the industry is severely pressured by surging mortgage rates and inflation. Juicing demand provides the incentive to get building, though we should note the plan includes price caps so only more modest homes can be bought. Nevertheless, whatever the finer details this is an unambiguous win for the industry and some relief for investors in these beaten down stocks. Persimmon, Vistry, Taylor Wimpey, Barrat Redrow and Bellway opened 14-16% higher, while MJ Gleeson stood out at +19% due to significant first-time buyer exposure. Berkeley Group lagged only +5% higher.
As noted last week, Persimmon stands out as the most likely to benefit from a Help to Buy revival thanks to its lower average selling prices and exposure to first-time buyers, particularly in the North. The other big winner is MJ Gleeson, a smaller cap play with a lot of exposure to first-time buyers. Bellway, Barratt Redrow and Taylor Wimpey are clear winners as well. Berkeley Group Holdings is seen benefitting the least due to high average selling prices, while Vistry's recent strategic overhaul leaves it in a much better position to benefit as most completions will in future be sold on the open market. Those supplying the trade are also likely to benefit and this morning there is a positive read across for the likes of Howden Joinery, Travis Perkins, Kingfisher etc on implied demand for materials boosting builders' merchants, while brickmaker Ibstock jumped 23%.
Oil trades higher after President Trump rejected Iran's proposal to reopen the Strait of Hormuz, though Tehran says they are waiting for an official response through negotiators. Brent rallied about 3% overnight to $107, scrubbing all the optimism from Friday that had seen crude down to $103. Oil is getting out and it's not Iranian, which means Trump is not in a hurry to do a deal.
Bond yields continued to advance with the 10yr Treasury yield up at 5.2%, while gilts are also feeling some heat again with the UK 10yr at 5.4% this morning. The move in yields has rocked precious metals with silver –5% to its lowest since early August, while gold slumped –3% lower after a technical breakdown at $4,230 which triggered some selling, with perhaps some profit taking in Asia ahead of China's Golden Week holiday, which begins on Thursday. More on gold's real yield test from Ole here. Copper is also about 2.5% lower, leaving mining stocks nursing losses to start the week.
Overall stocks though are holding up pretty well with European bourses in the green early Monday morning, making a cautiously positive start to extend the gains made on Friday despite the stress in the bond market. US futures are lower after Wall Street finished higher on Friday to cap a winning week for the S&P 500 (+1.2%) and Nasdaq (+2%).
Watch on tech shares with OpenAI pausing training of its latest models due to mounting fears about AI agents going rogue. Korea's Kospi fell 2.7% as semis were affected. This is likely to see US semis open lower and weigh on the broader market. Pre-markets show Nvidia, Broadcom, AMD etc down 1-2%. Micron reports this week as the next big test for the AI trade.
As noted last week, Persimmon stands out as the most likely to benefit from a Help to Buy revival thanks to its lower average selling prices and exposure to first-time buyers, particularly in the North. The other big winner is MJ Gleeson, a smaller cap play with a lot of exposure to first-time buyers. Bellway, Barratt Redrow and Taylor Wimpey are clear winners as well. Berkeley Group Holdings is seen benefitting the least due to high average selling prices, while Vistry's recent strategic overhaul leaves it in a much better position to benefit as most completions will in future be sold on the open market. Those supplying the trade are also likely to benefit and this morning there is a positive read across for the likes of Howden Joinery, Travis Perkins, Kingfisher etc on implied demand for materials boosting builders' merchants, while brickmaker Ibstock jumped 23%.
Oil trades higher after President Trump rejected Iran's proposal to reopen the Strait of Hormuz, though Tehran says they are waiting for an official response through negotiators. Brent rallied about 3% overnight to $107, scrubbing all the optimism from Friday that had seen crude down to $103. Oil is getting out and it's not Iranian, which means Trump is not in a hurry to do a deal.
Bond yields continued to advance with the 10yr Treasury yield up at 5.2%, while gilts are also feeling some heat again with the UK 10yr at 5.4% this morning. The move in yields has rocked precious metals with silver –5% to its lowest since early August, while gold slumped –3% lower after a technical breakdown at $4,230 which triggered some selling, with perhaps some profit taking in Asia ahead of China's Golden Week holiday, which begins on Thursday. More on gold's real yield test from Ole here. Copper is also about 2.5% lower, leaving mining stocks nursing losses to start the week.
Overall stocks though are holding up pretty well with European bourses in the green early Monday morning, making a cautiously positive start to extend the gains made on Friday despite the stress in the bond market. US futures are lower after Wall Street finished higher on Friday to cap a winning week for the S&P 500 (+1.2%) and Nasdaq (+2%).
Watch on tech shares with OpenAI pausing training of its latest models due to mounting fears about AI agents going rogue. Korea's Kospi fell 2.7% as semis were affected. This is likely to see US semis open lower and weigh on the broader market. Pre-markets show Nvidia, Broadcom, AMD etc down 1-2%. Micron reports this week as the next big test for the AI trade.
The fact is that market has been at the index level remarkably resilient, but under the hood things are happening. When the 10yr yield rises this far this fast something bad usually ensues. Regional US banks are where it will show up and already the KRE Regional Banks ETF is 10% below its recent high. These tend to need strong markets and good liquidity to do well. Stress is starting to show up in the weaker end of the US corporate credit market as higher rates increase refinancing risks, widening credit spreads. Utilities are also showing stress. XLU, the State Street Utilities Select Sector SPDR ETF is almost 20% lower since it made its recent peak.
Whilst I have written before that the 10yr at 5.25% is when things get tricky for broader markets, it's less about the absolute level for yields and more about the volatility. Until this volatility in bond markets subsides investors will be reluctant to load up on riskier bets. For now markets continue to reprice for higher rates as loose US fiscal policy and the AI capex boom drives supply in the bond market. Strong underlying demand in the economy is pushing up inflation expectations. The US PMIs hit 5-year highs last week and the Atlanta Fed GDPNow model has growth running at +5% and input cost inflation running at levels not seen since October 2022, when there strong demand met a supply shock and higher energy prices. The University of Michigan sentiment readings came in above estimates and one-year inflation expectations rose to 4.6%, up from 4.0% last month.
Whilst the Fed's rate hike delivered what the market was asking for, it has not yet acted as a clearing event for risk appetite. Fiscal and corporate are driving the macro much more than monetary policy. This means the Fed will need to hike a couple more times this year to get in front of the AI capex and government's 6% fiscal deficit juggernaut. The market is not looking at the price as much as it is looking at the absolute amount of issuance it needs to absorb.
This week has a lot on the slate. US inflation data on Wednesday is the big one – Cleveland Fed nowcasting indicates it's running hotter than the Fed would like (ie above the Waller Line) at +0.3% rounded month-over-month. Markets currently estimate the chances of the Fed hiking again in October at around 70% but a further hot print would likely the odds shorten further and could push the 10yr above 5.25%. You'll find a full rundown of the week's big events here.
Finally, SpaceX launches Starship today for its first orbital flight...lots hinging on this going well.
This content is marketing material.
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