Do you remember when things were really hopping?
Yeah, let’s Twist again—it’s Twistin’ time!
– Chubby Checker (Let’s Twist Again)
Just when the need for long-term financing is greatest, the cost of capital rises. The bill for building up defense capabilities, expanding AI and other infrastructure, residential real estate, and the aging population is mounting. The repricing of these assets is in full swing: on Monday, the U.S. 30-year Treasury yield—a benchmark—closed at 5.31%, its highest level since 2007. The same is true, incidentally, for British yields (5.77%), French yields (4.86%), and German yields (3.22%).
It became clear that we had gradually reached a critical point when the U.S. Treasury announced it would ramp up its repurchase operations in the 10- to 30-year yield segment in order to keep the term premium in check. This is a variation on “Operation Twist,” a similar initiative from the 1960s. The market reacted immediately: interest rates fell, gold, silver, and bitcoin skyrocketed, and the dollar dropped to a three-month low.
The stock markets are trading at record highs and have remained relatively calm. However, beneath the surface, we saw a substantial repricing. Any stock fueled by AI Capex was sold off, even on the back of strong quarterly results and positive upward revisions to earnings forecasts. Money didn’t leave the technology sector; it simply shifted direction. Software and Services—dismissed for most of this year as “AI losers” and generally maligned by investors—performed well. This was especially true following quarterly results suggesting that these companies’ competitive “moat” is more sustainable than feared, and that AI can generate added value for them. Elsewhere in the equity market, there were bright spots in both traditionally more defensive sectors and cyclical sectors. Moderna, which had been in high demand during the pandemic, surged by as much as 177% following a promising indication for a melanoma treatment. This helped the sector, which has been recovering for some time. Among cyclicals, companies with large capital investments and a real mismatch between supply and demand are particularly favored, such as mining, building materials, and industrial stocks. Consumer stocks, on the other hand, remain under pressure due to rising living costs, oversupply, and cutthroat competition.
The past week raises two major questions. First, whether Scott Bessent’s announcement marked the start of a larger and longer-term campaign. Price movements in gold and Bitcoin certainly seem to be heading in that direction. Second, whether the stock markets have shifted from a correction in the “AI bottleneck” trade to a regime change. We may get an answer to the first question as early as next Friday in Jackson Hole. The second question will be settled in a stock market that appears calm on the surface but is churning with unprecedented ferocity beneath the surface, featuring unprecedented intraday movements in individual stocks.
