“The winner takes it all
The loser has to fall
It’s simple, and it’s plain
Why should I complain?”
– ABBA , “The Winner Takes It All”
The third quarter has come to a close, and two trends dominated. Stock markets were once again driven by U.S. tech stocks, while the bulk of the market corrected. Bond markets, on the other hand, were weak across the board. The past week was no different, and this time it was interest rates in particular that made the headlines.
The correction in bonds is global. However, the drivers vary by region. In the U.S., the 10-year yield rose this week from 5.17% to 5.33%, the highest level since April 2002, despite lower-than-expected inflation (3.4% instead of the expected 3.7%, with core inflation at 3.0% versus 3.3%). The rise of AI is fueling an investment boom, not only in data centers but also in the energy infrastructure required to support them. This boom is financed by debt securities, which are added to the mountain of debt that the U.S. government must refinance. Increased supply, coupled with stable demand, is driving prices lower.
Although European interest rates follow U.S. interest rates, the dynamics are different. Unlike the U.S., the European economy is barely growing, and inflation is picking up due to structurally higher energy prices. Without an AI boom, it is primarily government debt that needs to be financed in Europe, and so the focus is on national balance sheets and budgets. France, with debt at 119% of GDP and a dysfunctional political situation, is the bogeyman. The yield spread with Germany widened to 111 basis points, the highest since 2012. The impact is also being felt closer to home: the Belgian 10-year yield broke through 4.25%, a level last seen in 2011. All of this brings back memories of the Eurozone crisis. Consequently, the euro is continuing to weaken.
On the surface, the stock markets absorbed the interest rate hike. However, dispersion—both sectoral and geographic—is increasing, and the leadership gap is narrowing. Semiconductors are performing well again, driven by a share buyback at Nvidia and better-than-expected results from Micron ($133 billion in revenue, up 256%, earnings per share up 811%, and a gross margin of 87%). Hyperscalers are on the rise again, thanks to demand for computing power and the potential of AI agents. And software is holding its ground. The losses are concentrated in two camps. First, interest-rate-sensitive sectors, including utilities and real estate. Second, companies whose business models are threatened by AI and AI agents, including consumer platforms such as Booking.com and insurers. The latter also explains why bank stocks are weakening despite higher interest rates.
Despite market volatility and a sometimes somewhat chaotic timeline, a consistent pattern is emerging. First, investors are buying growth, and that growth is in technology and in the U.S. (the USD). Second, investors favor pro-cyclical policies over policies that stifle growth. The choice between a Trump administration that deregulates, takes a proactive approach to taxation, and focuses on investment, versus European governments that cut spending and regulate, is an easy one.
Disclaimer: This blog post is for informational purposes only and does not constitute investment advice, an offer, or a recommendation. Past performance is not a guarantee of future results.
