Good morning. It is Wednesday, October 7. Here is what is on the agenda: SpaceX looking to raise $40 billion to buy NVIDIA chips, attacks on shipping in the Strait, and bonds fall after yesterday's rally. Investors remain on edge.
This is the Brent price move we have now. Up 0.7%, 101 the handle now on Brent as we watch what the Iranians are doing and how frequently in the Strait of Hormuz. What does that do to bond markets? We're seeing yields around Europe coming down. We're seeing yields coming down over the past couple of days. Has the backstory. The rest is this rising oil price. This is what we're seeing the U.S. 10-year doing as a result of that. Broadly speaking, yields moving higher this morning. When we get the start of European trade in bonds, that will be the context into which our open happens. Perhaps there is some oil effect in there. Perhaps also failing to reflect new all-time highs on U.S. stocks on the S&P yesterday. That sentiment not enough to hold European futures up this morning. The countdown to the opening trade starts right now.
Good morning, folks. How are you doing? Let's talk about what's happening with the tech stock and then the SpaceX story. We'll get to that in just a second. I want to set a little context out. You had a big rally in tech over the last few days. AMD updating. Chip stories looking positive. The U.S. market is getting narrower and narrower. You can see it clearly. It is an interesting tell as to where we are. We have Bank of America saying maybe the best of gains in the hardware story starting to come to an end. You have SpaceX. Basically got them looking at maybe raising $40 billion, $40 billion in terms of money to basically buy NVIDIA's chips. That comes on the back of Broadcom and others. How will the market take this story is a really interesting question. Are we starting to get nervous about the amount of money raised and the huge risk transfer? How is everyone feeling about that trade this morning?
The reporting suggests this would be a demonstration. There you are, $10 billion loan and debt of $30 billion. If you look at the debt level on SpaceX already, you're at close to $40 billion. You're looking at doubling that. The other way to take this would be this is a demand signal. This suggests that Musk and the team see palatable demand. They want to have the capital to get those chips into that data center and that cluster of chips. They have hundreds of thousands to power that demand they are seeing on the horizon.
I'm not sure how we take this story. You can worry about lack of breadth and say that is how bubbles build. But record low percentage of stocks on the S&P above their 200-day moving average. All of that sounds worrying. Or you can look at valuation. Actually a three-year low on S&P valuations. There is a lot of spreads in there. A lot of ifs and buts. There might be some overlaps, but if the metrics mean as much as they need to, maybe we worry less?
It is going to be interesting to see Samsung later this week. It is expected to produce huge amounts of earnings later this week. Records, and yet the market is basically saying we think you might be near the top. We think this could be as good as it gets, and keeping the momentum going from here is going to be a challenge.
Nine times this time last year.
Has the tech story this morning. We're also watching the energy story. These things seem to have been dominating our agenda for many days. 101 the handle on the Brent price. Iran increasing the frequency with which it is attacking vessels in the Strait of Hormuz. We have had nine attacks. A step up since December. The G7 announcing they are planning increased release of reserves. We saw some skepticism as to what that would really do. We see there a meeting to try to coordinate that activity. Diesel selling where Macron suggested the focus would be. The shipping rates and freight rates, we touched a new record earlier on this week on that rate from the Strait of Hormuz out to China, and another that I think maybe gets a chilling effect if we continue to see the Iranians attacking vessels.
Basically saying freight costs are the big factor. 100 grand across it.
It hasn't dropped down. Not like oil prices.
Freight rates, $1.3 million a day. $1.3 million, to your point, is a record. The ship captain has paid $150,000.
The U.S. Navy and others are also spending huge amounts of money to make this possible in terms of these crossings that are going through. That number probably lowballs the actual real figure.
Inflation costs when it comes to the challenges and the selloff that we see. The focus in France. Have been speaking on French radio in the last few minutes. One of the lines crossing: the ECB does not have a solution in France. Discussing whether or not, at what point the ECB takes action to quell the selloff that we're seeing. Of course there was a big rally yesterday. Well in. The futures are pointing to a further sell-off in French bonds. The banking governor of France says France is in the zone of risk on the budget deficit.
It was interesting to hear what Le Pen had to say yesterday and her plans involving the ECB and lowering interest rates. There is an appetite for that, I suspect. There is a lot of talk in France about ending QT as well and the impact that could have. It could go much further.
Le Pen wants the ECB to step in. Her plan would be to send less money to the European Union. I'm interested in this question, whether the ECB would step in and how. Skylar, who'll be with us later in the program, has an interesting chart reminder for us of just how far the spreads went on Italy at the two-year horizon. Italy over Germany back in 2018. The ECB did not get involved, and the spread blew out way more than the spread we're talking about on the 10-year now. In the sense of what we should expect from the ECB, maybe that lowers our expectations.
UBS investment bank strategist will be joining us. We'll get her take on what's happening with the U.S. equity market and the chief executive officer, private markets. That conversation comes up in the next hour.
8:30 a.m., ECB, the Bank of England governor Andrew Bailey will be speaking in Turkey at 7:00 p.m. U.K. time. You get Fed minutes and P.M., U.S. consumer pretty data.
Coming up, Jamie Dimon, his conversation, cyber security risks. We will bring you more of Tom's exclusive interview with the JPMorgan boss. HSBC is planning a new wave of job cuts. More on that shortly. And joining us will be the chief investment officer. How he responds to a new high on the S&P. If you have any guesses, our guests send them through to us. Another misty morning here in London. This is Bloomberg.
Welcome back. Happy Wednesday. European futures down by 0.8% after three days of gains. Slightly bigger losses in Germany. France, of course, continues to be in focus. Lashley on what's happening with bonds and the equity market as well.
That's the futures picture. Let's talk about what's going on in technology. Bloomberg has learned SpaceX is in talks with banks and investors to raise $40 billion to buy chips from NVIDIA in a deal that would be among the biggest in debt financing. Let's bring in Anthony Stevens, who is tracking this story. What is SpaceX going to do with all of these chips? They are going to Memphis?
Probably to computing. They have been building out to buy NVIDIA chips. The structure of the deal continues down this start of complexity, fundraising. $10 billion in bank loans. $30 billion in IG credit. The continued demand for this kind of AI credit, despite the concerns of all the leverage, that credit spreads are widening, and particularly the Elon Musk empire has seen on Tesla and SpaceX. They are looking to raise money. This is an increasingly crowded space. Of course we have Broadcom and Anthropic as well. There is a lot happening in terms of the capital structure being put to work at these levels, despite what yields are doing to fund the AI buildout.
Yesterday was really interesting. Your part of the world, Asia. I'm looking at the chip numbers there. They are not looking so good. What is going on? Why the disconnect?
Obviously this $40 billion will be used to buy AI infrastructure as well, a lot made in Asia. We had negative reactions to AI names who have reported earnings like L Electronics. A lot of these names down sharply. A reflection of last night's action in the U.S. We saw sharp rotation into the land, power and shale portion of the buildout. Power names in particular because of the deal with Google. A lot of utilities and structure names as well. We're seeing a similar price action in Asia. That space in Asia is just too small. There was an interesting strategy report from Bank of America as well on this, pointing to the potential formation into consumer names because the U.S. consumer cannot be underestimated. The war in Iran does mitigate or slow down, maybe that bounces materially. We are seeing hyperscalers dominate the conversation. Meta continues to grind higher. Microsoft continues to grind higher. This is pulling money out of the chip maker trade.
Thanks for explaining our lower futures picture. Patrick Armstrong joining us around the table. Good morning.
Still love the chips. Not having a great October, a lot of them. The profit margins, earnings growth is unprecedented really. I don't see any signs of it slowing. I'm not sure if they want to accelerate their spend, but market dynamics will make them accelerate their spend to keep up with peers, and we don't think it is a short runway anymore.
All of next year? So the market stays as narrow as it is now. The rest of the market doesn't feel as happy at the moment.
It doesn't. Breadth is terrible now. The semiconductors performing incredibly well. A lot of the other stocks are languishing, not performing terribly necessarily, but the rest of the market is not that expensive. Reasonable return on equities. We have been moving into healthcare stocks which are potentially AI beneficiary as well. Insurance companies look very cheap to us as well. Every month when I look at my contributors, it comes down to the semiconductors.
We showed a chart about breadth rebounding. Does that not bother you then if you're in the places that rally?
Exactly. There are thousands of companies in the world. As long as you buy companies that are generating earnings growth, I'm happy with that.
A lot of expectation around future earnings though that supports low valuations. How much certainty can we have around that?
I see discipline from these companies. Samsung, Micron buying back shares rather than spending on capex. That makes sure they maintain the pricing power. The quarterly reports from the hyperscalers, they always spend more than they thought they would. The quarterly reports are always beating profit margins.
This is a race to supply rather than demand-led?
The hyperscaler demand is insatiable. They just have to compete with all the other hyperscalers. If you're not accelerating your spend, you're falling behind, and your debt and everything else you have done is a cost you have to write off. There are very powerful forces forcing them to spend.
With that view in 2027 and the demand continuing for chip companies, how do you factor in higher costs of capital for that view and the monetization challenges? Is that at least the gears of this story in 2026?
We don't have hyperscalers anymore. Higher cost of capital. Borrowing debt. I think that story has a lot of challenges. Everything they are doing now is not hurting earnings as you start to depreciate the spend. The earnings headwind next year as well.
What would you need to see on the hyperscalers?
Elon and others ask to be regulated. I don't think it is to save humanity, the way he portrayed it. That AI is a danger to humanity. They are getting diminishing returns potentially as you see higher processing costs, higher energy costs. It is hard to justify the spend when your efficiency is going down. That's why they're in a dilemma, forced to spend even if they don't think it is positive returns on capital.
Is there a trade in the European crisis?
Probably now. You're calling it a crisis?
It feels like France is heading in that direction. The French central bank is talking about a situation.
I prefer Europe's fiscal situation to the U.S.
Is the U.S. in a debt crisis?
I think so. No signs of slowing. May be potentially accelerating. You have 2% real growth. You need 4.6% inflation to break even on a debt to GDP with that. Growth is much harder to come by. Europe has a 3% deficit. Its debt to GDP is not growing despite much slower growth than the U.S.
You wouldn't expect the ECB to step in. There is not any particular drama. There is no trigger to deploy the transmission protection instrument?
Looks like 2018 honestly.
It would be the beginnings of getting towards a crisis. We're not in a crisis now. This is elevated spreads. Something I think we get to.
The French have a zone of risk. Maybe debt crisis is too far.
A little harsh on the U.K. I have to come back to this. Debt to GDP lower than U.S. At least two main parties, the party in government, fiscal rules, you have the second — cut spending. At least we have acknowledged that spending is constrained.
As they have in France, to be fair.
Enough about the far left. That is a different story. Even in France, the fact that Le Pen felt she had to come out yesterday and talk about it.
Have you read the piece this morning talking about how unrealistic some of the claims she is making are?
The U.K. has 100% debt to GDP. The U.K. is running a 3% deficit as well. You have a lot of spending, but you're increasing taxes at least. In the U.S., it is just ignored.
If that's the case and you have to have those kind of 4% inflation, where are we going? Where is the 10-year going? How far does this current trade go?
10-year yields look compelling. I think the inflationary pressures persist. Trade wars, environmental issues. So you want — you lock a real yield. The government, it is a lot harder. You can print money to pay off the debt on the conventional treasury. It is compelling real yield. Inflation 4% to 5% on a risk-free investment now, you're getting inflation 3% for the next decade.
TIPS perhaps the answer in this environment.
President Trump says he has a call scheduled with Vladimir Putin to discuss a possible case of plague with Russia. China says it is also cooperating with Russia over the issue. The ECB reporting that the U.K. government is making a last-ditch attempt to persuade Israel not to close the British consulate in Jerusalem. They said they would shut it after the U.K. announced sanctions on Israeli settlements. It is due to close tomorrow. The Financial Times is reporting that HSBC is planning sweeping job cuts across its U.K. wealth management business. They plan to eliminate around half of management specialist positions and reducing the number of financial advisers by 5%. A broader push to use AI to serve clients more effectively.
Some of this — this is the FC story. Some of the roles reduced by 70%. This is a CEO who has been personally seeing spend on AI. Lots of jobs in wealth management and finance are going to stories that say robots are not coming for your job.
There is an index out as well who does the rankings of the top banks, and the line there is actually there is going to be job growth from the banks as a result of adopting it. It does — it is difficult to know.
Talked to a lawyer who said legal AI, more lawyers are going to be — coming up, the outlook for the European race. Investors weigh the risk. That is coming up. This is Bloomberg.
Wednesday morning. Good morning. Cash equities. Futures a little mixed now. More positive in the United States. Asia has had a negative take on the chip story this morning. Europe went out on the highs yesterday. Bear in mind when you look at the U.S. session. DAX down 0.7%. The FTSE looks like it is going to fare better. S&P futures are just positive now.
The futures picture for stocks looks pretty negative. This is what we're seeing in the bond markets right now. We are seeing some movement. This after yesterday. We saw yields coming down. Kind of a global story. Very much a French story. We saw the French yields dropping more than the rest of Europe and that spread is narrowing. Yields going higher. Particularly France and Italy. France 0.7. 0.7 the Italian 10-year. More than 250,000 people took part in protests in France calling for more money for education with unrest spreading across the country and at times turning violent. The prime minister urged people to make proposals on issues raised by students. We have seen the pictures of what's happening on the streets in France. This demand for new spending from the students, from French unions, from the education department I suppose, of education, part of French society, therapy at a time when France is trying to get to grips — this at a time when France is trying to deal with the debt.
How do they — air-conditioning in the classrooms when there is a heat wave. They are also asking for basically smaller class sizes. This is not only about money. This could only improve France's poor rankings in the latest educational rankings globally.
I read your piece yesterday. I thought —
I thought it was pretty damning on what you wrote. What stands out for you on what the RN said yesterday? Are there plans?
Actually quite surprised to see some positive market reaction about Marine Le Pen's budget plan. It looks realistic to us. That looks quite complicated and it could be damaging for growth as well. Has the first point. The second point which was striking to me was the fact that Marine Le Pen, with $50 billion a year additional spending. Finally the last point which I guess was interesting was Marine Le Pen was confrontational against the E.U. For example. She was proposing to cut France's contribution to the E.U. budget while in the meantime asking for a new round of QE from the ECB. It was weird from that perspective to see some positive comments in the market while from that perspective it looks unrealistic and difficult to understand from the fiscal perspective that she mentioned herself.
Thank you. Let's stay on this topic and bring in Reinout de Bock, head of European rate strategy at UBS Investment Bank. Do you find Marine Le Pen credible around the shadow budget? Is this a more credible opposition now?
Consolidating 0.5% of GDP every year. That just hasn't been done. The market liked — it likes a bit of love. At two points, the yields are falling as we speak. We're trying to bring some fiscal credibility. I think that explains a bit the market reaction that we saw yesterday. There is still a bit of a question mark on our economic policies. The fact that she came out with a hawkish budget.
The markets like a lot of love. How long can that last?
We're not going back to the level of early September any time soon. We have been short France. Closed out on Friday. Now we're short Italy versus Germany. You need to think about how the spread. Italy is underperforming today. The market will ask what consolidation did you have in mind? The budget from September is really one is the 54 billion. The market going. Le Pen going to do it? Last week the budget came out and showed a real spending increase of 4.6%. We need to be very careful here. The fact that they care about the market. If you want to, you can see it as a positive.
You saw the short because of —
The moves, we're talking about the next — it is interesting now because they presented the budget deficit for next year, 3.4% of GDP. The problem is that the energy costs and defense costs and part of deficit is driving this. We need to think about what that means.
Suggesting that Italy is getting hit because it has liquidity. You can do it through Italy because it is easier.
The futures are shorts. You go long shorts. You worry about a risk-off. That's what happened in Germany last week. Shorting Italy's future. If you have a risk-off. It is an interesting response for many people. It is liquid. It is very important.
Poor Italy. How vulnerable — not necessarily France because they have a lot of nuclear energy — but how vulnerable do you think Europe is going to be through the winter to higher energy prices? We have seen quite a read across from higher oil prices and higher yields since the start of the Iran war and that wasn't in winter. We have more diverse sources of energy than 2022. What should we watch for?
Europe has done a phenomenal job trying to produce energy independence. Oil is still very high. Diesel is very high. We have to see how markets respond after this diesel release. Actually I think the concerns, if the winter turns cold, we have not refilled the gas storage because the prices are still quite high. Clearly big concerns. Going to go 4.5. Trying to calm the market Monday. Bend it like Bessent and keeping it flat like Lane. It is really important. Possible to be lower next year. But if you have this energy price shock coming, there is not much news.
If we're keeping it flat, what does that mean for the ECB policy in December?
A hike for December. The ECB cannot communicate for a while in October. We are seeing the governing council say maybe let's not go too hawkish here because in September the press conference was hawkish. Two things to watch. You have the forecast. You have the pushback on the October hike from the ECB. That was a bit reversed. You can see maybe having some issues then. If central banks are tightening, normally you expect interest rates to increase but not as much as if you hike. No, the flattening is — the credibility. That's where the market is maybe stirring a bit. The market is seeing the energy prices, the Bund story you discussed earlier. Is this really going to work?
From flat like Lane to bend it like Bessent, is it a buyback story for him in terms of bending the yield curve? What can Bessent enact getting the yield story under control?
The back end there is a bit more pressure. We opened, the steepening on the back. That is maybe not the bend. You start seeing the — settling. Everything is settling in high range.
Settling in high range? Breaking out higher.
Are central banks going to be hawkish enough to basically lean against all of this that we have happening? That is maybe not so clear. If you have really strong growth then I think you will have the central bank respond to this and then you have the flattening pressure and from Bessent's point of view, more growth will help your fiscal account. Right now are we at 2% growth in the U.S.?
The Japanese want their ball back? Want their money back? Are you seeing any evidence the Japanese are starting to sell Treasuries, European bonds? What's happening there? Are they switching to stocks? What are you seeing?
Switching to stocks, it is hard to judge. There is still a lot of energy in market from clients. France — they have been reducing over time. There is still the Bunds. That's why I would like to be long Bunds. There are a lot of switches going on in Europe. The JGB market. Steeper curves. In the Japanese swap, we think there is a lot of supply coming. The Bank of Japan has been reducing its asset purchases. If we look at our charts, what's coming to the market, it is still going to be higher. Which is not the case in the U.S. and Europe. Japan still stands out.
In terms of switching in Europe, maybe going into France and other things, people talking about Germany. How do you rate the German spending push so far? What that is doing for the German economy? There is great fanfare about taking on more debt and spending more on defense and infrastructure. Are they managing to do that?
My impulse when this was announced last year, this is all stuff. It will be announced. I think we see — this is gradually being transmitted. There are two components. One defense, the other infrastructure. Defense went quickly. Now infrastructure. It looks quite OK in the first half of 2027. We are going to see German fiscal as a support for European growth. That is quite important. If I may get back to what Lane was saying, the fiscal impulse is going to drop next year in 27. Let's see if it is driving the boat a little bit longer in 2027.
Thank you for joining us. Reinout de Bock of UBS Investment Bank.
Coming up, Jamie Dimon issues a warning meanwhile about government debt.
If you borrow endlessly and spend endlessly, it has been going on for a long time. If you build up debt around the world, you kind of tapped out at one point. America has been from 50% of GDP to 100%. Countries around the world are borrowing money. We can't be complacent. The lesson is there will be a point where the market will ask for more and more and more.
Jamie Dimon speaking to me exclusively in London yesterday. We'll bring you more of that interview later in this program. This is Bloomberg.
12 minutes until open. Negative picture across Europe. The U.S. session, we got some downside too. Europeans selling off this morning. A pretty decent bounceback in terms of yields in French and Italian debt this morning. Prices are going lower.
Let's take a step back and talk about these markets with Mark Cudmore. Good morning to you. We spent a lot of time asking guests about when higher yields hurt stocks. You have been giving this some thought. Some people arguing this has been happening. Stocks have been on the rise. Valuations have not kept up.
The higher yields clearly are going to hurt some parts of the stock market. For all stocks they affect the valuation and the discount rate. The narrative here people are realizing is with earnings growth so extraordinary in the AI sector because of the capex bubble, the sector, I mean broadly there. The hardware side. The names involved. The buildout. It doesn't matter if we get higher yield. We can get Treasury yields 200 basis points higher and these names are still making extraordinary growth. Because some of those names are some of the biggest names in the index level, that means the index is staying resilient despite the fact that many smaller names have had a much tougher year. The U.S. wants to talk about smaller names versus bigger names. Less tech names in Europe. A lot of the indexes have struggled a lot. We're seeing which names are more sensitive to what's happening in yield trade. At the margin, a higher yield always impacts. I'm a long-time believer in it. If we're getting higher yields primarily because of good growth, that is not negative for stocks in isolation. In reality that is one of the main drivers of higher yields. Not only the driver. Stocks will be OK but it will get more volatile.
Is there an argument that says the only growth is in AI? Does it matter that has the archdiocese? You just want to own that part of the market. Why do you need to own anything else at this point? Don't we get more concentration?
The vast majority of the growth is AI. We have a K-shaped economy. It is problematic long-term. I don't think that is where you can trade on a short-term basis. Yes, growth is concentrated. The spillover impacts, the people — some trickle-down impact. Doesn't spread throughout the whole economy. Obviously long-term, but yes, growth is very concentrated. At the moment growth is so good in some sectors of the economy it is supporting a broad economic level, a broad countrywide level and the same at index level.
Growth is not what is powering yields higher in France of course. Yields are higher today after a rally yesterday. Where are we do you think on this journey?
I think French yields have higher to go. You're right, Europe is the exception. France doesn't control its own currency. Countries like the U.S., U.K., Japan, their higher yields are more driven by the story. We have globally good growth. We have inflation problems. That is a large inner part of it. Europe is trading the fiscal story more aggressively because individual countries don't control their currency and their issuance.
Mark Cudmore. Thank you. You can get up-to-date analysis from Mark on your terminal. Let's get your stocks to watch.
Starting off this morning, the Dutch government has cut its stake to about 20% to 10% after they became the largest shareholder during the financial crisis. They are pairing that back. The past year, the stock is up almost 60% this year alone. It has been Europe's best performer within financials. They are saying that this is a vote of confidence. We had the CEO earlier on Bloomberg TV who said this is positive. Sticking with financials but turning to London. We're looking at HSBC. This has been a report they are cutting jobs in their wealth management arm in London. This is partly a bet on AI but also partly part of this wide restructuring we have been seeing under the CEO who joined in September 2024 and all of these measures he has been implementing — job cuts, cost cuts, a wider restructuring — has boosted that stock. You can see how much that has risen in that time. And then finally, we're looking at Orange, the telecom operator in France. They have been put on a watch list by JPMorgan. You can see sentiment shared widely. This is ahead of their results later this month expecting a beat there on a few positive catalysts that they indicated as well as company growth valuations rising so another positive story there.
Louise, thank you very much. Some of the stocks that could be on the move. We had an update out of Porsche. A report that says Germany and France agreeing on a push to weaken E.U. customs rules. Perhaps in connection to the Commission preparing to soften the CO2 emissions rules on new cars.
Apple maybe producing. The —
You're skeptical? I interrupted you. Apple is going to be producing — what else have you got going on? Talk about the banking sector. That could be a factor as well. A few stories that could get interesting.
Not a stock mover for us. Jaguar coming up with this new EV, 130,000 pounds. I think it is going to be available to purchase in 2027.
Very long. May not go into British parking spaces. Some of the descriptions are boring. Looks like a Chinese EV.
As the Type One. 130,000 pounds. Fuller Jaguar that will be released 2027.
