Today
Elon’s been busy. U.S. and Canadian equity futures are pointing higher this morning, with tech stocks getting a lift from SpaceX’s earnings. Shares of Elon Musk’s rocket and satellite-internet company rose as much as 10% in premarket trading after it reported a $4.4 bln quarterly profit on revenue of $14.6 bln. Musk also confirmed during the earnings call that SpaceX and Tesla have formed special committees to explore a potential merger, although no deal is assured. Not all the attention surrounding Musk was positive, however. A WSJ investigation published yesterday alleges he ordered restrictions on Ukraine’s military-grade Starlink service, hindering its ability to defend against Russian attacks. Just days earlier, Musk had maintained that decisions over such restrictions rested with the U.S. military and ultimately POTUS, an account now being challenged by the WSJ’s reporting. Elsewhere, French 10-year government bond yields briefly topped 5% for the first time in 24 years, as political unrest and fiscal concerns continued to pressure the country’s debt market. Earnings remain in focus today, with AT&T reporting before the bell, followed by Meta, IBM and Tesla after the close.
The recent stabilization in bond markets may provide a temporary relief for both bond yields and equity markets, but the longer-term trend of rising yields is likely not over. Experts believe strong global growth, limited economic slack, sticky inflation, and cautious central banks will continue to put upward pressure on bond yields over time. While equities remain supported by strong corporate profits, higher yields pose a risk to some areas of the market and could eventually destabilize risk assets if they rise too far or too quickly. There are several risks to monitor, including elevated energy prices, geopolitical conflicts, fiscal strains in countries such as France, and vulnerabilities in highly indebted economies.
Pending home sales in the U.S. fell in September, with the National Association of Realtors’ Pending Home Sales Index dropping -7.3% to its lowest level since the series began in 2001. The decline was worse than economists had expected and highlights the continued weakness in the housing market as higher mortgage rates and home prices deter both buyers and sellers. Combined with recent weakness in new-home construction data, the data reinforces concerns that housing remains a vulnerable sector of the U.S. economy. Contract signings, which typically lead existing-home sales by one to two months, were down nearly -13% from last year, signalling that housing activity is likely to remain under pressure in the near term. The weakness was widespread across the country, as higher mortgage rates continued to weigh on housing activity, prompting prospective buyers and sellers to delay transactions in hopes of more favourable borrowing conditions.
The U.S. equity risk premium, a measure of stocks’ attractiveness relative to bonds, is currently low by historical standards, suggesting equities are expensive compared with U.S. Treasuries. The attractiveness of stocks is being supported by strong corporate earnings and profit margins, especially in the tech sector, which may be unsustainable over the long term. While equities have outperformed bonds over the past decade, delivering one of the highest excess returns in more than 60 years, some strategists expect this trend to weaken as earnings growth slows and bond yields remain elevated. Adding to this, recent ERP measures may understate equity risk because they rely on inflated current earnings rather than normalized profitability levels.
Investors are beginning to target BB-rated high-yield bonds after the recent market selloff made valuations more attractive. These bonds offer higher yields than investment-grade debt while benefiting from the strong financial health of many U.S. companies and relatively low default rates compared with lower-rated junk bonds. Investors have been shifting away from riskier CCC-rated debt, where yields and distress levels have risen amid concerns about refinancing challenges and weaker corporate balance sheets. Managers seem to be selective, favouring companies with strong cash flow, healthy margins, and manageable debt levels, such as certain issuers that resemble investment-grade borrowers despite their junk ratings. At the same time, heavy corporate bond issuance from both investment-grade and high-yield issuers has created supply pressures that could keep credit spreads elevated.
EM currencies face risks amid expectations for additional Fed interest-rate hikes, elevated developed-market bond yields, and as geopolitical uncertainty tightens global financial conditions. The Mexican peso is viewed as the most overvalued EM currency according to some strategists, having appreciated despite a narrowing interest-rate differential with the U.S. and limited improvement in Mexico’s terms of trade, while the upcoming USMCA review introduces additional risks. The Thai baht also has an unfavourable outlook, as it contends with stretched valuations and negative interest-rate carry with weak domestic demand, structural growth challenges, and a deteriorating current account, which moved into deficit in Q2. Although some expect most EM financial systems to remain relatively resilient, sustained increases in U.S. yields could trigger broader risk aversion, particularly if tighter financial conditions undermine economic growth and corporate earnings.
Nike’s turnaround efforts under its new CEO are facing growing challenges, and you can (partially) blame Chuck. Converse, a subsidiary of Nike, is experiencing a prolonged sales decline, raising questions about the brand’s future within the company’s portfolio. Although Converse represents just 2.5% of Nike’s total revenue, it accounted for approximately 20% of the company’s sales decline in the latest quarter, with Converse revenue falling -28% YoY. The brand’s annual sales have more than halved from a record $2.43 billion in fiscal 2023 to $1.17 bln last fiscal year, and could fall below $1 bln for the first time since 2010 if the trend continues. Experts are saying the declining sales may be due to Converse’s dependence on its iconic Chuck Taylor sneakers, whose heavier construction and traditional styling have fallen out of favour as consumers move towards more comfortable options. Unlike Adidas, which has successfully revitalized classic models such as the Samba, Converse has struggled to diversify its product offering or generate continued demand beyond its flagship shoe. The size of the decline has some speculating that Nike could divest Converse, especially given that it has already sold most of its other acquired brands and is now facing weakness in its China business and Jordan franchise.
Diversion:
Oh Shoot
