Weekly Research Briefing: Panda Diplomacy

@WalterDeemer: BOND MARKET TO HOUSE: DROP DEAD

As the energy shock has extended, and product prices have risen further, the major central banks have restarted their tightening cycles. The market is now priced for cumulative tightening cycles (including those delivered in September) of close to 5 hikes for the ECB and Fed and more than 4 for the BOE.

@WilliamsonChris: "To put the growth surge in context, barring the spike in demand following the opening up of the economy after the COVID-19 lockdowns, the latest improvement in business activity is the greatest recorded since early 2015"

• Oil up double digits, fixed income down
• The Mag-7 saves the market as valuations continue to recover from the Situational Awareness blowup
• Rising US interest rates benefitting the US dollar
• US Small and Midcap stocks feel the weight of rising rates

“The overarching narrative is — anywhere and everywhere,” says Greg Peters, co-chief investment officer of asset manager PGIM’s credit business. “The quantum of debt that is hitting the marketplace is historic. The numbers are just absolutely enormous. It’s transformational.”

The fundraising binge is changing the way the world borrows money, affecting where, when and at what cost companies and governments issue debt. Some have said it could be the biggest shift since the creation of the Eurobond market in the 1960s.

Many companies are now being forced to tiptoe around hyperscalers, timing their bond issues to avoid clashing with those of the tech giants and, investors say, often borrowing for shorter periods to avoid the market’s glut of long-term debt.

Even the very biggest financial players say they are affected.

Federal Reserve chair Kevin Warsh and US Treasury secretary Scott Bessent argue that the hyperscalers are competing for capital with the $31tn US Treasury market, where last week 10-year borrowing costs hit their highest since 2007.

Staff at the European Central Bank have expressed concern that “the surge in big tech borrowing could make it harder for other companies and other economic sectors to access finance.” In a blog post last month, they asked: “Can euro area financial markets smoothly handle such large and concentrated debt inflows?”

The cost of insuring Oracle against default has surged to a record after its force majeure notice for Project Jupiter rattled AI data-center debt markets. 5y CDS quoted at 240.7bps imply a 19.1% probability of default by end-2031, assuming 40% recovery.

Nvidia flush with cash from the artificial-intelligence boom, is launching the largest-ever U.S. stock buyback.

The chip giant on Monday said its board had approved a $150 billion increase to the Santa Clara, Calif.-based company’s share-repurchase program, bringing the total buyback authorization to $235 billion.

The authorization eclipses the $110 billion stock buyback that Apple unveiled in May 2024 and comes just four months after Nvidia’s board added $80 billion to the buyback program.

Nvidia—which dominates the market as the world’s largest designer and supplier of graphics processing units and specialized hardware for AI data centers—sports a market capitalization topping $5.4 trillion, the largest of any company in the world.

“Nvidia’s growth is being driven by a once-in-a-generation platform shift to AI and accelerated computing,” said Jensen Huang, chief executive of Nvidia. “Our cash generation gives us the capacity to invest in the technologies that advance this transformation and return capital to shareholders.”

Shares of major banks, insurers and online travel agencies slid on Tuesday as investors fear that tools like Meta Platforms Inc.’s personal AI agent could disrupt businesses that benefit from so-called consumer inertia, the tendency to keep buying something out of habit even when a better alternative exists…

The downturn came as Muse, Meta’s new AI agent, rose to the top of Apple Inc.’s US app store. The product can complete digital tasks on a user’s behalf by connecting to third-party services like Gmail and OpenTable. Shares of Meta jumped 11% on Monday on signs of its rapid ascent.

As artificial intelligence assistants like Muse and Instinct improve at price comparison, trip booking and dealing with customer service interactions, industries that rely on recurring bills, negotiable pricing and add-ons could come under pressure, Goldman Sachs Group Inc.’s trading desk said in a note…

Goldman said telecoms, insurance and utilities are the industries to watch if AI agents make it easier and cheaper to switch service providers. Its basket of “consumer inertia” stocks at risk of disruption include telecom carriers AT&T Inc. and T-Mobile US Inc., insurers Allstate Corp. and Progressive Corp., streaming service owners Netflix Inc. and Paramount Skydance Corp., and travel booking sites Expedia and Booking.

A gallon of diesel cost $6.52 on average in the U.S. on Wednesday, following missile attacks that have disrupted refineries and trade routes in the Middle East and Russia. Big exporters of the fuel, such as China, Japan and South Korea, have also reduced shipments as crude supplies out of the Strait of Hormuz waterway near Iran and Oman have stalled for months.

That has left the U.S. as one of the few major suppliers of diesel on the market—meaning American fuel makers have a lot to lose if the U.S. implements even a temporary export quota. U.S. refineries have been running near full capacity in recent weeks. In the second quarter, earnings at big oil companies surged as they banked on record margins for their refineries.

A full export ban on diesel would leave U.S. refineries with a large surplus of the fuel, which would force them to cut production by almost two million barrels a day, or 12% of refinery runs, according to S&P Global. The firm estimates gasoline production could decline as much as 750,000 barrels a day. Some analysts think that figure would translate into an increase of 25 cents a gallon in gasoline prices.

The oil-and-gas industry has been gearing up for this scenario. Even as energy prices soared and risked feeding into inflation, executives refrained from criticizing Trump, at least publicly.

Some oil executives and administration officials have long held the view that Trump wouldn’t hesitate to turn his back on his oil allies if the political circumstances demanded it. Still, veteran energy advisers have said that the industry wouldn’t take export controls lying down as it sees them as a red line.

@NateSilver538: And here's how that map changes if you also account for diesel prices, which have increased even more, especially in the heartland.

Republicans hold narrow majorities in the House and Senate, and their troubles in farm states are boosting Democrats’ prospects for flipping both chambers and taking back governor mansions. Races in agricultural states such as Iowa—which went for Trump by 13 percentage points in 2024—are increasingly competitive for Democrats, who are bashing Trump’s farm policies while calling for breaking up large agriculture companies…

Dave Wasserman, a senior elections analyst for the Cook Political Report, compared this election cycle to midterms in 1986, during an economic crisis that sent many farms and ranches into foreclosure, and 2006, an election seen as a referendum on the unpopular Iraq war and high fuel prices. Democrats flipped the Senate from red to blue in 1986 and increased their House majority. In 2006, they seized control of both chambers of Congress.

“Everything’s got to go right for Democrats to win in these double-digit Trump states, but this is close to a perfect storm for Democrats,” Wasserman said.

Mega-solar farms need good sunlight, access to the power grid and to be a reasonable distance from residential areas. Many golf courses tick those boxes.

“If you can snap up a cheap golf course, which is nice and flat, gentle slopes, not mountainous, it’s probably cheap land,” Chapman said. “So it makes a lot of sense, especially if they’re going into regional areas.”

Japan has plenty of courses thanks to a construction boom four decades ago, when resorts and golf became a symbol of corporate wealth and leisure during the country’s economic heyday. But the game’s popularity has faded over the last few decades, particularly in rural areas with declining populations.

The Minohara Country Club typifies this trend. The fee for a day of unlimited play at the course is just ¥5,000 ($31.87) – far cheaper than in the US or Singapore — yet it still barely attracts any customers.

“This establishment is losing money,” Kamisato Kensetsu’s Toya said. The course loses more than ¥2 million a year, he said. The developer bought the site with a plan to cover it with 152 megawatts of solar panels — one of the biggest projects planned for the country…

At least 1 gigawatt of solar projects either announced or under construction are located on Japanese golf courses — roughly 10% of the current pipeline, according to Bloomberg calculations.