Weekly Market Update: how high is too high?

The latest economic news and market highlights from the UK and abroad.

This week's headlines: 

• Average UK mortgage rates hit 6% – the cost of five-year mortgages have risen to 6% for the first time in three years. Lenders are facing much higher costs amid rising prices and borrowing rates. 

• UK borrowing costs hit 28-year high – this week saw the UK’s cost of long-term borrowing hit its highest level since 1998 as the yield on 30-year gilts briefly hit 6.05%. 

• Diesel reserves hit the brakes – at the end of last week the US, France, Italy, Germany, Japan, the UK and Canada announced plans to release diesel from their reserve stockpiles to hopefully ease record high prices. This week, however, they appeared to backtrack saying the 100m barrels promised would actually come from a release of 400m barrels already promised in March.

• Paramount completes $110bn Warner Brothers takeover – Paramount Skydance completed its takeover of Warner Brothers after months of legal disputes and criticism of how cuts and consolidation could affect the film industry.

• Australian Data Centre IPO scrapped – Firmus, an Australian Data Centre firm backed by Nvidia pulled its IPO – due to recent market conditions. It was due to be Australia’s largest ever IPO and would have valued the company at $30bn.

Putting the brakes on diesel prices

With diesel hitting over £2 a litre at pumps, the news that more would be released was welcome. However, it now appears that the amount promised was part of a previous agreement. Governments seem reluctant to release more diesel, but the International Energy Agency has said it was ready for member governments to release additional stock if needed.

Diesel prices are at all-time highs and will continue to fuel higher prices if left unchecked, impacting not just clients' spending, but also their investments. This inflation is also impacting the bond markets.

High cost of lending

The UK faces ever-higher borrowing costs due to a continuing bond rout, but it’s not just the UK – other major economies around the world are being affected too.

France has been hit this week by its own sell-off with its 10-year yield touching 5%. It’s seen the spread between French and German government debt (seen as the safest in Europe) widen, suggesting that there’s a large premium for holding French debt. Its interest payments could top €90bn euros next year, with fiscal headroom depleted, and debt equivalent to nearly 120% of the economy.

Presidential hopefuls in next year’s election have promised to tackle it but haven’t provided any convincing solutions, weighing further on yields. Could France be out of control? Fears the French debt crisis may expand to other Eurozone debt markets is triggering a regional debt crisis.

Energy prices and the ensuing inflation are impacting governments and interest rates around the world. The knock-on effect on mortgage prices will impact the affordability for those attempting to get or renew a mortgage.

Some tough political choices will need to be made to bring this under control.

IPOs bottleneck

We’ve seen a spate of IPOs delayed or cancelled recently, most AI-linked. Open AI is the biggest one, still expected in 2027.

Global listings have raised nearly $230bn this year so far, which is already 45% higher than last year. So, you’d think IPOs are doing well. It’s actually quite concentrated, as there are historically fewer companies involved, just over half the number of that listed last year. SpaceX might account for a lot of it.

Why are fewer companies coming to market? For some it’s scepticism, but also the market conditions might not be quite right. There are higher rates and tighter financial conditions for backers. There’s also scrutiny over the valuations the companies are aiming to raise, vs what investors are looking to pay for.

Some companies might also be waiting to see whether companies like Anthropic are able to raise the sums they’re looking for before taking the plunge themselves. How Anthropic’s upcoming IPO fares could determine how other companies decide to list in the future, and OpenAI’s if it goes ahead could be a moment of truth for IPOs and AI.

Chart of the week: the top-heavy ChatGPT era

During the AI boom, a few large companies have dominated. 

The Nasdaq 100’s advance and the broader stock market is very dependent on a small group of massive trillion-dollar companies. The market cap weighted Nasdaq 100 vs the equal weight version highlights this. The market cap version would have been more driven by companies like Nvidia (over 8% of the index) as opposed to 1% in the equal weighted version.

Since ChatGPT’s release, the Nasdaq 100 has doubled the price return of the equal-weighted version. While the S&P 500 and Nasdaq have continued to rise since the US-Iran war to record levels, it’s because the biggest companies have continued to grow. The S&P 500 may be up over 20% since March when the war broke out, but 40% of the index has declined in that time.

With such concentration in the market, diversification is (as ever) key.

UK: The FTSE All-Share slid over the week while surging oil prices put pressure on bond yields.

US: The S&P 500 and Nasdaq hit record closing highs early in the week before sliding lower on Wednesday and Thursday. Nvidia and AMD took a hit following reports of softer revenue expectations, sparking concerns over the capital expenditure required for AI infrastructure.

Europe (ex UK): A volatile and highly pressured week, fuelled by the global bond rout, and escalating energy prices.

Japan: This week saw a weakening yen, and a tech-sell off tracking the US’s own with Softbank dropping over 4%.

Asia Pacific Ex Japan: The region saw a similar AI reality check to other markets, so there was some profit taking on semi-conductor stocks. High oil prices also pushed yields on sovereign debt in the region.

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