Markets: As bond yields cool off, stock buyers step in where angels fear to tread

Global markets witnessed a mixed reaction today as bond yields receded, prompting stock buyers to step in. Asia saw a mixed performance, while European markets declined. U.S. futures opened higher following a tech-led sell-off on Friday, indicating that traders now perceive last week's volatility as overblown. Chris Beauchamp, chief market analyst at IG, noted, "Things are looking a lot cheerier than they were at the close on Friday.

After yet another lurch lower for tech, buyers have once again appeared." Despite the recent selloff, the S&P 500 was at a record high just two weeks ago, suggesting a more stable market sentiment now. Looking back, today marks the 39th anniversary of Black Monday, when the Dow Jones fell by 22.6% in a single day. S&P 500 futures were up 0.47% this morning, after falling 1.09% on Friday.

In Europe, the Stoxx 600 was down 0.78%, and the U.K.'s FTSE 100 was down 0.87% before lunch. Asia saw South Korea's KOSPI up 1.76%, Japan's Nikkei 225 down 0.62%, and India's Nifty 50 down 1.19%. China's CSI 300 rose marginally by 0.09%. Brent crude prices surged to $108 per barrel, while Bitcoin stood at $82,769. The 10-year Treasury yield dropped to 5.08%, down from its recent peak of 5.3%, indicating a less severe market crisis compared to last week when yields spiked.

The market priced in risk similar to the Great Financial Crisis, as highlighted by Michael Hartnett’s team at Bank of America. The increasing bond yields have made it costlier for tech companies to borrow funds for AI development, with the weighted average cost of capital for hyperscalers doubling since 2023. This rise has put a weight on the profitability of AI development, with the ROI threshold for hyperscalers now at 10%.

Economists warn that investing may not be profitable if returns on incremental invested capital fall below the weighted average cost of capital (WACC). Despite the challenges, there is a forecast that the capex wave may continue, but a "marked shift in trend" could occur next year if yields continue to decrease.