Trading Day

A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. stocks ended a choppy session on Thursday in the green, lifted by optimism that a U.S.-Iran peace deal is close at hand, while investors also pored over Nvidia's earnings report and awaited potential bumper IPOs from SpaceX and OpenAI.

In my column today, I look at the overlaps between extreme concentration in U.S. stock ownership, Wall Street's AI boom, wealth effects, and workers' record low share of national output. Can stock market gains soothe workers' pains?

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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Today's key reads

Today's Key Market Moves

STOCKS: South Korea +9%, Japan's Nikkei +3%, China -2%. Europe and UK flat. Wall Street up, Dow +0.6%, S&P 500 +0.2%.
SECTORS/SHARES: Japan's Softbank +20%, Samsung +9%. Ralph Lauren +14%, IBM +12%; Intuit -20%, Walmart -7%.
FX: Dollar, G10 FX mostly flat. In EM, India's rupee +0.5%, Korea's won -0.5%.
BONDS: Long-dated U.S. yields dip, short-end yields blip. Curve flattens. 10-year TIPS auction mixed - ok bid/cover, but tail of nearly 2 bps.
COMMODITIES/METALS: Oil -2%, gold flat. NYMEX gasoline futures -8% this week, eyes biggest fall since September. U.S. wheat futures -2%, easing from Tuesday's 2-year high.

Today's Talking Points

* ChatIPO

SpaceX and OpenAI are preparing to go public, the latest chapter in the stunning trillion-dollar tech/AI story that has driven Wall Street and global stocks to new highs this year. At projected IPO prices, they may soon be valued at just under $2 trillion and $1 trillion, respectively.

They're striking while the AI iron is hot. But will investors end up getting burned? It's a lot of equity supply to hit the market and OpenAI - or 'ChatIPO', as Deutsche dubbed the creator of ChatGPT - is not expected to make a profit for years. How this plays out could set the market tone for the rest of the year.

* Keepin' it real #1

Real yields on Treasury Inflation-Protected Securities are high for a reason, but are they high enough to be a 'buy'? The 30-year TIPS yield nudged 2.90% this week, the highest since 2008, the 5-year yield 1.70% and the 10-year yield 2.20%, both the highest in a year.

These may look like decent real returns worth locking in for investors seeking inflation protection for the bond side of their portfolio. On the other hand, is there room for them to rise even higher in the coming weeks and months?

* Keepin' it real #2

Are bond yields now high enough to become a problem for equities? Nominal and inflation-adjusted measures of the 'equity risk premium' are at or close to levels not seen for two decades or more, which suggests they might be.

JP Morgan's Nikolaos Panigirtzoglou says stocks are indeed expensive relative to bonds from a long-term investor's perspective, but also notes there is "some way to go" until we are in exuberant late 1990s territory. "There is currently more limited room before a further rise in real bond yields starts becoming a problem for the equity market."

Can Wall Street boom soothe workers' pain?

Two things can be true at once: the majority of U.S. households own stocks and are getting richer as Wall Street hits new highs, yet the gains are thinly spread. As U.S. workers' share of national GDP slumps to an all-time low and fears of an AI "jobpocalypse" grow, this broad but concentrated equity ownership is assuming greater significance.

Can the so-called "wealth effect" – people feeling richer and spending more as asset prices rise - offset other, more challenging economic forces bearing down on the average Joe?

Maybe. But the wealth effect is not equally distributed.