The Warning Still Stands - But Something Has Changed

This week’s update at a glance

• The market just passed an important stress test. The rate moves we were watching arrived, but the feared chain reaction across global markets did not.
• The warning still stands. Several negative catalysts remain in play, but semiconductors are holding up, credit markets remain relatively calm and equities are not confirming a more serious breakdown.
• Relative movement matters more than a single number. The relationship between rates in different countries, and the speed at which those relationships change, can matter far more than whether one yield crosses an arbitrary line.
• Evidence should dictate what happens next. If exposure was reduced, the objective is to rebuild progressively as positive evidence appears, using cash and partial positions rather than reacting to hindsight.

What you’ll learn

• Why the interest-rate differential can matter more than the headline rate move itself.
• Why a US 10-year Treasury yield around 5% is not a magical market-breaking level.
• Why I am watching semiconductors, the yen and credit markets for evidence that stress is actually spreading.
• How cash and partial positions can be used to rebuild exposure without needing to predict what markets will do next.

What changed this week

Last week I believed the potential damage from the rapidly changing macro environment was significant enough to warrant an unusual degree of caution. That risk was real. What we did not know was whether the market would actually confirm it.

This week provided a useful test. The central-bank rate moves occurred, yet the feared chain reaction never arrived. One important reason was that the relative rate differential barely changed. Markets remained surprisingly calm despite an environment that, on simple logic, could have produced a much more disruptive response.

That does not mean the risks have disappeared. There are still several foreseeable catalysts that could create volatility. It means the market has given us new evidence, and our decisions should respond to that evidence rather than remain anchored to what we thought might happen a week ago.

Why equities remain so resilient

There are also genuine fundamental reasons why US stocks continue to hold up despite the long list of macro risks. Corporate earnings remain surprisingly strong, while the AI investment cycle continues to provide more evidence that demand is real and sustainable.

Importantly, that evidence is appearing through the supply chain rather than only at the hyperscaler level. Pricing power in compute capacity and improving evidence of returns and productivity suggest this is not simply a market running on hope. Semiconductors are also continuing to hold up well, which is an important signal while the wider risks remain unresolved.

Where I’m focused now

• Semiconductors: Continued strength would be encouraging. A meaningful deterioration would be one of the signals that conditions are changing.
• The yen and Japanese carry trade: A fast currency move matters because of the enormous amount of global capital financed through low-cost Japanese borrowing.
• Credit markets: There is still no obvious sign of serious stress. That remains important contrary evidence against a more bearish scenario.
• Bond markets: I am less interested in whether one yield is slightly above or below 5% than in the speed and relative movement of yields around the world.
• AI and corporate earnings: Strong earnings and increasingly tangible evidence of AI demand continue to provide support beneath the market.
• Portfolio exposure: If you reduced exposure, rebuild it on positive evidence and tolerable weightings rather than because hindsight makes the earlier decision feel uncomfortable.

Important information

_{Any advice in this video is general advice only. Neither your personal objectives, financial situation or needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice. Garry Davis (AR No:317590) is an authorised representative of Primary Securities Ltd (AFSL No. 224107).}

_{Note to traders* The publishers of this article/information/promotion wish to disclose that they may hold stocks mentioned in their portfolios and that any decision to purchase those stocks should be made only after the purchaser has made their own enquiries as to the validity of any information in this article/information/promotion.}

_{Past performance should not be taken as an indicator of future returns. Trading and investing in financial markets involves risk of losing money.}

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