AI and Interest Rates: A Reversed Market

Major stocks like SpaceX, SK Hynix, and Google tumbled, and small and medium-sized stocks were hit even harder.

The Treasury yield, which surged 15 basis points in 17 months, reached its highest level since 2007, fueling market fear.

Existing expectations for rate cuts have disappeared, and concerns about a shift to a tightening stance are spreading.

At the summit, President Trump rejected Iran's proposal to open the Strait of Hormuz, leading to a breakdown in concrete agreements.

The two countries agreed to extend the trade agreement period by two months, from November to January, but the purchase of US coal remained a recommendation, raising questions about its actual deterrent effect.

Discussions about the risks and benefits associated with AI were planned, but a concrete roadmap for cooperation was excluded from this agreement.

Starting with the China summit in November and concluding with the G20 Florida Miami summit in December, the leaders of the US and China are scheduled to alternate meetings.

Following the November China summit, face-to-face meetings between the two leaders will be pursued again at the G20 Summit in Florida Miami in December.

Individual investors showed caution, selling stocks, primarily tech stocks, in the New York market.

In contrast, institutional investors and hedge funds absorbed individual selling volume, maintaining their buying stance.

This is based on the fact that the largest AI infrastructure investment in history is currently underway.

With recent AI security issues, such as the OpenAI hacking incident, coming to light, major companies like Google and Salesforce have agreed to establish an AI safety standards body.

This indicates a growing consensus for government intervention and regulation to ensure the safe use of technology.

The past trend of SK Hynix's stock price adjusting whenever Solidigm-related news was reported raises market caution.

Given the past history of SK Hynix's stock price adjusting in response to Solidigm-related news, attention is focused on the impact this listing plan will have on the market.

Meta's stock price showed strength, recording its highest monthly increase since 2013.

Meta is focusing on acquiring users by opening up agentic AI tools for free, planning to strengthen its future advertising revenue model through this.

At Meta Connect, the company also announced an expansion of its new VR devices and smart glasses lineup, accelerating the establishment of an AI-based extended ecosystem.

Alexander Wang will soon unveil the most advanced training model, and Meta Muse will be integrated into Mac apps, introducing a feature that continues to operate even when users are away.

Oracle's stock price plunged after it issued a force majeure notice due to delays in its 2.5GW Jupiter project, but the company clarified it is proceeding with the project as planned.

Oracle explained that the notice was part of normal business operations.

Fortunately, other AI-related stocks like CoreWeave did not decline, preventing a broader instability in the AI sector.

Tesla is set to unveil its autonomous robotaxi on 'Robotaxi Day' on October 1.

Additionally, the release of third-quarter delivery figures is scheduled for October 2, drawing significant investor interest.

SpaceX is awaiting its 14th Starship launch, and in collaboration with Google, it plans to send TPUs into space as part of the Suncatcher project, set to launch on a SpaceX Falcon rocket on October 1.

An increase in term premium, reflecting supply-demand uncertainty, directly impacts US stock market valuations.

Rising growth and inflation expectations are perceived as acceptable factors by the market, but an increase in term premium, reflecting uncertainty in Treasury supply and demand, acts as a greater negative factor for the stock market.

Guest Jung Mo explained that the rise in term premium stimulates multiples and valuations, which is a much larger negative for the stock market, and noted that with both factors currently rising, market anxiety is increasing.

The US third-quarter GDPNow estimate is 5.2%, a significant increase compared to 1% in the previous quarter.

Despite the high interest rate environment, expectations for US economic growth act as a key pillar of support for the stock market.

It was pointed out that for the AI industry to expand, either interest rates need to fall, or there needs to be an increase in companies that can generate profits even with high interest rates.

The speaker explained this polarization by mentioning that the IT sector is currently dominating, while sectors like energy have not been performing well in terms of earnings over the past month.

The forward P/E ratio of the S&P 500 is around 19-20 times, which, when inverted, implies an expected return of approximately 5%.

Currently, the spread between the US 10-year Treasury yield and the S&P 500's forward earnings yield is nearly zero.

Without an increase in corporate earnings or a decrease in interest rates, the relative attractiveness of stocks compared to bonds is bound to diminish.

From August to October 2023, the 10-year yield, which had risen to 5%, began to decline after Treasury Secretary Yellen's announcement of Treasury issuance plans.

At that time, Secretary Yellen announced an increase in the proportion of short-term Treasury bills and a reduction in long-term Treasury bond issuance, alleviating market concerns.

Expectations are forming that a similar supply adjustment will occur with the US Treasury's bond issuance plan announcement in early November this year.

Market attention is focused on whether such government intervention can lower term premiums and contribute to the stabilization of long-term interest rates.

Conversely, the Taiwanese and US stock markets are maintaining near their peaks, highlighting the undervaluation appeal of the domestic market.

Executive Director Sung Sang-hyun emphasized the importance of understanding why Korean stock prices are falling despite continuously increasing earnings.

Korea's EPS growth rate reached a very high 91% over the past six months, but its recent one-month EPS increase has slowed compared to Taiwan.

While Taiwan's EPS increase has been consistently maintained, Korea's average monthly EPS acceleration has actually shown a declining trend.

Controversy over the peak of the memory cycle reflected in market consensus led to a slowdown in semiconductor stock gains.

The slowdown in growth of industries downstream from memory (such as autonomous driving, robots) has weakened expectations for the memory cycle, which is analyzed as contributing to the relative weakness of the Korean stock market.

It was explained that the collapse of the dot-com bubble in the past was primarily caused by the government stopping money printing as it began collecting taxes.

Currently, the US government continues to print money through ongoing fiscal deficits, which differs from the dot-com bubble era, and the continuation of the government's money-printing policy is expected to play a key role in the long-term outlook for the AI cycle.

The tariff truce period was extended by two months, from November to January 10 next year, and the two leaders are scheduled to meet again at the APEC Summit in November and the G20 Summit in December.

Sensitive topics such as Taiwan's independence, semiconductor export controls, and AI-related cooperation were either not discussed or only met with general statements of position at the talks.

Some speculated that although the summit concluded without a major breakthrough, meetings for stable management of bilateral relations would continue.

A Bloomberg survey showed that more than half of market participants expect the US 30-year yield to reach 6% within this year, which would be the highest level since the dot-com bubble collapse.

Samuel Martinez, a portfolio manager at Vanguard, mentioned that market participants are preparing for multiple interest rate hikes.

This marks four consecutive quarters of record-high earnings since the fourth quarter of last year, with the full-scale sales of HBM expected to be the key driver for Q3 performance.

According to KB Securities, Samsung Electronics' HBM proportion of its DRAM production capacity is projected to expand from 27% last year to 33% this year, and 40% by 2027. The lead time for server DDR5 is also extending up to 52 weeks, increasing price pressure on general-purpose DRAM.

The US market fell on Wednesday and Thursday during the holiday period due to concerns over rising Treasury yields, but rebounded on Friday.

Calculated simply, the impact of the US market trend is expected to be around a 1% decline, but overall, it can be seen as having little significant effect on the Korean market.

The US-China summit concluded without special issues other than a two-month extension of tariff trade regulations, and the market should focus on month-end/quarter-end rebalancing and supply-demand related to Samsung Electronics' ex-dividend date.

Over the past three days, Samsung Electronics rose 10%, while SK Hynix only increased by 1%, showing a divergence in stock prices.

This is attributed to the influx of demand seeking dividends ahead of Samsung Electronics' quarterly ex-dividend date.

SK Hynix faced controversy over the listing of its subsidiary Solidigm as a negative factor, but some experts argue that the growth of a subsidiary should not be seen as a negative, leading to differing market interpretations.

The rise of AI agent commercialization as an issue is also largely connected to why the semiconductor materials, parts, and equipment (Sopex) sector showed strength.

Bond yields have surged, leading to a 5% era for Treasury yields, and with the S&P 500's multiple at 20x, the expected return and international interest rates both at 5% are causing market concern.

The market believes that the government and the Fed will provide liquidity and implement policies to defend against inflation, providing downside support.

A Goldman Sachs report mentioned past instances where the stock market rose after US midterm elections, suggesting that market expectations remain present.

The speaker believes that differentiation will become much greater, with only companies that can withstand high interest rates, companies that can invest even with high interest rates, and companies or industries that can connect to profits continuing to advance.

Historically and experientially, investors who only worry about market weakness find it difficult to make profits.

Even among those who went in the right direction, quite a few did not make a profit, and the structure becomes riskier towards the end.

The market seems to be moving forward believing that the government and the Fed will act, and the speaker expressed a personal opinion that it will eventually converge towards a predetermined direction.

Meta's new wearable devices integrate shopping, payment, and productivity control functions. This is expected to accelerate the commercialization of AI agents, which will determine the new winners after smartphones.

These devices aim to integrate functions such as shopping, payment, productivity, computer control, and email, which is part of what is called AI agentic.

The AI devices introduced by Meta are expected to provide clues for determining the new leading stocks that will dominate the future AI agent market.

The spread and commercialization of such AI technology are expected to have a positive impact on related infrastructure companies.

Details of the US-China summit are expected to be announced, but based on confirmed information so far, there appears to be no direct damage to the Korean stock market.

On the contrary, the market is interpreting it as a resolution of uncertainties and a mitigation of risks in related sectors such as secondary batteries.

The US stock market experienced pressure from rising Treasury yields during the holiday period, but on the last day, the Philadelphia Semiconductor Index rose, buoyed by the Meta Muse effect, creating a positive atmosphere.

Meta's new AI product launch and expectations for AI market growth and expansion are likely to have a spillover effect on domestic memory and materials, parts, and equipment (Sopex) companies.

With significant expenditures on R&D and sales, companies may face difficulties if performance visibility is lacking during earnings season.

Meta's new product launch is expected to drive AI market expansion and have a spillover effect on domestic memory and materials, parts, and equipment (Sopex) companies. Conversely, a cautious approach is required for new investments by companies with ongoing funding concerns.

At this point, a strategy focusing on short-term approaches or profit realization is recommended until the trend of these stock groups reverses.

LG Electronics continuously communicated about Nvidia, maintaining its box-bound range, while Naver communicated relatively less with the market.

However, with remaining momentum such as the Nvidia investment capital increase payment scheduled for late October, the possibility of stock price recovery is also mentioned.

However, it is advised that for domestic quantum-related companies, theme-based short-term response strategies are effective as actual earnings are still minimal.

Remarks by Federal Reserve officials are scheduled, and with a 64% possibility of an October rate hike, their statements are expected to have a significant impact on the market.

Also, aerospace-related stocks are gaining attention in relation to SpaceX's 14th Starship test flight schedule.

Construction stocks' price movements vary based on diverse issues, including President Trump's statements and shifts in geopolitical risks.

Changes in Trump's stance on Iran's 7-day ceasefire proposal, for example, have been linked to expectations for reconstruction and nuclear power projects.

Issues related to investment in the US, such as data center construction, are synergistically contributing to a heightened atmosphere in the construction sector.

Analysis suggests that new market movements, such as OpenAI signing contracts with small and medium-sized data centers recently, could present opportunities for domestic construction companies.

The current financial market maintains stability despite rising US Treasury yields due to a narrowing term premium, and the market believes it's difficult for the 7,000-point level to break.

Upward revisions to earnings forecasts for major US tech companies continue, driving market growth.

A stronger Korean Won is expected to positively influence foreign capital inflows.

Although short-term volatility due to ex-dividend concerns is anticipated, strong expectations for the HBM4 market and positive guidance announcements are likely to attract foreign capital into semiconductor sectors like Samsung Electronics.

Analysis of past rate hike periods from 2004-2006 and 2017-2018 revealed a pattern where, despite rising interest rates, term premiums contracted and stock prices increased.

These periods commonly saw changes in IT growth paradigms, such as the internet and cloud, offsetting interest rate hike risks.

The growth potential of the current AI ecosystem is also expected to be a crucial variable in overcoming the interest rate hike trend.

However, as seen in past cases, the market cycle could rapidly change if unexpected geopolitical risks or crises arise.

Recently, unlike past trends centered on large-cap stocks, small and mid-cap stocks have shown strength in the market.

Foreign capital inflows tend to concentrate on small and mid-cap stocks, such as electrical and electronics materials, parts, and equipment (Sopex) on the KOSDAQ. While Samsung Electronics and SK Hynix are not viewed negatively, foreign capital is focusing on small and mid-cap stocks due to supply-demand factors, such as self-share buyback periods, that make them move more agilely.

Individual investors are also showing a pattern of short-term trading in small and mid-cap stocks, moving towards more volatile options.

After the market downturn from June to August, the Korean market appears to be returning to a small and mid-cap-led market driven by themes and sectors.

By utilizing AI agent tools, small and medium-sized enterprises can have the opportunity to threaten large corporations if they possess passion and ambition.

The era has arrived where one can summon and reference the principles or advice of famous investors through AI.

After the September macro events concluded, exclusive events from major AI companies like OpenAI, Meta, and Google have begun in earnest since late September.

Unexpected risks are expected to decrease around major international events such as the US midterm elections (November 3) and China APEC (November 18). A stock-specific market driven by the valuation attractiveness of M7 companies is anticipated.

It is necessary to pay attention to the movements of materials, parts, and equipment (Sopex) related stocks regardless of HBM supply shortages.

With an estimated 3.5 additional rate hikes, if international oil prices fall below $80, there is a possibility of a repeat of the average 5% strong rally observed after previous final rate hike periods.

The market is currently reacting sensitively, reflecting the possibility of about 3.5 additional rate hikes by next year. If international oil prices fall below $80, the number of hikes could decrease, leading to a relief rally.

As companies are inevitably becoming more efficient due to AI, the relative superiority of stocks over bonds is expected to continue even in a high long-term interest rate environment.

A clear inverse correlation is observed between international oil prices and biotech stocks, with a pattern of oil price peaks coinciding with biotech stock troughs, and oil price troughs coinciding with biotech stock peaks.

Currently, unlike in the past, memory semiconductors account for a larger share of exports, leading to the view that rising oil prices are not a direct cause of a Korean stock market crash.

After the advent of Meta Muse, as intelligence becomes common, the speaker believes that occupational groups like their own, who perform tasks of synthesizing and analyzing existing information, may face a professional crisis.

Alexander Wang mentioned that AI agents 'will create a Mecca Goliath among small and medium-sized enterprises' and that 'large corporations that are slow to act may face a crisis.'

Unlike the AI glasses Zuckerberg brought two or three years ago, Meta's AI glasses are now starting to come out with designs that are perfectly acceptable to wear in daily life, seemingly overcoming the sense of awkwardness. The speaker predicts that if AI glasses become a new hardware form factor, Meta will capture 90% of the market share.

Last week's five consecutive days of net inflows offset the decline in Bitcoin prices.

Recently, Bitcoin has shown a stronger correlation with Nasdaq, exhibiting a trend of synchronizing with risk assets. Additionally, the Fed's announcement of stablecoin regulations garnered market attention.

In response, the Iranian Foreign Minister stated that Trump's remarks were not an official position through official channels, so they would wait for verification.

Meanwhile, Gulf countries also expressed opposition to the issue of tolls related to the reopening of the Strait of Hormuz.

This Wednesday, the Personal Consumption Expenditures (PCE) inflation data will be released, followed by non-farm payrolls and unemployment rate data on Friday.

Low inflation figures and moderately weak employment data are generally considered favorable for risk assets.

The Financial Times predicted that the unemployment rate in this employment report could rise from 4.1% to 4.2%, with some views suggesting this could make interest rate hikes more difficult.

This week's various events, including inflation and employment data, are expected to lead to market volatility.

In this new model, XRP is used as collateral, and the RLUSD stablecoin handles payments and settlements.

This signifies a strategic shift from a simple transfer-focused business model to one that involves long-term holding and utilization of XRP.

The circulation of the RLUSD stablecoin has recently grown rapidly, and it is attracting interest from operating platforms in the Ethereum ecosystem by offering high interest rates.

When investors deposit XRP into a vault, these funds are lent to market makers, who use them for purposes such as managing XRP ETFs and pay a portion of the profits as interest.

This is similar to Ethereum's staking and interest income structure, but XRP differentiates itself through its strong connectivity with institutional networks.

With the Ripple Foundation directly implementing functions and proposing standards for developers within the ecosystem to create products, the goal is to target a DeFi market centered on financial institutions.

The circulation of the RLUSD stablecoin surged approximately fivefold from June last year to September this year, showing rapid growth.

This is because RLUSD offers higher interest rates than USDC or USDT within the Ethereum ecosystem, making it an attractive asset.

The interest provided by RLUSD is based on US short-term bond yields and interest income from demand for RLUSD loans.

In the US market, on-chain finance is being treated as an agenda as important as AI.