Market Paradox Amid Rising Interest Rates

Recently, short-term treasury yields have been continuously rising, amplifying market anxiety. However, the Nasdaq and S&P 500 indices have paradoxically hit new highs.

This is evidence that market participants are finding it increasingly difficult to make investment decisions in a high-interest rate environment, leading to deep contemplation about whether to buy.

Currently, the stock market shows a polarization phenomenon where only AI-related stocks are rising, and the majority of other stocks are being sidelined.

The US 10-year Treasury yield is fluctuating in the low to mid-5% range, leading to a tug-of-war over interest rate control between the government and the bond market. At the core of all these macroeconomic variables, former President Trump is identified as a key factor.

The US 10-year Treasury yield has surpassed 5.3%, and the 30-year yield has risen to 5.7%, reaching dangerous levels.

The inversion of the yield curve, historically seen as a recession signal, and the rise of real interest rates to 4% are occurring simultaneously, interpreted as typical signs of an overall tightening financial environment.

Despite the S&P 500 index reaching new highs, the true state of the market is assessed as unhealthy.

The number of declining stocks is increasing, and there are far more stocks hitting new lows than new highs. In September alone, 75% of S&P 500 stocks declined.

Despite high-interest rates, AI-related stocks, which constitute 40-50% of the US stock market, show a similar concentration of funds as leading stocks during the dot-com bubble. AI companies with annual revenue growing twofold are offsetting high discount rates and receiving market favor.

This growth trend maintains investment appeal even in a rising interest rate environment. The proportion of AI-related stocks in the US stock market, at 40-50%, is similar to the share of leading stocks during the dot-com bubble or the Japanese bubble. New themes like agentic AI and infrastructure tailwinds continuously support the strength of the AI sector.

The 1-month correlation coefficient between oil prices and interest rates is extremely high at 0.95, indicating strong co-movement.

Oil prices may fall short-term if Middle East conflicts are resolved, but they show a long-term trend of continuously rising lows. The increase in oil prices is translating into service inflation, exacerbating inflationary pressures.

The Federal Reserve Chairman has also expressed concerns about service price burdens, and geopolitical risks like the Iran war are major factors pushing oil prices higher.

Ultimately, oil price movements critically influence interest rate fluctuations, and the direction of the Iran war is analyzed to be in former President Trump's hands.

The semiconductor sector, after peaking in June, has seen its multiples significantly decline, entering an undervalued phase. While valuation burdens have decreased, earnings remain robust, creating an environment for stock price appreciation.

The AI semiconductor sector has undergone adjustments, and valuation burdens are currently not high. If it shows additional growth in the earnings season at the end of October, it could gain momentum for stock price increases.

However, the US midterm elections scheduled for November could emerge as a potential risk for the AI market due to issues such as data center regulations.

The incumbent governor also responded by issuing an order to halt data center permits, indicating that regulatory issues have emerged as a key variable in the election. An unknown Democratic candidate gained support by pledging a 'complete ban on anti-data center construction.'

In response, the incumbent governor also issued an order to completely halt data center permits, demonstrating the significant impact of data center-related issues on the election.

A decline in interest rates perceived as a loss of growth momentum rather than macro stability would be detrimental to the stock market.

A halt in data center construction could lead not only to a decline in stock prices of related companies but also to a decrease in bond yields. If this decline in interest rates is perceived as a loss of growth momentum rather than macroeconomic stabilization, it is expected to significantly impact the entire market.

Bitcoin has recently shown a higher correlation with Nasdaq than with gold, strengthening its characteristics as a growth stock.

Agentic AI is highly likely to emerge as the next theme in the stock market, and Bitcoin is drawing renewed attention as blockchain technology is suitable for building the infrastructure where agents operate. Bitcoin has recently shown a higher correlation with Nasdaq than with gold, solidifying its position as a growth stock. Furthermore, the utility of blockchain as a high-frequency, low-cost transaction platform is also being re-evaluated.

In the current situation where AI leads the market, if AI stocks collapse, the entire index is expected to shake, negatively impacting economic growth momentum.

If interest rates exceed 5.5-5.6%, the formation of a new price consensus is inevitable. Approximately 70bp of leeway currently remains.

If interest rates rise further to the 5.5% to 5.6% level, the market is expected to form a new price consensus after asset revaluation.

During this revaluation process, market volatility may increase, requiring caution from investors.

A sharp rise in interest rates, occurring during the leverage operation in the bond market, is a key factor that can trigger panic selling by financial institutions due to insufficient collateral and liquidation crises.

Asset managers using leverage in the bond market may face insufficient collateral and liquidation crises due to falling bond prices when interest rates surge.

The Silicon Valley Bank crisis in 2022 was also primarily caused by the rapid pace of interest rate hikes. While financial institutions can respond through securitization if interest rates rise gradually, a sharp increase within 1-2 weeks can trigger panic selling.

The Fed's hesitation to aggressively raise interest rates is due to a complex interplay of burdens related to AI investment and the issue of U.S. debt, primarily short-term bonds. It is suggested that the Fed Chair's intention may be to control inflation expectations by utilizing market fear rather than actual interest rate hikes.

Similar to Mario Draghi's stabilization of market rates through mere statements without actual measures in 2012, the Fed is also aiming for a tightening effect by using market sentiment instead of presenting a specific path.

The Fed Chair is interpreted as aiming to control inflation expectations by allowing the market to anticipate and respond to tightening on its own, rather than by presenting a concrete policy path.

Geopolitical risks such as the Iran war are major factors pushing up oil prices, which means that oil prices could be determined by Trump's Middle East policies.

If oil prices are not contained and inflation resurges, the Fed will have no choice but to push for high-interest rate policies, making Trump's policy direction a decisive factor for inflation and interest rates.

The current real interest rate is around 2.95%, a level that can burden the market. However, unlike in the past, Bitcoin's synchronized growth stock nature with Nasdaq partially offsets the impact of interest rates.

When investing in Bitcoin, it is analyzed that it is important to observe whether the growth rate of the AI industry can overpower a high discount rate, rather than the level of real interest rates.