Latest / Merryn Talks Money / French Bond Markets and AI Neoclouds Feel The Pressure

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French Bond Markets and AI Neoclouds Feel The Pressure · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios. Podcasts. Radio. News.
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  Speaker 2: Welcome to the Merlin Talks Money Market Wrap, where we
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  Speaker 2: talk about the biggest moves in markets this week and
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  Speaker 2: what's driving them. I'm John Stebic, senior reporter and author
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  Speaker 2: of the Mindstilled newsletter. I'm in today while Merlin's out.
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  Speaker 2: And joining me in the studio is one of our
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  Speaker 2: regular guests, Sam Unstead. Sam is the co-editor of Bloomberg's
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  Speaker 2: Markets Today blog, who have also launched a newsletter recently
• 0:40
  Speaker 2: you should sign up for. And Sam writes about UK stocks, economics,
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  Speaker 2: central banks and global markets. Today, we're going to be
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  Speaker 2: talking about French bond yields, which have exploded higher. We're
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  Speaker 2: talking briefly about the UK and why we're currently somewhat
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  Speaker 2: in the good books for a change. And we'll also
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  Speaker 2: be talking about AI and what's been going on with
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  Speaker 2: the latest wobbles in the art market. Sam, thanks very
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  Speaker 2: much for joining us again. It's nice to have you
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  Speaker 2: back on the show.
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  Speaker 1: Thank you for having me.
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  Speaker 2: So, I just wanted to warn our more sensitive readers
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  Speaker 2: that today you're going to hear the worst butchering of
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  Speaker 2: a foreign accent by a Scotsman since Sean Connery was
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  Speaker 2: in his prime. So, you know, just turn down the
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  Speaker 2: sound now, particularly if you're French, but I have to
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  Speaker 2: say zut alors and sacre bleu. What's been going on
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  Speaker 2: in the French bond market this week?
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  Speaker 1: Well, nothing good. It has been a striking shift in
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  Speaker 1: the way that French assets in general actually are being
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  Speaker 1: looked at over the course of the last couple of months.
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  Speaker 1: So with the French debt situation and their political situation,
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  Speaker 1: This does come up, like this has happened previously, not
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  Speaker 1: to this extent, but pretty much every time they come
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  Speaker 1: round to what are we going to do about the deficit,
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  Speaker 1: you get a similar kind of bit of risk coming
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  Speaker 1: into French bonds. But those incidences have not been accompanied
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  Speaker 1: by an election next year. And so the political risk
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  Speaker 1: in France is now, I mean, really quite drastically high.
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  Speaker 2: Yeah, because you look at the, just for clarity's sake,
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  Speaker 2: The way you measure this is a thing called LISPRED,
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  Speaker 2: which is the gap between the borrowing cost of French
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  Speaker 2: 10-year bonds and German 10-year bonds. And the highest that's
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  Speaker 2: ever been is just under 190 basis points. That's 1.9
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  Speaker 2: percentage points. And today is back up at close to,
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  Speaker 2: not far off 1.8. So it got up to about
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  Speaker 2: 178 basis points then to today. And so that is,
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  Speaker 2: and that's the highest since the Eurozone financial crisis. So
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  Speaker 2: we really are talking about the kind of proper panic,
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  Speaker 2: aren't we?
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  Speaker 1: Yeah.
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  Speaker 2: It's a lot of panic, actually, but a lot of worry.
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  Speaker 1: Yeah, yeah, yeah. We won't go all the way to
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  Speaker 1: panic just yet, although I think we're not that far
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  Speaker 1: off of that. But one thing that's very interesting about
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  Speaker 1: it is that when you look at your bond screens,
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  Speaker 1: which tend to have all of the European countries on them,
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  Speaker 1: For the most part this year, they generally have been
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  Speaker 1: moving in tandem because most of the movement has been
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  Speaker 1: based on oil prices and then onto interest rates and
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  Speaker 1: the curve for the European Central Bank. Now, you're looking
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  Speaker 1: at your screens and German yields today are down. They're
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  Speaker 1: actually falling by quite a bit. And French yields and
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  Speaker 1: Italian yields are going up. So there's a very specific
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  Speaker 1: narrative going on in European bond markets where investors are
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  Speaker 1: assessing who they do and do not like. And actually,
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  Speaker 1: as somebody who works on a UK-focused blog, Gilt, which
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  Speaker 1: have been carrying the so-called moron premium for a while,
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  Speaker 1: and they still do, the gap between French yields and
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  Speaker 1: UK yields was, I think back in May, was about
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  Speaker 1: 150 basis points. Now it's about 30. So it's a
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  Speaker 1: huge change in where investor concerns about political risk, about
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  Speaker 1: government debt are being focused.
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  Speaker 2: Yes, it's nice to be out of the spotlight from
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  Speaker 2: a UK point of view. I mean, you're right, I
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  Speaker 2: was looking at the spread between France and Britain and
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  Speaker 2: basically 10-year gilts haven't yielded less than French debt since 2013.
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  Speaker 2: But we're now only, like you say, about 30 basis,
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  Speaker 2: so 0.3% away. And so again, I mean, I guess
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  Speaker 2: that reflects, it doesn't just reflect France blowing up either. It's,
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  Speaker 2: you know, to be fair to our credit, the market
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  Speaker 2: seems to be giving the benefit of the doubt so
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  Speaker 2: far ahead of the budget next week.
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  Speaker 1: Yes.
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  Speaker 2: Which is interesting.
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  Speaker 1: Yeah. If we do just briefly, yeah, on the UK
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  Speaker 1: and looking, you know, towards the budget next week, the
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  Speaker 1: thing that most investors seem to be kind of saying
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  Speaker 1: is that When Andy Burnham first came in, and previous
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  Speaker 1: to him coming in as well, there were concerns. The
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  Speaker 1: comments he made around finding flexibility in the fiscal rules,
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  Speaker 1: that caused a little bit of nervousness. Not as much
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  Speaker 1: as we've seen previously, but some. But they have been,
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  Speaker 1: Andy Burnham and also the Chancellor, John Healey, very, very clear.
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  Speaker 1: And in fact, have probably said at this point, maybe
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  Speaker 1: a hundred times, we are going to stick to the
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  Speaker 1: fiscal rules. and we are going to find a way
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  Speaker 1: to do what we want to do without causing a
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  Speaker 1: huge upset in the bond market. Whether that happens or not,
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  Speaker 1: we shall see next week. But certainly most investors are
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  Speaker 1: just not that worried. They just feel as though it's
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  Speaker 1: going to be kind of okay. And that worry is
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  Speaker 1: just very, very much honing in on France. And then
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  Speaker 1: going out to the sort of weaker, if you like,
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  Speaker 1: parts of the Eurozone, as far as investors are concerned,
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  Speaker 1: and Italian bonds and you could feel a bit sorry
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  Speaker 1: for Italy in some ways, because they, in the past,
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  Speaker 1: were always BTPs, Italian government bonds, were the ones that
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  Speaker 1: would have that kind of role that guilds had played
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  Speaker 1: for quite a long time, where guilds would sometimes just
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  Speaker 1: sort of sell off for almost no reason. That happened
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  Speaker 1: to Italy a lot, again, because of a lot of
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  Speaker 1: government change, which is, again, something we share with them.
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  Speaker 1: That's no longer been the case in Italy. Actually, they've been,
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  Speaker 1: for them, extremely stable politically over the course of the
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  Speaker 1: last couple of years. But because there's this concern in France...
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  Speaker 1: That's spreading out to the rest of the Eurozone and
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  Speaker 1: it's dragging Italy along it.
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  Speaker 2: It's interesting, isn't it? Because on the one hand, Britain
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  Speaker 2: obviously has had some economic growth, some kind of surprises
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  Speaker 2: to the upside, some figures that have kind of made
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  Speaker 2: the market feel more comfortable. But really, I think you'd
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  Speaker 2: probably have to argue that what's made the difference is
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  Speaker 2: that Healy and Burnham essentially speak in a more reassuring
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  Speaker 2: way than Stammer and Reeves did. And from that point
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  Speaker 2: of view, it is almost purely a kind of presentational
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  Speaker 2: political issue. I think the market probably feels that, okay,
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  Speaker 2: these guys broadly seem to be in charge. The party
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  Speaker 2: broadly seems to be behind them and they're roughly saying
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  Speaker 2: the right things. And we'll see if that comes to
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  Speaker 2: fruition at the budget, but there's that sense of kind
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  Speaker 2: of confidence that, and it is in the politics. And
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  Speaker 2: I think what's interesting for, People have been in markets since,
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  Speaker 2: you know, whatever, the kind of 2000s and the 2010s.
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  Speaker 2: The assumption was mostly that politics didn't matter and it
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  Speaker 2: was kind of a side issue. And obviously this is,
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  Speaker 2: you know, very much demonstrated that it's not because ultimately
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  Speaker 2: the French thing boils down to it's not the fact
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  Speaker 2: that the debt is so high. It's the fact that
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  Speaker 2: there is nobody, essentially nobody in charge at the moment.
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  Speaker 2: And we don't know who's going to be in charge
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  Speaker 2: in about a year. But it's going to be at
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  Speaker 2: least six to eight months before we actually have a
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  Speaker 2: clear view, won't it?
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  Speaker 1: That is a really good point because, as I say,
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  Speaker 1: you're in a European debt market or a global debt market, really,
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  Speaker 1: or global government bond market, which, you know, for the first,
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  Speaker 1: maybe for the first time ever, really, is competing with
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  Speaker 1: a whole new set of potential investors. borrowers right from
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  Speaker 1: from the ai trade and and in all honesty like
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  Speaker 1: if you're sat there you know who do you want
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  Speaker 1: to to lend money to you've got france over here
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  Speaker 1: where as you just mentioned the politics is is a
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  Speaker 1: real mess at the moment and and the election is
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  Speaker 1: unlikely to clear any of that up so the political
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  Speaker 1: risk is really high or do you want to lend
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  Speaker 1: that money to microsoft to just throw off an enormous
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  Speaker 1: amount of cash and they're continuing to drive you know
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  Speaker 1: kind of 25 percent growth so Where am I going
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  Speaker 1: to put that money? And obviously Microsoft don't need as
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  Speaker 1: much money as France does. But even so, within a
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  Speaker 1: market where there's this huge extra set of considerations to
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  Speaker 1: take as to who's in the market and there is
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  Speaker 1: only so much money to go around, if you have
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  Speaker 1: a political situation like that, anything you can use to
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  Speaker 1: kind of divide up, like who do you want to
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  Speaker 1: lend to and where is the weaker part of the market,
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  Speaker 1: investors will use it.
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  Speaker 2: Rampant speculation time here just out of curiosity because obviously
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  Speaker 2: the spread is blowing out so that's the technical term
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  Speaker 2: for saying France is costing France a lot more to
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  Speaker 2: borrow than Germany there is an element of spillover into
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  Speaker 2: Italy as well which is arguably not entirely deserved and
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  Speaker 2: the European Central Bank at least part of its job
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  Speaker 2: is to keep an eye on these things Now, obviously,
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  Speaker 2: it would say at the moment, well, actually, we're only
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  Speaker 2: allowed to intervene to close the spreads if there's something
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  Speaker 2: irrational driving it. Whereas it's perfectly rational to want to
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  Speaker 2: charge France more to lend them money. At what point
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  Speaker 2: do you think the ECB starts to say, actually, there's
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  Speaker 2: a risk that this is existential for the euro? And
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  Speaker 2: that kind of gives them permission at that point, doesn't it?
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  Speaker 1: Yeah, I mean, I think we're quite a long way
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  Speaker 1: from that. Because I think... I need an exact spread
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  Speaker 1: number of some. If you look back to the Euro crisis...
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  Speaker 1: You know, nearly 15 years ago now. It's depressing, isn't it?
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  Speaker 1: But if you look back to that, the underlying issues,
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  Speaker 1: like in terms of the banking sector and stuff like that,
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  Speaker 1: was much more fraught and much more difficult than it
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  Speaker 1: is now. You know, everything now is much more regulated.
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  Speaker 1: The financial system is much more robust.
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  Speaker 2: This isn't about the banks. This is very much sovereign debt.
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  Speaker 2: So that's a good point.
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  Speaker 1: And I think, yeah, so the spread is, you know,
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  Speaker 1: to Germany has gone out quite a bit. But the
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  Speaker 1: actual yield on French bonds, yes, is much higher than
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  Speaker 1: it was. But it's not at those kinds of levels
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  Speaker 1: where you would look at it and, you know, if
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  Speaker 1: you're invested in it, kind of start crying. Like, it's
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  Speaker 1: not that bad yet. And when you look at the yield,
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  Speaker 1: say the yield has closed against the UK, but it
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  Speaker 1: is still below. So we're not quite at that kind of,
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  Speaker 1: the word I think they would use is disorderly. We're
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  Speaker 1: not quite at that kind of point just yet.
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  Speaker 2: I suppose my assumption is that we probably won't see
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  Speaker 2: anything until we do start getting headlines about the... You know,
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  Speaker 2: you get one big day where the euro suddenly craters
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  Speaker 2: by a percentage point against the dollar or even the
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  Speaker 2: pound or something like that.
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  Speaker 1: Well, and there are also lots of other considerations to
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  Speaker 1: take into account over which Europe and the European Central
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  Speaker 1: Bank have no control whatsoever. You know, oil prices, for example,
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  Speaker 1: the AI trade, you know, and whether there's a bubble there,
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  Speaker 1: if that bubble bursts, you know, that kind of thing.
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  Speaker 1: There are lots of other things to take into account.
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  Speaker 1: But I think we're a way off just yet.
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  Speaker 2: See, that's a really interesting point then, Lois, turning to
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  Speaker 2: the AI and also the energy. But obviously, AI has
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  Speaker 2: had quite a few wobbly weeks, really. And every week
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  Speaker 2: seems to bring a sort of fresh bit just getting
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  Speaker 2: knocked out of the story. It's interesting because I hadn't
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  Speaker 2: really appreciated it, but whenever you start looking around the world...
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  Speaker 2: A lot of these NEO clouds particularly are having either
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  Speaker 2: IPOs falling flat on their faces like in South Korea
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  Speaker 2: or in Australia. Obviously one completely failed to take off
• 12:32
  Speaker 2: like the night before it was pulled. And I'm sure
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  Speaker 2: I saw another couple of kind of slightly smaller ones
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  Speaker 2: this week. Again, I think it was Australia where they've
• 12:42
  Speaker 2: either come out and had to, I think one of
• 12:45
  Speaker 2: them was failed to get kind of power connections for
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  Speaker 2: its data center, and the shares collapsed by about 40%.
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  Speaker 1: Wow, so we can claim that one. Yeah, that's N
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  Speaker 1: scale in the UK.
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  Speaker 2: Oh, yeah, well, I know that one, but there's another
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  Speaker 2: one as well. But yeah, the NEO cloud specifically seemed
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  Speaker 2: to be causing the angst this week.
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  Speaker 1: Yeah, I mean, there's a corollary to draw with bond markets,
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  Speaker 1: which is that if you are starting to get a
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  Speaker 1: little concerned about how much money is being borrowed in
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  Speaker 1: the AI sector or industry or however you want to
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  Speaker 1: term it, You start to think about, okay, well, who
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  Speaker 1: do I want to lend to? And like I said,
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  Speaker 1: the hyperscalers, yes, they are spending an enormous amount of money,
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  Speaker 1: but they've got the money. And if they need to
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  Speaker 1: borrow some money, they can, because they generate huge amounts
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  Speaker 1: of cash, even with the capex that they're doing. The
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  Speaker 1: neoclouds are, in some respects, they're almost sort of startups,
• 13:39
  Speaker 1: but really big startups or really valuable startups, because- they are,
• 13:43
  Speaker 1: you know, highly leveraged to how everything goes. If, for example,
• 13:47
  Speaker 1: so the N scale thing was very interesting because, you know,
• 13:50
  Speaker 1: that's a company that are trying to list, unfortunately in
• 13:53
  Speaker 1: the US, they're a London or a UK based company. Yeah, yeah, yeah.
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  Speaker 1: But they've already had a bit of pushback on the valuation.
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  Speaker 1: So they've had quite a difficult, you know, week or two.
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  Speaker 1: And then Microsoft pulling out of that data center, which
• 14:08
  Speaker 1: I think was in Essex. I think it's the largest,
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  Speaker 1: data center project in the country in terms of the
• 14:13
  Speaker 1: overall value of it, it leaves them in a difficult
• 14:16
  Speaker 1: position because I think I remember this from the story
• 14:19
  Speaker 1: this week, but the vast majority, more than 80% of
• 14:22
  Speaker 1: their revenue comes purely from Microsoft and Anthropic. And so
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  Speaker 1: they are extremely leveraged businesses. So yeah, if you're looking around,
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  Speaker 1: where are you going to lend the money? You do
• 14:32
  Speaker 1: need to, or who are you going to buy as
• 14:34
  Speaker 1: a stock investor? You do need to have a think
• 14:36
  Speaker 1: about where do I, if the cracks are going to appear,
• 14:40
  Speaker 1: where are they going to appear first and it does
• 14:42
  Speaker 1: seem that people are have decided neoclouds which is a
• 14:45
  Speaker 1: word that i don't think i ever thought would just
• 14:47
  Speaker 1: enter my lexicon but now i'm saying it i've said
• 14:48
  Speaker 1: it about six times now it.
• 14:49
  Speaker 2: Just trips off the tongue doesn't it well it seems
• 14:52
  Speaker 2: just they're almost like these very leveraged slivers of data
• 14:57
  Speaker 2: centers that are wedged in between the hyperscalers themselves and
• 15:01
  Speaker 2: the like say anthropic and I mean, I guess if
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  Speaker 2: Trouble was going to show up, they are kind of
• 15:07
  Speaker 2: obvious candidates because they're almost like a mortgage on a
• 15:11
  Speaker 2: data center in terms of their kind of structure. Whereas,
• 15:16
  Speaker 2: you know, at least Microsoft and Google, they're still Microsoft
• 15:20
  Speaker 2: and Google and Anthropic and Chat or, you know, whatever
• 15:25
  Speaker 2: they are. But they're not the same thing, is that?
• 15:27
  Speaker 1: No, no, not at all. I mean, in some respects,
• 15:30
  Speaker 1: you haven't really seen companies like that, you know, these
• 15:32
  Speaker 1: big tech companies really exist before, you know, in terms
• 15:35
  Speaker 1: of just the sheer scale. I mean, maybe you go
• 15:37
  Speaker 1: back to kind of the, you have to probably go
• 15:39
  Speaker 1: back to the beginning of the 20th century for this
• 15:41
  Speaker 1: kind of like enormousness of company. But for those, for
• 15:44
  Speaker 1: the neoclouds in particular, you know, these are the companies
• 15:47
  Speaker 1: that are in the midst of trying to IPO. A
• 15:48
  Speaker 1: lot of them are trying to IPO. You mentioned Firmus,
• 15:50
  Speaker 1: which is the, you know, the company in Australia who
• 15:52
  Speaker 1: had to pull their IPO. And there was a big
• 15:56
  Speaker 1: flop as well in South Korea.
• 15:57
  Speaker 2: Yeah.
• 15:58
  Speaker 1: They need those IPOs. You know, they need to raise
• 16:00
  Speaker 1: that money because they need to shore up their balance
• 16:04
  Speaker 1: sheet so they can continue this, you know, incredible amount
• 16:06
  Speaker 1: of investing that needs to be done in order to
• 16:09
  Speaker 1: meet the demands of the AI build-out. Which then, as
• 16:12
  Speaker 1: you actually just mentioned as well, energy, just quickly as well,
• 16:15
  Speaker 1: is then bumping up against the, you know, it's just,
• 16:19
  Speaker 1: I would say, almost impossible to build enough energy capacity
• 16:23
  Speaker 1: to actually connect all of these things to the grid
• 16:25
  Speaker 1: as well. So then that creates delays and, These are
• 16:28
  Speaker 1: all of the things that are starting to rumble like
• 16:31
  Speaker 1: this question of, yes, there's hundreds of billions of dollars
• 16:35
  Speaker 1: being spent on building out the AI, but can we
• 16:37
  Speaker 1: do it in the timescale that we think? You need copper,
• 16:41
  Speaker 1: you need all these different commodities, you need to build
• 16:44
  Speaker 1: out all these connectors to grids all over the world.
• 16:48
  Speaker 1: And it's hard, complicated, long work. And so the speed
• 16:51
  Speaker 1: it's all moved at, the neoclouds are the ones who
• 16:54
  Speaker 1: are probably getting the first little bit of kind of
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  Speaker 1: pushback that maybe this has gone a bit too fast. Well, yeah.
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  Speaker 2: And what I find really interesting is the AI bubble
• 17:02
  Speaker 2: or whatever is kind of reminding me a lot of
• 17:05
  Speaker 2: the commodity super cycle and the high prices are the
• 17:08
  Speaker 2: cure for high prices. And so the high price of
• 17:12
  Speaker 2: the chips means that people are starting to use the
• 17:14
  Speaker 2: chips more efficiently. Because the other thing that has freaked
• 17:17
  Speaker 2: people out slightly is this kind of meta kind of
• 17:22
  Speaker 2: joint venture. Not so it's not a joint venture, but
• 17:25
  Speaker 2: a tie up with Apple.
• 17:26
  Speaker 1: Yeah.
• 17:27
  Speaker 2: You can basically run Meta's AI agent Muse on Apple hardware.
• 17:33
  Speaker 2: And it's not running on your local Mac. It's, you know,
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  Speaker 2: you'd still have to spend quite a lot. It's kind
• 17:38
  Speaker 2: of a business thing rather than a consumer thing. But
• 17:40
  Speaker 2: the point is that runs locally and you don't need
• 17:44
  Speaker 2: the data center for as much stuff. And then there's
• 17:47
  Speaker 2: that kind of question of, well, wait a minute, if
• 17:49
  Speaker 2: you don't need as much data center capacity, then actually
• 17:54
  Speaker 2: have we spent too much money on these things already?
• 17:57
  Speaker 1: Yeah.
• 17:57
  Speaker 2: So it's going to be interesting to see how that
• 17:59
  Speaker 2: all plays out.
• 18:01
  Speaker 1: Yeah, because, I mean, if the answer to that ends
• 18:04
  Speaker 1: up being no, then it kind of upends everything, you know, because...
• 18:09
  Speaker 1: The amount of spending is truly, truly unbelievable. Not just
• 18:13
  Speaker 1: on the most eye-opening, I suppose, is all the hyperscalers
• 18:18
  Speaker 1: and the CapEx plans. But power companies, electricity companies, grid companies,
• 18:23
  Speaker 1: miners who've got to get new mines going, which again
• 18:27
  Speaker 1: is a long, difficult process. All of a sudden, they're
• 18:31
  Speaker 1: all like, oh, hang on a minute. Do we continue
• 18:33
  Speaker 1: with this? Do we pull back? Do we stop investing
• 18:35
  Speaker 1: in this? it creates an enormous amount of uncertainty and
• 18:39
  Speaker 1: markets really don't like uncertainty.
• 18:41
  Speaker 2: Yeah, it's always the problem with these kind of very
• 18:44
  Speaker 2: capital intensive and long lead time projects is there's always
• 18:48
  Speaker 2: a point at which someone's left hanging like, oh wait,
• 18:51
  Speaker 2: I've only just opened this copper mine that you all
• 18:53
  Speaker 2: needed 10 years ago and suddenly the price is down half.
• 18:57
  Speaker 2: But anyway, that's such is life. Thanks very much, Sam.
• 19:00
  Speaker 2: Excellent to have you on again and have you on
• 19:03
  Speaker 2: again soon, I'm sure.
• 19:04
  Speaker 1: You're welcome. Thank you very much for having me.
• 19:09
  Speaker 2: Thanks for listening to this week's Merrin Talks Money Markets Wrap.
• 19:12
  Speaker 2: If you like our show, rate, review and subscribe wherever
• 19:15
  Speaker 2: you listen to podcasts. And be sure to follow me
• 19:18
  Speaker 2: on X at John underscore Stepek and Merrin at Merrin SW.
• 19:24
  Speaker 2: This episode was produced by Summer Saadi, Moses Andem and
• 19:27
  Speaker 2: Jennifer Seeley. Questions and comments on this show and all
• 19:30
  Speaker 2: our shows are always welcome. Our show email is merrinmoney
• 19:34
  Speaker 2: at bloomberg.net. Special thanks to Sam Unstead. Thank you.