Meta Muse-cil

The constipated Bull seems to have been cured.

Despite soaring Treasury bond yields, investors are being sucked back into the AI momentum trade. Interest rates matter, but earnings matter more, I guess. Yesterday saw a new potential earnings catalyst for the AI cycle. Meta's latest product breakthrough: Muse.

I, like many others, had worried that the bond market would cause a larger correction than we have seen. Why did the 5% yield level turn out to be a paper tiger?

Let's start with a bit of context. Treasury bonds are coming back from a nearly 20-year period of artificial pricing. Through the mechanisms of ZIRP, QE, and YCC (look 'em up), bond yields have been suppressed by political intervention. This 5% level, although a convenient round number, is just the new normal. It is perfectly justifiable in a world of 3% inflation and 2% real GDP growth. So when the confidence-inducing rate hike was announced by the Fed, a green light for risk-takers flashed brightly. The bond market, always the adult in the financial room, is now back in charge.

And yesterday's drop in oil prices, combined with the reopening of a Saudi pipeline, renewed hopes for a peace deal with Iran and eased fears of multiple energy-induced interest rate hikes. With politics likely to dominate in the short term, investors can ignore the Fed for now.

Meta's 'Muse' is the new No.1 on Apple's App Store. Why? Simple: it is the poster child for the transition of AI functionality to mass consumer adoption. I mean, why order all those NVDA chips and build giant data centers if there isn't demand for your product? It's sweet revenge for Mark Zuckerberg on the tech hipsters who regularly dismiss his Facebook as 'Boomer TikTok'. Meta is clearly ahead, as Grok, ChatGPT, and Claude lack the agentic qualities of Muse.

Momentum investors have been struggling to regain the upper hand lately. But the sharp correction in the relative performance between momentum and old-economy value stocks has held at an important uptrend (chart below). The excitement surrounding AI development had recently diminished due to opposition from politicians worried about the impact on prices from increased demand for land, water, and electricity. Now the real battle begins for the ultimate prize: the consumer's home page. Tech's market leadership has been reinvigorated. Cue the rotation back from energy to technology.

Momentum vs Value Relative Strength

The AI super-cycle has a new focus on adoption. Amazon, Apple, Google, Microsoft, and the start-ups OpenAI and Anthropic will reveal their agentic products shortly, thus blunting Meta's first-mover advantage. Although I don't want Mark Zuckerberg to have all my passwords, consumers will eventually embrace the advantages of AI agents in their everyday lives.

Yesterday's bounce has given the bull new life. And this week is pregnant with political possibilities. Today's Greenland agreement is perhaps the new direction of travel for Trump. Compromise without admitting capitulation. The fuse is getting shorter for the GOP with the Midterms just 42 days away. Let's hope Taco Trump fixes the mess created by his failed Iran gambit too.

That would really get things moving!

Risk Model: 4/5 - Risk On

The Model had it right last week. Risk On indeed! Only the home-gamers in the AAII sentiment survey are caught napping. They must be waiting for an all-clear signal in the Strait of Hormuz, I guess. But this market isn't waiting for them.

Copper's relative strength against gold has sharply rebounded as fears of an economic slowdown due to a hawkish Fed have been judged as overblown. Copper's dominance is usually a sign of a strengthening economy. But rather than its traditional role, it is now part of the AI momentum trade due to its critical role in the data center buildout. Can you imagine what copper prices would be if the U.S. and China real estate busts hadn't happened? The Fed hike has been shrugged off this week, reflecting that they are still behind the curve on real rates.

Cu/Au Relative Strength

Copper is still my favourite hard asset. The secular bull market has more to run. This chart says it all. After long periods of consolidation, the 'red metal' gets red hot.

Copper

The potential end of the Crypto Winter corroborates that assessment of the Fed as well. The momentum and volume measures gave a classic non-confirmation of the July lows. Buy.

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