Pound slumps as Burnham enters the race to be PM, as Cerebras has stunning IPO

The UK is back in focus at the end of the week. After initially rallying, UK bonds fell on Thursday afternoon and yields for the 10-year Gilt rose back above 5%. Plans to topple the Prime Minister have now burst into the open. Wes Streeting resigned from government, but did not announce a leadership challenge directly, as he waits for others to join the race. Andy Burnham is now expected to run in a byelection to pave a long and winding route to number 10, and Angela Raynor is also expected to run in any leadership race. Kier Starmer is also expected to stand. There is no timeline for a contest, so the current prime minister is now a lame duck indefinitely.

The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring. GBP/USD is currently trading at $1.3350, a loss of 1.5% this week. This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect on the pound. There has been a 10bp rise in the 10-year Gilt yield so far this week, but there could be further upside for yields later today when the bond market opens.

Technical signals suggest that there is further downside for the pound to come.  GBP and Gilt markets are impacted by two things: 1, the prospect of a big shift to the left that decimates growth and blows an even bigger hole in the UK’s public finances, and 2, the uncertain nature of this coup to oust Kier Starmer. What if Andy Burnham does not win the by-election to become an MP? Who will become leader then?

Overall, UK politics is a mess, there are already signs that foreign buyers are ditching the Gilt market. If there is a major rout in the pound and/ or Gilts in the coming days, prospective candidates may need to assess whether now was a wise time to make a move against the PM.

Risk off tone to markets as new Fed chair takes the helm

There is a risk off tone to markets as we reach the end of the week. The oil price is rising once again, and Brent crude is higher by 1.2% and is above $107 per barrel. There is still no sign that the Strait of Hormuz will reopen. Although Iran allowed 30 ships to pass through the Strait earlier this week, it is a mere trickle compared to pre-March levels. Added to this, President Trump also sounded irritated by the lack of progress on making a deal with Iran in an interview late on Thursday. Although the ceasefire continues to hold, it remains extremely fragile.

The market is discounting a positive summit between the US and China, and is instead focusing on the lack of progress towards reopening the Strait of Hormuz for another week.

Rising interest rates a major threat to risk rally

After reaching record highs for another day on Thursday, US stock futures are also pulling back this morning. Higher oil prices and rising bond yields are starting to spook investors. The 10-year Treasury yield in the US reached a one-year high on Thursday, which has shifted the dial for stock traders. For some time, analysts have been puzzled by equity markets’ resilience in the face of rising bond yields and clear inflationary pressures. Today we may see the pressure of rising bond yields start to weigh on equities, and futures prices suggest that US indices will pull back from record highs later today and could close the week on a dampener.

Cerebras IPO: AI trade has a new kid on the block

Today, there is a 38% chance of a rate hike from the Federal Reserve by the end of this year. Before March, there were two rate cuts priced in. Without the support of rate cuts and rising global bond yields, it is hard to see how US and some Asian markets can maintain their record highs. Whether or not we see a deep decline for equities could depend on the fate of tech stocks. AI chipmaker Cerebras Systems had a stellar IPO on Thursday. Its stock price doubled  when it opened, and in the lead up to the IPO bankers had raised the opening price on several occasions. Not that long ago, Cerebras was known as a poor cousin of Nvidia’s, however, after one day trading the company has a $70bn valuation, which is around the same size as General Motors and Walt Disney Company.

If Cerebras can raise $70bn in one day, it highlights the insatiable demand for tech stocks, and chip stocks, in particular. It also sets the stage for mega-cap IPOs that could take place this summer, including SpaceX and OpenAI. Cerebras has seen revenue surge in recent years; however, it is still making an operating loss. Its main selling point is that it designs large chips that thread multiple chips together. The benefit of this is that it can speed up responses to AI users’ queries, which is seen as a Holy Grail in the battle to bring AI to market.

The surge in Cerebras’s stock price yesterday boosted all chip stocks. Nvidia rose by 4%, which helped to lift the S&P 500 to a fresh high. Cisco, the cyber security and networking computer company,  was the top performer, after it posted stunning results. Its gross profit margin was more than 60% last quarter, and its stock price rose by 13%. Oracle was also a top performer. It is not a chip maker, it is a chip user, but investors might be hopeful that a challenger to Nvidia’s dominance could also benefit chip buyers, who could benefit from lower prices down the line and enhanced productivity.

Cerebras is the new AI kid on the block, and all eyes will be on its performance at the end of this week. If chip stocks can withstand higher rates and a rising oil price and post further gains today, it would suggest that any pullback will be a short term pause in the rally, rather than a reversal.

Rising bond yields weigh on risk sentiment

Asian equities fell, including a 1.8% decline for Japan’s Nikkei, and South Korea’s Kospi pulled back from the 8,000 level on Friday.  The gold price is down 2% on Friday morning, and the dollar is broadly higher. European equities are also pointing to a lower open later this morning.

Overall, it could be a rough day for risky assets, as investors take risk off the table as we move into the weekend. The UK is struggling under the weight of more political woes, while rising oil prices and higher bond yields are eroding global risk sentiment.