Yields up, AI accelerates, cities adapt

Welcome to Julius Bear's Moving Markets podcast on Thursday, the 29th of September. My name is Bernadette Anderko, and today I'm looking forward to catching up on the latest financial markets news with my colleague, Mike Rauber, and then we'll be joined by our head of next-generation research, Custon Manker. After the wildly hot summer we've all been experiencing, we're going to talk about the impact of that on city living, what's being done to address the issues, and the impact for investors. First, let's catch up with what's been going on in the last 24 hours. Good morning to you, Mike. Good morning, Bernadette. So the story of the last couple of weeks continued yesterday, didn't it, with higher oil prices and higher government bond yields? What more can you tell us, Mike? So there's no end to the conflict in the Middle East, in sight, and strong economic data releases last week. Higher oil prices are stoking inflation concerns. Federal Reserve Governor Lisa Cook added to these concerns yesterday, after saying that future productivity gains from artificial intelligence may not be enough to offset near-term price pressures. Warning this trend could drive up inflation across the economy. Yeah, and so US Treasury yields rising to multi-year highs? Indeed, take the 10-year Treasury yield. It settled at 5.24%, the fresh 19-year high, and its highest level since June 2007. That was also a time of high interest rates and rising oil prices, that meant that the non-interest-bearing, precious metals complex was hard hit yesterday, gold fell nearly 4% to a 7-week low while the dollar rose. Okay, and Europe is typically very sensitive to higher oil prices, but markets were fairly resilient despite rising yields. What helped to support equities here? So the Pan-European Eurostock 600 closed slightly up, although off its best level, one group that saw strong price action, British housebuilder, Perseman jumped 15% their best performing stock in the Eurostock 600. The government said it would confirm a new equity loan program for first-time buyers in next month's budget. And turning to the US mic after rising last week, the major indices closed in the red yesterday, so the S&P 500 down 0.8%. Besides these higher bond yields and oil prices weighing on markets, was there anything else in focus there? One could say the AI trade came a little under pressure, with meta falling nearly 5%, but remember it rose 13% last week. NVIDIA interestingly, it bucked the trend rising 1.6%. The company announced an additional 150 billion share buyback, taking the total to 235 billion. Now this surpasses Apple's previous record of 110 billion dollars set in 2024 easily. And we also got some reports around anthropics anticipated IPO later this year. What more can you tell us about that? The Financial Times reported anthropics long awaited S1 filing, a mandatory step to an IPO. NVIDIA revealed plans for 518 billion of infrastructure spending in the coming years. In the filing, the company also warned of the existential risks to humanity of its technology. It almost backs a question whether the lawyers writing the S1 filing asked Chatbot Claude what risks are being discussed around the tropic. All right, then let's move to overnight action. The Reserve Bank of Australia hiked rates following their colleagues at the Fed and the ECB. And there was a strong 40-year JGB auction in Japan. What can you tell us? The Reserve Bank of Australia raised rates to a 15-year high of 4.6% bringing cumulative hikes this year to 1%. And it signaled that further tightening may be needed as inflation at 3.5% in July was still well above target. Markets were largely unmoved with both the Australian dollar and 10-year bond yields little changed, suggesting investors had already priced in a hawkish outlook. And that JGB auction? To ban the 40-year government bond auction attracted its strongest demand since 2020 with yields at 4.23%. Just five years ago, that yield was 0.75%. The issuance was a key test of whether these higher yields are drawing long-term buyers such as life insurers back into the market. Yeah, and looking at the boards and Asia equities are following Wall Street lower. At the same time, China has announced additional policy support in response to its economic slowdown. So what are they announced? Now, turning to the market moves in Japan, the topics is down nearly 2%. But note, Bernadette, more than half of the stocks in the topics index went ex-dividend today. Meanwhile, Hong Kong's Hang-Seng Index was down 0.6% when I last looked. And to the China story, its government signaled a more urgent policy response following a state council meeting, pledging additional measures to support growth and stabilizing the struggling property market. The government said it would introduce a package of targeted policies and strengths and counter-cyclical support to help achieve this year's economic objectives. Finally, then, what should investors be watching out for today, Mike? So Spain will release its inflation data while in the US a consumer confidence will be in focus. But before that, in Switzerland, the co-fleeting economic indicator is due. The Swiss National Bank raised its growth forecast for this year to 1.5% to 2% last week, signaling confidence in the economic outlook. And lastly, looking at the futures board, I see Europe slightly in the green. So that's all for me. Thank you very much for joining us today and bringing us the markets, Rap Mike. Thank you very much for having me, Bernadette. Now time to talk to Castan, good morning to you. Hey, good morning, Bernadette. So it's nice and warm and sunny in Zurich again this week, but it's fair to say that summer seems to be coming to a close. And what a summer it's been here in Europe. We've had multiple heat waves sweeping through the continent. New temperature records were reached. And obviously we had unprecedented drought conditions taking hold in many regions. I know you've been taking a closer look at cities, Castan, and their ability to adapt to a warmer world. Why do you look at climate change from a city's perspective? That's very simple because of economics. Cities are economic powerhouses. Their power and prosperity are shaping the world as we know it. The world's 50 largest metropolitan areas account for around a quarter of global economic output. At the same time, they are just home to 5% of the world's population. And this is why it is very important for us to understand what the impact of climate change on cities actually is. Yeah, and I like that approach because typically climate change is mostly associated with ecological consequences. Indeed, but its economic impact is becoming increasingly visible. So catastrophe costs from heat waves, wildfires, floods, and storms remain on the rise. Globally, average costs have risen from around 150 billion dollars per year between the start of the century and 2015 to almost 250 billion dollars per year since then. While no breakdown between the urban and the rural data is available, I think it's fair to assume that the lion's share of these costs is concentrated in cities, simply because of a greater density of assets, of course. And there's broad agreement from scientists and reinsurance companies that those costs are continuing to rise around 5% to 7% per year after accounting for inflation. All right, then. So specifically for the cities, what threats do you see? Three things stand out. First, our infrastructure wasn't built for today's temperatures. Road softened rail tracks buckle and power systems come under most stress. Second, heavier rainfall means more urban flooding and rising repair cost. And third, cities simply become less attractive places to live and work when temperatures keep rising. So then what actions can the cities take? I mean, how much can they actually adapt? Well, I guess an initial response might be very little, but that's not true. History tells us that cities have always been surprisingly adaptable. And the choice they have today is, well, pay for the repairs or prevent the damage. Yeah, and I guess preventing the damage sounds much more appealing. Well, of course. And the sponge city concept in this context has become the state of the art solution for cities to adapt. It centers around breaking up sealed surfaces and providing green spaces. The idea is fairly simple. Instead of treating rainwater as a problem that needs to be drained away as quickly as possible, cities try to absorb, store and reuse it. Okay, that all sounds compelling, but cities are already struggling with budget constraints, aren't they? So can they actually afford these investments? Well, that's a fair point, of course. Climate adaptation goes hand in hand with a broader push to improve infrastructure, I would say. And public spending alone won't be enough. Closing the infrastructure spending gap will require a much greater mobilization of private capital. And that's where the investment opportunity comes in from our point of view. By the way, future-proving our cities and adopting them to a warmer world does not stop with improving the infrastructure. Buildings are equally exposed to climate change and there is an increasing differentiation between higher quality and lower quality ones. Retrofitting and renovation are particularly attractive because the resulting value creation a cruise directly to owners. It's all about private capital. All right then, so what does this actually mean from an investing point of view, Karsten? We believe that climate adaptation is creating a very appealing structural growth outlook for the infrastructure and building this value chains, ranging from urban planning and construction companies to electrical engineering and building technology companies. Sicklically, I have to say there are some differences across regions. The US remains the strongest followed by Europe, while China remains weak. But looking beyond those shorter term differences, we think future cities remains a very compelling investment thing. Certainly something to be taking a closer look at. Thanks for providing a taste to today, Karsten. Thanks for having me. Bye-bye. Well, that's it for today's podcast. Thank you all for listening. And of course, thanks to Mike and Karsten for joining me today. Please do tune in again tomorrow when Lucia Chachullovich will be here, hosting more of our experts to bring you up to speed on what's moving markets. So don't miss that. Meanwhile, good luck today and goodbye for now. The information and opinions expressed in this podcast constitute marketing material, and are not the result of independent financial or investment research. Please refer to www.juleasbear.com/legal/podcast for further other important legal information.