Bloomberg notes that CDS on hyperscalers are all beginning to sell off. Oracle has by far the highest CDS - because it has so much debt. USD 167Bn of debt, with a big increase in 2026.
I am a bit surprised by the increase in Nvdia CDS, as it has USD 80bn of cash on the balance sheet -with relatively little debt. Google now has 118bn USD of debt from USD 25bn two years ago. Microsoft has USD 125bn of debt - up from USD 100bn a year ago. And Meta has risen from USD 40bn to 87bn this year.
In the GFC - rising CDS was definitely “BAD”. But its usefulness since then has been diminished somewhat. Tesla had Oracle level CDS or higher for most of 2018 to 2022.
The high CDS sent a message about financial issues with Tesla, which led to high short interest, which eventually got obliterated, when Tesla generated cash. Short interest is the middle graph below. Being bearish on Tesla was very popular and very wrong.
My point is that CDS does represent increasing debt levels, but is largely agnostic on the future profitability or lack thereof of that investment. But the movement in CDS is interesting. It matches up with a move lower in HYG US. Which I would consider bearish.
Which is wildly at odds with the behaviour of equal weighted SPX - which is at all time highs.
If I look at the KDP High Yield daily - this is generally correlated to equities. You would think US equities would be broadly weaker.
Following on from my autocallable note, US equities are not following dividend futures.
Something funky is definitely happening. GS Momentum Index getting obliterated again, with longs down and shorts up. Now down 5% for the year, from up 70% in June. Yowser.
If I had to take a view, and I guess I do, the market got over long AI trade, and we have seen some negative pricing in CDS from big bond issuance. This led to some selling, which because of the presence of leveraged ETFs, caused more selling. This hurt long books, so hedge funds degrossed, and so bought back shorts and underweights. You end up with equal weight S&P 500 going up -see Apple at new highs. But actually, credit is not looking great - so short covering is happening at the wrong time. It does make me wonder if another momentum trade that suddenly reversed early this year is about to make another reversal? Gold has underperformed S&P 500 hugely since a February peak? Time for a turn?
This would fit more closely in with my pro-labour view of the world. That is one of volatility, as rising cost of capital fights with growing revenue. And the S&P 500 was very volatile in the 1970s.
In some ways I love this market - because I have a theory about how it should work, and we are going to see if its right or not. That theory is pro-labour politics is great for growth but raises the cost of capital - which should be more problematic for the US. Cost of capital is rising now - lets see if the theory holds.
