LIVE MARKETS-Equities on borrowed time 

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EQUITIES ON BORROWED TIME

There are three themes that were driving markets in the third quarter, according to Capital Economics: the waxing and waning of investors’ enthusiasm for AI-exposed equities, big swings in commodity prices, and the sharp rise in bond yields.

Capital Economics believes all three are close to their turning points.

"We suspect the AI-driven equity rally has become stretched and will turn into a rout at some point," it said.

"We also expect commodity prices to fall back, with the caveat that energy prices will continue to depend heavily on developments in the Strait of Hormuz."

"And we think that government bonds will recover as tightening cycles underwhelm expectations."

The first one is perhaps the most interesting. If the AI rally is in its final throes, as CapEco believes, then markets are heading for a rough ride.

The consultancy believes there are good reasons to be concerned, including valuations, lofty earnings expectations, and the sector's increasing sensitivity to interest rates.

While price-to-earnings ratios are not stretched, there are some other valuation metrics that are high by historical standards, such as Shiller's CAPE or the price-to-book ratio of the index, according to Capital Economics.

"What’s more, the rally has been mostly about expectations for earnings, which we think now look quite optimistic," they note.

If the rally were to end, Capital Economics expects the largest declines to be in the US and South Korea, while Taiwan and Japan may also suffer.

Europe could be relatively insulated.

"While we aren’t projecting an especially strong outcome ... in part because we think the region’s economic growth will disappoint, we still project it to be the best performer of MSCI’s regional indices over the next couple of years as the bubble bursts elsewhere."

(Samuel Indyk)

EARLIER ON LIVE MARKETS:

Q4 OFF TO ROCKY START CLICK HERE

EUROPE BEFORE THE BELL: FUTURES IN THE RED, SEMIS SET FOR BOOST CLICK HERE

INFLATION RELIEF GIVES BONDS LITTLE REPRIEVE CLICK HERE