Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at Keir Starmer’s leadership challenge, UK banks pushing back on private credit, and why some corporate bonds are trading at lower yields than government debt.

But first, our number of the week…

$29.3 billion

That’s how much AI startup Anysphere, which makes the coding assistant tool Cursor, is worth according to the company’s most recent funding round. Anysphere’s valuation has soared from just $2.5 billion earlier this year, with the company now counting both Google and Nvidia as investors.

Sidekick Takeaway: Anysphere’s staggering valuation growth represents enduring investor appetite for outsized AI bets. With AI companies increasingly feeling the pressure of higher compute costs, however, turning adoption into profits may prove more challenging than expected. 

Only have a minute to read? Here’s the TL;DR:

• With Labour’s popularity collapsing in the polls, rumours are circulating that health secretary Wes Streeting is plotting to replace PM Keir Starmer. A potential leadership challenge could trigger a gilt market reaction, while Rachel Reeves’ upcoming budget may increase pressure on the PM if taxes rise as expected. 
• Executives from HSBC and Barclays urged regulators to loosen bank capital requirements while increasing private credit oversight, arguing that they face tighter rules than non-bank competitors. The pitch follows aggressive financial deregulation in the US and comes as the Bank of England reviews capital requirements in the UK.
• Corporate bonds from companies like Microsoft and Siemens now trade at yields below their respective government bonds, marking a historic shift. With global public debt-to-GDP ratios reaching 93%, investors increasingly view some private companies as safer than sovereign borrowers.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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The Red Wedding: Starmer Faces Leadership Challenge as Chaos Grows

For months, Labour’s polling figures have steadily dropped.

In the 2024 election, Labour won a voting share of about 33%. Now, just four months later, their polling average has dipped to just 19%.

Amidst voter anger surrounding tight fiscal policy and immigration issues, competitors like Reform UK have surged. 

Unsurprisingly, Labour’s poor performance has led to internal divisions within the party. 

And this week, those divisions burst into the open with the most significant challenge to PM Keir Starmer’s leadership yet. 

Starmer supporters accuse Streeting of plot to replace PM

In a series of anonymous briefings to news outlets, supporters of the Prime Minister accused Wes Streeting, Labour’s health secretary, of staging a plot to oust Starmer.

For his part, Streeting has denied the allegations. But it’s clear that the episode reflects substantial discontent within the party:

• Streeting is not the only name being circulated as a potential replacement, with home secretary Shabana Mahmood also being rumoured as eyeing the top job.
• The chaos undermines claims about Labour’s stability, which Starmer cited as a key advantage over the Conservatives.
• Labour’s rebellion may be set to grow in the wake of the autumn budget, which could see Chancellor Rachel Reeves breaking a campaign promise by raising income taxes. 

To the extent that a new PM would indicate a change in fiscal policy, such a move could spark a major market reaction.

In fact, Starmer’s allies have pointed to a potential gilt market crash as a key reason the PM can’t be replaced.

Sidekick Takeaway: Whether or not Starmer ultimately faces a leadership challenge, it’s clear that Labour’s declining polling figures and poor performance can no longer be ignored by the party. Unfortunately for Starmer, the Chancellor’s upcoming budget is likely to raise the pressure on the PM and lead to increased calls for a change in direction. 

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Collateral Damage: Banks Push Back at Private Credit’s Rise

In 2008, the Global Financial Crisis underscored an important fact: banking can be risky.

In the wake of the crisis, regulators around the world created stricter rules for major banks. That led to banks pulling back on lending and other financing activities. 

In response, the private credit industry – which connects investors directly with borrowers – filled the gap. By sidestepping banks, private credit has grown into a multi-trillion-dollar industry.

Increasingly, banks are feeling the pressure of private credit competition. And this week, UK bank executives took those concerns to lawmakers, urging an update to existing regulations.

Private credit may need stronger oversight

According to executives at HSBC and Barclays, banks are subject to much tighter balance sheet rules than non-bank lenders. As a result, they struggle to compete with nimbler private credit firms:

• In a pitch to the House of Lords, the executives argued that capital rules should be loosened on banks, while private credit groups should have to divulge more information. 
• That pitch follows an aggressive cutting of financial regulations in the US, with UK banks fearing an international disadvantage. 
• The Bank of England is currently conducting a review of its bank capital requirements, meaning the pitch comes at an opportune time.

Whether or not bank rules need to be loosened is an open question. But it’s increasingly clear that regulators need greater insight on private credit.

As a small and fast-moving industry, private credit can afford to be opaque. But as a major bank competitor, regulators need to have a clear view of private credit, especially following a string of high-profile bankruptcies linked to the industry. 

Sidekick Takeaway: Bank bosses pushing for less bank regulation is to be expected, but the executives do have a point about how less oversight has allowed private credit to grow more rapidly. Separately, the Bank for International Settlements has also argued that greater transparency is needed for private credit to continue growing safely. 

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Yielding the Crown: Are Companies Safer Than Sovereigns?

Sovereign countries are generally seen as some of the safest borrowers in the world.

After all, governments have the power of tax-raising authority and military force, something that private companies lack.

As a result, government bonds typically trade at lower yields than those of companies. Investors are willing to earn less interest for the perceived safety of sovereign debt.

But in recent years, this long-standing relationship has started to shift. In some situations, it’s corporate debt that’s now seen as the safer bet.

Corporate yields fall below governments as public debt rises

In the US, bonds issued by Microsoft trade at yields just below those of Treasury bonds due in the same year. In other words, investors think that the tech giant is a better credit risk than the US government.

A similar phenomenon is seen in Germany, where the debt of Siemens trades at or below yields on bunds. 

In France, the gap is even more pronounced. Amidst France’s extended political crisis, bonds issued by Airbus have traded at yields more than 30 basis points lower than the French government.

To be sure, the vast majority of global corporate debt still trades at a premium to government-issued bonds. 

But the fact that this can no longer be taken for granted highlights investor concerns over rising public debt ratios and increasing political instability. 

Sidekick Takeaway: This year, public debt-to-GDP ratios climbed to a global average of 93%, a figure that’s only projected to grow. Given this evidence of rising fiscal deterioration, it’s no surprise that some private companies have come to be seen as a safer bet.

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Notices

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𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.