Need to Know: If America debt spiral gets worse, here’s the stock that may benefit, says fund manager

Over the same short period, the yield on the 10-year Treasury
BX:TMUBMUSD10Y
has twitched within a range of roughly 4% to 4.2% as investors try to get a handle on varying inflation and economic growth readings.

So, what’s an investor to do amid such uncertainty? Well, buy the companies that help traders to trade it, reckons VGI Partners, the Australia-based fund manager. In it’s semi-annual investor letter, covering performance to the end of June, VGI highlighted the top ten long investments in its Global Investments fund , three of which provide, to varying degrees, what may be termed the plumbing of the financial markets.

With a weighting of 7% is the London Stock Exchange
LSEG,
-0.67%,
which VGI is keen to point out has transformed from a traditional exchange into a data and analytics group. After its purchase of data group Refinitiv in 2021, the LSE now generates only 3% of revenues from its legacy cash equities exchange.

Deutsche Börse represents about 8% of the portfolio and is deemed atractive says VGI because it provides trading, clearing, pre/post-trading and data and analytic services in four key operating segments: Trading & Clearing, Fund Services, Security Services and Data & Analytics.

DB is a “well-diversified exchange group whose activities touch on most aspects of European capital markets, offering a blend of transactional and non-transactional revenue exposure,” VGI adds.

But top holding is CME Group
CME,
-0.83%,
with a 9% weighting. CME operates futures and derivatives exchanges, including the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Chicago Board of Trade, and the Dow Jones Index Services.

VGI particularly likes CME’s “effective monopoly” of trading in interest rate derivatives. “Demand for interest rate derivatives is driven by volatility in interest rate markets, whose effect is compounded by the number of bonds held by those looking to manage interest rate risk and, by extension, market liquidity,” the fund manger notes. And the chart below illustrates this strong relationship.

VGI expects the growth in the size of the U.S. Treasury market, particularly in relation to privately held US treasuries as the Fed undergoes a balance sheet unwind, to provide important support to a CME’s interest rate derivatives business. CME should also benefit — as are other exchanges — from a boost to net interest income from the collateral balances it holds.

“We believe that CME’s assets are critical pieces of market infrastructure and will be recognized as such in the future,” VGI concludes.

Markets

U.S. stock-index futures
ES00,
-0.31%,

YM00,
-0.17%,

NQ00,
-0.63%
are little changed as benchmark Treasury yields
BX:TMUBMUSD10Y
dip. The dollar
DXY
is lower, while oil prices
CL.1,
+0.71%
slip and gold
GC00,
-0.15%
gains.

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The buzz

Economic data on Friday, include the July producer price index report, due at 8:30 a.m., and the August consumer sentiment reading at 10 a.m.. Both times Eastern.

UBS Group
UBS,
+0.73%
has terminated a 9 billion Swiss franc ($10.27 billion) loss-protection agreement and a CHF100 billion public-liquidity backstop guaranteed by the Swiss government that were put in place at the time of its takeover of troubled rival Credit Suisse.

The pound
GBPUSD,
+0.08%
rose back above $1.27 after data showed the U.K. economy grew 0.5% in June, more than twice the 0.2% expected.

Country Garden shares
2007,
-5.77%
fell nearly 6% to below HK$1 for the first time as China’s biggest homebuilder warned of a loss and suffered another ratings downgrade of its debt.

Shares of Cano Health Inc. 
CANO,
-0.65%
are down more than 50% in Friday’s premarket after the primary-care provider and health-management platform said there was “substantial doubt” about its ability to keep operating.

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The chart

Just a reminder from Christopher Wood, global head of equity strategy at Jefferies, of why some investors are getting twitchy about the recent rally in oil pries because of how it may clobber the happy narrative that major central banks can soon stop raising interest rates.

“The correlation between the Brent crude oil price and the five-year forward inflation expectation rate has been 0.88 since 2011,” says Wood. “This is potentially an awkward development in the context of the prevailing narrative that both the Federal Reserve and the ECB are all but done in this tightening cycle even if the official mantra in both cases remains ‘data dependent’.”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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