Markets, AI and rising yields test the rally 9/24/26

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1:19Good Thursday morning. I am Morgan Brennan. Welcome to Morning Call. We begin this morning with breaking news. The New York Federal Reserve President John Williams is speaking just a short while ago, telling the London Macro Policy Forum it is reasonable to see another rate hike by end of this year, adding that the time for explicit direct forward guidance is over. Williams also saying downside risks to achieving maximum employment have receded and that we are seeing remarkable resilience in the U.S. economy. Williams is seen as a bit more dovish in terms of that committee composition, that Fed committee composition.

1:54So more Fed speak in a week that's already seen some hawkish Fed speak here on the back of those comments. We've got a sharp reaction in U.S. equity futures, which are lower again this morning. You can see right there on your screen after a sell off yesterday, the S &P is poised to open lower by 45 points right now. The Dow, about 245 points. The Nasdaq, 319 points. We're actually now lower on the week for the Dow. And we've given back some of the gains for other averages. Treasuries, because, of course, this is where so much of the action is taking place right now, given the bond sell-off that we've seen and we've been tracking.

2:27That's really picked up speed here in the past 24 hours. We're watching the Fed-sensitive two-year Treasury. 4.89 percent right now. In general, looking across the Treasury market, yields across the curve are trading at multi-decade highs. That is the case for the 10-year Treasury as well. 5.13 percent right now. This is the highest level since 2007. And if we take a look at the 30-year treasury, that is yielding 5.43 percent. And that is the highest since 2004. Let's take a look at currencies, too, and specifically what we've seen in the dollar index, because as bonds have weakened, the dollar has strengthened against other major currencies.

3:09And that continues to play out here this morning. Dollar index this morning, 101.18 is the level there. We're getting reaction now from our Steve Sedgwick in London, where we see accelerated market action as well. Steve.

3:25Yeah, absolutely, Morgan. Look, we are also closely watching those bond markets today. As you mentioned, the 10 year U.S. spiking to its highest level since July 2007. As you and I keep saying, nothing much happened in 2007, did it? But anyway, it marks the biggest one day move in nearly 18 months. But I will direct our viewers to the IIF as well. I'm holding Tim Adams's report here. It's a global debt monitor. And at the same time, we've got those big yield increases. We've also got global debt going up by$10 trillion plus in the first half of the year. Global debt is now$365 trillion. That equates to 310 % of GDP.

4:03And it's not just the emerging markets, although they're leading the way on this one. Advanced economies, including the US, now spend more on interest payments than they spend on defence, than they spend on healthcare, and then they spend on AI as well. These are really big numbers, and the debts just keep going up. And who's got a deficit control policy? Not the British, not the Japanese, not the French, and it doesn't seem like the Americans have at the moment. Now, European equities, they're also edging lower, as you mentioned, in a choppy early set of trade. Bond yields continuing to hover in Europe near those multi-year highs.

4:36Tech stocks leading to declines this morning. Industrials, utilities, financials also weaker. Investors also watching some key central bank decisions. We're not just watching Williams. Also, we've had decisions out of Switzerland, Sweden and Norway this morning. The Norwegians, the Norges Bank, they're the only ones who have actually gone for a 25 basis point hike. But both the Swiss and the Swedes have talked about those inflationary pressures. Morgan, back to you. All right, Steve Sedgwick, thank you. Also, just want to get a check on what we're seeing in the energy markets this morning, because it has been a perfect storm triggering what we're seeing in the global bond markets right now.

5:09And you have seen a reacceleration in price gains here for the energy complex, in part because of some of the commentary we got from Iran's president at the U.N. yesterday. That continues this morning. WTI is up 2 percent. It's back at ninety four dollars a barrel. But Brent crude, this is the global benchmark that in particular has really picked up steam in the past 24 hours and up another two and a half percent this morning. Brent crude is trading at about$105.70. We're also seeing other refined product prices move higher this morning, too, in the futures market. Well, let's get to the capital and President Trump greeting China's President Xi Jinping in Washington late yesterday as the two prepare for their day-long summit at the White House today.

5:50And ahead of that, Treasury Secretary Scott Bessent saying that progress has already been made on one critical trade issue. Let's get to Megan Casella in Washington with the very latest. Megan. Morgan, good morning. That's right. Chinese President Xi Jinping touching down in the U.S. It was late yesterday evening to what was an elaborate welcome. President Trump and the First Lady on the tarmac at Joint Base Andrews to greet President Xi and his wife. That's an exceedingly rare diplomatic gesture. Now, the ceremony then included military flyovers. the U.S. Air Force playing both countries' national anthems, and a 100-foot-long red carpet.

6:30But now we can't show you photos or videos of the arrival, given that the TV pool coverage of the president has been suspended following the president's decision last week to ban three national news outlets from the White House. But this same level of pomp and circumstance is expected to continue throughout the day today. Later this morning, there will be an arrival ceremony when President Xi gets to the White House. That's set for around 10 a.m. That'll be complete with a gift exchange and military review. That will be followed by the official bilateral meeting between the leaders and then the CEO studded state dinner tonight.

7:05And around all the pageantry, Morgan, there are real questions about how much can be accomplished on the policy front. But as you just hinted, Besant says that one big deliverable on trade is already done. Take a listen. We have agreed today that we will extend what we call the Busan Agreement, the economic detente between the two countries that was scheduled to end on November 10. That is going to be extended until January 10 to give us more time to see what we can do on the economic front. So no new tariffs on China for another two months. That's a good sign for economic stability, though the Chinese, I will say, have not acknowledged or confirmed this yet.

7:53And they had been pushing for a much longer extension on AI, though, Iran, Taiwan and other issues. Still much more to watch to see what can get done. Morgan. Yeah, a lot on the table here, Megan. But we do want to point out you just touched on it. We do want to point out that a federal judge this morning is calling that ban unconstitutional and is offering the White House to immediately restore press access for the impacted outlets. No word yet from the White House. But to your point and what you just referenced, this is why we're not showing images or video from the summit so far. So in light of that, Megan, it almost seems like for the market right now, no news or a little bit of news is still good news in the midst of all this.

8:34But perhaps on a morning where we're seeing crude prices move higher, yields are moving higher again. How important is Iran to this entire conversation? It's the elephant in the room in every conversation that is happening throughout this three-day summit. Because China by far is—we know how close the Chinese are to the Iranians. By far has been the largest buyer of Iranian oil. But the president has been reticent to really go after him on that. We're not really expecting that posture to change in this summit. This is much more about the pageantry, about the pageantry being the point or the meeting being the message.

9:08They want to show stability and closeness in this relationship and probably not confront the Chinese leader on that when he gets to the White House today. But it's what everybody is thinking about, and it's sort of coloring every conversation. We have seen some criticism of the amount of ceremony going into this, the level of honor and respect being shown because of how difficult so many issues are right now in this relationship. and I would put Iran right at the top of that list. All right, Megan Casella, thank you for teeing up. It's sure to be a very long and intense day for you as you cover all of this from Washington, D.C.

9:40Appreciate it. Well, we're turning to what's been the AI stock of the week, MetaPlatforms. CEO Mark Zuckerberg taking the stage of the company's MetaConnect conference in Menlo Park, California last night to unveil a suite of new hardware products and upgrades to others with Muse-enabled$349 camera-less Ray-Bans taking the center stage. Audio glasses.

10:07So without cameras, this opens up a lot of new design possibilities. They can look like any other glasses. You can make them much lighter and slimmer. They have the longest battery of any of our glasses. They're going to last for a full day of use, whether that's using Muse throughout the day or listening to music or making calls. Among the other devices that are front and center, a$1 ,299 Meta VR glasses set, which will go on sale in the spring and would directly compete with Apple's product, and a small handheld device that it calls the Meta Charm. This is unpriced so far. It's pocket-sized AI assistant that will ship in December.

10:55Kind of looks like a Tamagotchi, If you know, you know. Joining me now with Reaction is Egal Arunian, Managing Director of Equity Research at WebBush. It's great to have you on. After just a huge start to the week for Meta and all the excitement around its Muse AI bot, what did you think of the event last night itself? Yeah, it's great to be here. Good morning. Look, I thought the event, really, the focus was around bringing AI and Muse as a personal assistant together with the hardware and the wearables, right? Whether it's the Tom Cachillac device like you talked about or the glasses, whether it's the glasses or the VR.

11:39I think what Meta is trying to do here is connect that personal assistant ambitions with Muse with the wearables. And I think that's what was front and center yesterday. Well, and that does seem where that seems to be where everything's going in terms of the consumer picture here is this idea of encapsulating the the A.I. into hardware. I realize that is not the only one doing this. We've had reports that opening eyes working on something similar. Obviously, we're seeing efforts at Apple, Amazon, others. So how does this set the stage for this next chapter when it comes to consumer engagement with A.I.?

12:13Well, I mean, the Muse launch took everyone by storm, and you can see that in the share price reaction over the past couple of weeks, Muse being the top downloaded app over the past week or so, seeing strong early adoption. And it has major implications, right? It's about how consumers shop and use applications, use the internet as a whole. And right now, the only way to access that is through the app. And the goal is to move beyond that. So you can talk to your personal assistant over the course of a day. You can use it in the VR classes. There's a lot of ambitions to change how people use the Internet and run their daily lives through Muse and AI assistance.

13:01And it seems like this is just the start of it for Meta. I mean, MetaShares are up 9 % in five days. We're up 33 % in a month here. Do you buy? Would the stock down pre-market 2 % right now? I mean, it does seem to be a sell the news type of dynamic that's taking shape here in the market. Is this a buying opportunity or do you sit on your hands and see how this entire ecosystem now plays out when we know that more of these chatbots are going to be coming online and more companies, including the open AIs of the world, are going to be announcing their own products very soon. Yeah, for us, it's been a little bit more of a wait and see.

13:39And clearly, shares and investors have reacted to this news and to how Meta may be positioned in the future of compute and consumerism. There's some real clear positive factors here in how you're able to use this and run your daily lives. And we think that's great. We've used Muse a lot testing it out. It does some amazing things. And at some points, it really does feel like magic. How this translates to monetization for Meta. I mean, Mark talked about it last night in terms of driving payments and getting a piece of the payments. How consumers will end up using Muse and personal assistance to make the transaction, if they're just going to go to the personal assistants and say, hey, I want to buy this, go buy it for me, or they're going to want to shop the old-fashioned way, I think we'll see.

14:42And to your point, there's some competition coming in as well. And the other question is just on the cost of this, right? The compute cost of running a personal agent for millions and billions of users, like Zuckerberg talked about last night. That's a big question mark out there as well for us. All right, so in light of all of that, what would you be buying right now? right here as we do see a sell-off, a little bit of a sell-off this week in the equity markets? Well, you know, if you look across the ecosystem, there's been some real dislocation on the other side of where this impact might be.

15:18You've seen it in the OTAs, like if you look at Booking and Airbnb, right? The view is that as the consumer goes to personal agents, some of those platforms are going to get dislocated. You're going to see some real disintermediation on the value that booking provides, that Airbnb provides. And you've seen it even in Shopify where the news has been up and down around this point. There's been dislocation around a lot of the tech consumer ecosystem. I think there's a lot of opportunities there. Okay. Egal Arunian, great to have you on. Appreciate it. Thanks for having me. We got a lot more to come here on Morning Call.

15:57Don't we always? including a first-of-its-kind AI breach courtesy of an OpenAI agent and the stock sector surging as AI hacking fears persist. But first, answering the munitions stockpile question and why investors need to be paying close attention to this. And later, much more on the global AI rate shock and what it means for your money today. We've got a very busy hour still ahead when Morning Call returns.

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18:10And we're building them at levels that we have never done before. We are adding to our stockpiles faster than we have ever been able to do before. Top of the line stuff. In addition, in the very near future, massive munition plants will be opening. There are 18 of them being built by the greatest defense companies in the world right now. 18 under construction. Some of them very quickly will be completed. They're almost there. Well, that was President Trump speaking at the U.N. General Assembly in New York earlier this week and pushing back against those reports that say that the wars in Iran and Ukraine have drained the U.S.

18:51military ammunition arsenal to critically low levels. Joining me now with a defense sector reality check and what investors need to know in a week that has been chock full of geopolitics. Tom Carrico, he is the director of the Missile Defense Project and senior fellow at the Defense and Security Department with the Center for Strategic and International Studies. And quite frankly, one of the foremost experts in the world on things like missiles and munitions and missile defense. So it's great to have you here on set. Good to be with you. Yeah. All right. Want to get your reaction to what we heard from President Trump when the missiles and munitions stockpile story has certainly gained steam, but has been there in the background for a number of years now.

19:29Well, look, the president is going to be meeting with President Xi today and there's going to be a wry smile on President Xi's face. Look for it. And one of the reasons, one of the many reasons, is that China is quite pleased at the expenditure rate, the burn rate that the United States of America has been doing with our offensive and defensive missile fires in the Middle East. We are burning up both our offensive long-range strike, tomahawks and the like, and then likewise our patriots and our THADs and our various missile defense interceptors. That's a problem. You heard the president talking to the UN yesterday about we have tons of munitions.

20:07Well, we do. We have lots and lots of JDAMs. We have lots and lots of gravity bombs. But unfortunately, over the past six, seven months or so, we've been burning up the high-end, exquisite stuff. Not the gravity bombs, but the really exquisite stuff that's so important for deterring Chinese adventurism in the Pacific. So that's the backdrop here. China is quite pleased. And I think Xi is going to be quite happy at the burn rate that we're going. It certainly helps them militarily. Yeah, and of course, it comes as we get reports, and this could be a whole separate conversation about China apparently, reportedly, holding sensitive F-35 parts diverted to Hong Kong.

20:47But in light of that, it does seem that Taiwan arms sales, U.S. arms sales to Taiwan is a red line for China. They've been very vocal about that coming into this summit. So where do we stand when there is a multibillion-dollar backlog in arms sales already, arms deliveries already to Taiwan by the U.S.? So there's a backlog for a lot of folks. And right now, what is happening? And there's a tension between the White House executive order that says to our European friends, hey, buy American. Not just European friends, our allies probably. Buy America. We want to sell lots of weapons to our allies.

21:20That's a good thing. But there is a complete tension between that and the reality that what has happened from Operation Epic Fury is a complete diverting of everything coming off the line that is being diverted from, frankly, missiles, interceptors that their allies have already paid for, are being understandably diverted to the U.S. Army, to the U.S. military, that needs to replenish what we have just shot through and vaporized over the past six months or so. And so Taiwan, I think you heard Secretary Rubio say this recently, Taiwan might get slowed down. Our European friends who want to buy patriots are going to be slowed down in terms of their delivery.

22:02That's just a reality. And of course, perhaps it speaks to why we've seen this great escalation within this Ukraine-Russia war where we're having strikes back and forth on critical infrastructure, including refineries, which is beginning a lot of tension given what we're seeing with diesel prices right now. OK, so if we put all of this together, what does it mean in terms of the tens and hundreds of billions of dollars that are now going towards ramping up production of missiles and munitions? And also not just the exquisite stuff, although it's interesting to see GM back in the mix as a supplier for patriots, right?

22:31That's right. But also some of the more affordable, low-tech, defense-tech stuff that's starting to come online, too. Look, it is good to see GM producing patriot components and things like that. That's basically Lockheed going out and looking for new suppliers for different things that go into a Patriot. But you said tens and hundreds of billion dollars. To some extent, that's true. But so far, it has been primarily companies' own money, their own internal funds that are going to the ramping up. What has not happened, the shoe that has not dropped yet, is actual appropriations. And so you're seeing the CBO report, this IG report about the cost of Epic Fury.

23:13They're talking about the cost of the missiles that we've expended, but we have not actually appropriated the money to replace them. And so here we are, we're waiting for basically the lame duck session, when hopefully the unified government, the Republicans in both houses of Congress, will be able to pass something in terms of appropriations. But so far, there has been no supplemental. There has been no reconciliation thing. And so we are just digging the hole deeper and basically paying IOUs in terms of what we think we're going to do to appropriate these funds. But almost nothing has been appropriated.

23:48That's really interesting, especially when you think about going into another earning season with some of these defense primes who have announced these big contracts. OK, so so quickly, then is your expectation that we are going to see some of this money roll out, whether it's, you know, through through the through the budget getting passed and appropriated, whether it's reconciliation, whether it's through a supplemental. I think so. I'm cautiously optimistic about that. It's going to have to happen in the lame duck session. That's the last bite of the apple, basically. It's the right thing to do.

24:18On a bipartisan basis, everybody understands the numbers. The numbers don't lie. We have expended a very significant percentage of our offensive and defensive missiles. It has to be replenished. It's dangerous not to. And so that's going to be the thing that I'm looking for. But you're right. In terms of the outlays of capital, it's been primarily the company's own dime. They're going out. They know early to need. The demand signal is there, not just from the United States of America, but the 17 other countries that operate Patriot, for instance. The demand is basically infinite. But in terms of the government appropriations, we're still waiting.

24:52So that's going to be what I'm really looking for in terms of the next couple of months. All right. Tom Carrico, it's great to have you here on set. Appreciate it. Good to be here. We talk so much about how AI infrastructure spending is contributing to the U.S. economy and the GDP picture. Defense spending is as well. So this is something to watch very closely. Straight ahead, we're basing for hurricane force winds and massive coastal flooding. We've got a live report from Virginia Beach on the nor 'easter that's heading up the coast. But first, watching shares of MGM Resorts, Barry Diller says that he is withdrawing his bid to take the company private after months of talks.

25:25Diller holds a roughly 27 % stake in the company and offered to take private deal of about$12.4 billion. But he's open to another one. Nonetheless, MGM is down 8%. We're back after this.

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27:23AccuWeather national reporter Leslie Hudson joins us now from Hampton Roads, Virginia, just about 30 miles from Virginia Beach. Leslie, good morning to you. Hey, good morning to you, Morgan. Yeah, this is the main event here in the Virginia Beach-Hampton Roads area. We have been prepping for this nor 'easter for about three days, and today it will make its closest approach here to the Virginia Beach area. Over my shoulder, you can see the Virginia Beach Pier, a nasty sea. We have seen the heights with those waves topping anywhere from 8 to 12 feet at times. And we're also starting to see that famous tidal wash that rolls ashore here in Virginia Beach this time of the year.

28:05So that is the main concern for the officials here along Virginia Beach. because you have to remember this area, the eastern seaboard, extremely susceptible to beach erosion. And Virginia Beach, here where we are, has actually invested about$1 billion since 2001 trying to re-nourish this particular stretch of beach. And just last year, the nor 'easter from 2025 in October did significant damage in this region. So folks here are worried what this one will deliver. The tidal wash coming up as we speak, you can probably see some of that seafoam behind me And the high tide here expected around 6.30 a.m.

28:42Eastern time and will last for hours. Now, we've also got this other event called tidal trapping. That's where when this wind comes in, the water comes in, it goes through the tributaries, through the rivers here in the Virginia area, beach area, and goes inland to the Norfolk area where it historically floods. And the problem is when you get this tidal trapping, when the water traps there, then it doesn't leave. The pumps can't pump it out. It can't go back the way it came in. and there's standing water and then we get another astronomical high tide like we're going to see this morning and that just elevates that tidal surge.

29:16We've also got king tides here which also will give a boost to that astronomical tide as well as an El Nino year. So it's like a trifecta of all these weather elements coming together to create a very dangerous, potentially dangerous situation as we head through the next 12 to 18 hours. I certainly hope that it's not too dangerous. In light of that, what you're telling me here is that we're going to have a wet weekend on the East Coast. Things like tidal trapping and high winds and a high tide that persists, is that something we should expect as this nor 'easter moves up the East Coast? Yeah, so we've seen about three cycles here in Virginia Beach that have created this tidal trapping that I've been talking about.

29:58And so we've got the next one coming within this hour. And the AccuWeather meteorologists are anticipating about another one to two, maybe three high tide cycles that we could see some of this tidal trapping. So probably conditions here, we'll get another high tide tonight and then another one tomorrow. But as that low of the nor 'easter heads north and draws away from us, the rotation on the backside of that low will help funnel that water north. So we'll start to see improvements here probably tomorrow. But the problem is we've already had three days of this tidal trapping, if you will. And it has been a nightmare for folks in Norfolk, Virginia, trying to get around as this nor 'easter heads north.

30:38All right. Thank you, Leslie. Good to see you. Stay dry. Stay warm. Still on deck. Thank you. We've got breaking down the global rate shock for their morning call crew. What it means for your money. Morning call is next.

31:13I'm Morgan Brennan. Welcome back to Morning Call. Let's get a check on U.S. stock futures, which are in the red again this morning. That's after a sell-off yesterday that was triggered by the bond market. More on that in just a moment. And you can see under some pressure again this morning, S &P is poised to open lower 45 points, and the Dow is poised to open lower by about 215 points, the Nasdaq 330 points. We're actually lower on the week now for the Dow. We're still hanging on to some gains here for the Nasdaq and the S &P. But this is all following comments this morning from New York Federal Reserve President John Williams, saying just a short while ago that it's reasonable to think the Fed might need to raise interest rates again before the end of the year to help bring down inflation risks, adding the time for explicit, very direct forward guidance is over.

31:56He's sort of seen as a bit more dovish on the FOMC. So in a week where we've had a lot of hawkish Fed speak, this continues to contribute to that discussion and a repricing you're seeing in the market in anticipation of more rate hikes before the end of this year. Now, that in turn is playing out in the bond market as well. We've seen a sharp reaction there, a big sell-off that continues. Ten years spiking to its highest since 2007 after its sharpest upside move yesterday since President Trump's tariff Liberation Day back in April of 2025, up 13 basis points in a single day. That is a torrid move.

32:31You can see right there, if we get a check on U.S. 10-year Treasury yield, 5.14 percent right now. If we watch the long end of the 30-year yield, it's the highest since 2004, 5.43 percent this morning. You've seen a huge move in the two-year. And actually, just across the curve, everything has a five-handle except the two-year and the three-year. It's not just here at home either. In Japan, the benchmark 10-year is sitting at its highest since 1996. And talk of rate hikes, surging yields, pushing expectations for an actual Fed hike, as I just mentioned, in October higher. Kalshi users are now pricing in a 67 percent chance of a rate hike next month.

33:09Now, let's also get a check on energy, too, because we see crude continuing its climb this morning. You had some commentary from Iran's president at the U.N. yesterday that restoked the move higher. in crude. And you can see that continues here again this morning. WTI is up about 1.8 percent, just below$94 a barrel. Brent is back above 100. We went there yesterday, about 2.2 percent higher this morning at 105 and change now a barrel. And you also see refined product prices in the futures market moving higher as well. Well, let's turn to Washington, because today is the first full day of Chinese President Xi Jinping's visit to the U.S.

33:47News ahead of today's very full schedule of events. Treasury Secretary Scott Besant now saying that the trade truce between the U.S. and China will be extended until January. Joining us now for more, and there's so much more, is Shahzad Qazi, China Beige Book COO. Great to have you here on set. What are you watching today? Well, look, we already know this is a very low expectations summit. There's going to be eventually a board of trade announcement coming out of it. I wouldn't make too much of the two month truce extension. Quite frankly, I think if anything, it underscores the amount of distrust and lack of progress on existing deliverables there is between the two sides.

34:23Okay. So when we talk about a board of trade, what would go into that and how meaningful would it actually be? Yeah, the board of trade is the exact opposite of what people might think of it. It's about managing trade so that you can isolate items or things that are considered non-sensitive, non-critical, and say we're going to have something resembling free trade on those items. Everything else we're going to put tariffs on and we're going to determine just how much we want to buy from you. and therefore the Chinese will do the same with us. So what would be considered non-critical, non-sensitive?

34:51Is this part of this$30 billion bucket, which is arguably a drop in the bucket? That's exactly right. It's the whole 30 for 30. Now, you know, the trade representative famously says, you know, fireworks and perhaps I would add on shoelaces might be considered non-critical, but lots of other things will not be, right? And the list of what's not critical should be growing, in my opinion, when it comes to U.S. national security interests. Okay. Okay. AI has obviously been a big focal point overall this week, including at the UN yesterday with the Security Council briefings we got from, you know, some of the world's biggest AI entrepreneurs.

35:27How is that going to factor into these conversations? Is there anything meaningful we should expect here? Look, AI dialogue is a good idea. We're talking about the world's second largest economy and a pretty serious major military power. But I think, again, what progress can we possibly make with China on this? I am just not very optimistic. So keep the dialogue lines running. But expectations need to be very, very low that we can make much progress in some kind of AI governance with China. What do you anticipate in terms of some sort of work together on the war in Iran? Very little progress, again, to be honest with you.

36:01This ultimately will come down to what the U.S. and Iran are willing to give each other. The Chinese have made very clear that they will suggest that there should be peace and they agree that this rate of Hormuz needs to be open and there should be no tolls and so forth. But they're not willing to expend any political capital in trying to bring the two sides to the table, try to play the role of mediator. China has for the longest time very smartly tried to stay out of the Middle East. And even this crisis is not precipitating a change. But they were buying a lot of Iranian oil. And we're seeing those floating inventories quickly drain here amid this U.S.

36:36blockade on Iran. I mean, there's also reports that they're starting to buy more oil from Russia, where we also see a conflict. So I guess I am curious whether energy is actually a bigger player in terms of the talks at the table today than people are appreciating, especially as we do go into a midterm election where it's just become a huge topic. Yeah, absolutely. I mean, it's huge for us here in the United States. We have to remember that China has one of the largest, if not the largest, strategic petroleum reserves. And I think that gives them a lot more bandwidth to deal with this eventually than we have, for example, here, just simply because of the way pricing is working here versus in China, where there's far more state control.

37:12Are there any specific deals with companies we should be watching for? I don't think there are going to be any real major deals announced on either side. It doesn't look like we're going to get much from Chinese buying either, from like Boeing and so forth. Yeah, and I saw some of those headlines overnight, too. Shahzad, it's great to have you here. Appreciate it. OK, we are back after this.

37:49Here's what to watch today. China's President Xi Jinping continues his state visit in Washington with President Trump. On the economy, we get weekly jobless claims, August new home sales. Earnings on deck include Costco, BlackBerry and Darden restaurants. And we've got a busy morning of Fed speak with Richmond Fed President Tom Barkin at 8 a.m. Eastern, followed by Cleveland Fed President Beth Hammock and Philadelphia Fed President Anna Paulson. We're also going to get a seven-year bond auction today. Keep an eye on that this afternoon. But turning back to the AI trade and new security concerns, Australia saying an OpenAI agent breached a government health data portal back in June, gaining unauthorized access to files and what officials are describing as the first known instance of an AI agent hacking a government website.

38:38The disclosure coming just one day after OpenAI CEO Sam Altman and Anthropic CEO Dario Amadei addressed the United Nations. It was actually on the same day. United Nations Security Council warning of the risks tied to AI and calling for global guardrails. I see two main categories of risk. The first is misuse of AI models. For example, misuse by bioterrorists to create biological weapons. The second risk is loss of control, model capabilities accelerating beyond developers' ability to control them. These questions are global in scope and concern all of humanity. Well, this latest AI agent breach highlighting the market's increased attention on the cyber defense sector.

39:20Names like CrowdStrike, Fortinet, SentinelOne, Cloudflare are all trading in record territory. It looks like here, pre-market, we're under a bit of pressure now. But CrowdStrike is the clear standout. It's up nearly 40 percent in the past four weeks alone. Cloudflare up 24 percent and Palo Alto Networks up nearly 10 percent. Although giving back some of those gains this morning amid a broader market sell off. Straight ahead, though, the morning call crew teeing up the trading day ahead with one crew member asking, what rate level can stocks handle? I want to hear that. It's next.

40:00It's time for your call sheet where we look at the topics driving the trading day ahead. Crew members today, Stephanie Link, Hightower Chief Investment Strategist and a CNBC contributor. Drew Pettit in the house, Roundtel Investments Chief Investment Strategist. And Steve Sosnick, Interactive Brokers Chief Strategist. Great to have all of you here. I mean, I got to start. I got to start with what we're seeing in the bond market. Drew, you're sitting right in front of me. Your thoughts. Look, it's messy. the move yesterday, very real rate driven, not inflation driven. And to us, that's the biggest risk in equity markets right now.

40:31Growth is good, but growth really has to deliver the higher rates go. We think with the growth backdrop, S &P can actually handle a 10 year around 530. But at that point, you need to keep pushing revisions higher and higher and higher. OK. I mean, you can also make the argument, Stephanie, that based on a number of other metrics that stocks are looking expensive right now. And I guess the other piece of this with the bond market specifically, it's not just the levels themselves, but it's the velocity at which we reach those levels. And yesterday was pretty torrid. Yeah, I mean, looking at the five year, the five year bond yield is above 5 percent for the first time since 2007.

41:11And that's not bad. I mean, if yields are going higher because growth is better, which is what the main reason I think yields are going higher, that's not a bad thing. It's a nice diversification tool, but you will see some switching for sure with yields above five. But that being said, Morgan, the economy is humming along. Look at the PMIs that came out yesterday. The composite is the best number since July of 2021. Earnings have been really good as a result. And I still think that you're seeing a lot of places that are not participating. The Qs are up 4 % in September, but the S &P 500 is only up one and the average stock is down 4%.

41:53So I think those stocks that have lagged can actually catch up. And so that's what I'm looking for into the end of the year. Interesting. Yeah, there's been a lot of focus on breadth to that point. Steve, I was looking at your notes and you made the point that given what we did see with this bond sell off yesterday, that we didn't see much movement in stocks in response. Yes, we finished with major averages lower, but not a down draft, a violent down draft like you might expect to see. Yeah, Morgan, what I've been seeing for the last few days, and this persists actually for a couple of weeks, is even on the days where we pull back a little bit, there doesn't seem to be a get me out trade.

42:30It's a little bit of let's pull back our bids. Let's you know, maybe let's not be quite as aggressive at buying the dip today. But we're not really seeing this get me out type of move yet. People are all in on the AI trade. And we can argue whether that's a systemic risk or not. But as of now, nobody really wants to part with their winners. I don't know if it's taxes. I don't know if it's just love of the markets. I don't know if they really feel sincere about the valuations. But I thought yesterday the stock market reacted rather well, considering that the bond market was pretty much as bad as you could get.

43:06Yeah. I want to focus just a little bit more on the bond market here because, yes, we had much stronger than expected economic data with a flash PMIs. But how important now is it to keep an eye on Fed speak? We had John Williams just about an hour, hour and a half ago, who was definitely tilting more hawkish and basically saying, hey, maybe plan on another rate hike before the end of this year. That was notable. And then you also are raising more debt as a country. We've got seven year auction today. The five year yesterday contributed to the conversation, too. And all of this, despite a six billion dollar refunding that was announced by Treasury yesterday?

43:40I think if you're looking for the broadening trade, like Stephanie brought up, you do have to listen to Fed speak closely. If you're talking about AI, a little bit less closely. On the broadening trade, we actually think the market stays narrow right now, at least tactically, because every time you get that good economic news, you see the real rates move higher. So you have this reaction function where, hey, the data is better. That should flow through to cyclical earnings, the other 493, Russell 2000. But the Fed comes in and says, we're going to choke this off so inflation doesn't get too hot.

44:13Until that dynamic goes away and we can actually see better data without the tougher Fed speak, twos, fives, front end of the curve moving higher, you're just going to stay in a narrow trade. That's our positioning view for now. Yeah, I do wonder. It's a big week for geopolitics and just international relations, Stephanie. So when we see moves like this in the bond market, I don't know. We're going to have to wait and see what kind of data we get here, you know, in the coming weeks. We've got Xi and Washington, the international investor piece of this and what we are seeing. I do wonder how that factors in and how we need to be thinking about geopolitics right now.

44:51Well, we always have our eyes on geopolitics, Morgan, as you know, but I've never really made money based on geopolitics. In fact, I've actually seen opportunities because the market corrects. So, look, I think the economy is humming along. We're running at an Atlanta Fed track. We're at five percent. And actually, at the same time, crude is actually crude prices are rolling over. So I think it's not only the A.I. trade that's working. The consumer, I think that's the best opportunity, discretionary stocks in the sector into the end of the year because the consumer continues to consume. Ask any of the big six banks.

45:27The CEOs are saying the consumers are the consumer is in really great shape. And so that's where I really want to think or focus on for opportunities. OK, Steve, are you watching? I guess what are you watching in terms of this Trump? She meeting and anything meaningful that comes out of it? I think the key, Morgan, is to see if there'll be any deals. You know, there'll be some announcement just, you know, because because just the nature of the beast. The question is, are they meaningful? You know, and to the point about geopolitics, they're important. But stock markets are actually terrible at geopolitics because stock markets really are good at things that affect earnings.

46:06You know, if it affects earnings, if it affects revenues, if it affects the basic bottom line of companies, stock markets are great. If it's sort of, you know, nebulous, we don't really do so well, to Stephanie's point. And so I think right now I'm looking to make sure that they come out smiling, that whatever face saving deals are made seem reasonable. And then we just carry on. All right. We've got about 30 seconds left, Drew. And we just showed it. The XRT is actually fractionally higher this morning. We do get some consumer earnings here, too, and more of that data with the University of Michigan tomorrow.

46:39Just your final thoughts. Look, I think we're going to struggle with the cyclical trade short term. I don't think we're going to have follow through. I think leadership stays in the mags. AI, growth trade, shorter term might set us up for something different when we get into next year. All right. Ten seconds. Stephanie, final thought. Well, I mean, I think earnings are really the driver. And I think you want to focus on that. And they're going to be great. And I think we are going to see a broadening out into the end of the year. OK, we're going to leave it there. Thank you to our call crew. Great to have all of you here.

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