Written by AI panic pushes Nasdaq to 10-week lows
Wall Street closed in the red on Thursday, as the selloff in AI-related, software and data-provider stocks continued to pummel equity markets, which are facing threats on two fronts. Fears that all the spending on AI will not generate substantially higher revenue to justify the bloated valuations, and more recently, the disruption that AI could cause in certain industries such as software and data services, are no longer being seen as remote risks.
Amazon is the latest to spark concerns about its capex plans after it yesterday announced that it wants to up its AI investment to $200 billion this year. The stronger-than-expected revenue growth it reported for Q4 was not enough to stave off a 10% plunge in its stock in after-hours trading.
The S&P 500 slid 1.2%, taking its weekly losses to 2.0%, while the Nasdaq 100 closed at its lowest since late November. The Dow Jones, which is less exposed to AI, has been having a better week, and although it also finished down on Thursday, it stands a good chance of posting weekly gains, as it’s been boosted by health stocks, as well as the rallies in Apple and Walmart shares.
Globally, whilst the AI rout has hammered most major indices, those that are less tech-focused such as the FTSE 100 have been outperforming. But there are signs that the selloff may be easing, with US futures turning marginally positive at the start of European trading.
Dollar headed for weekly gains despite weak jobs data
Increased expectations that the Federal Reserve will cut rates at least two times this year are probably helping to brighten the mood slightly on Friday. The renewed bets for aggressive Fed easing come after a slew of labour market indicators out of the United States this week were on the soft side.
The ADP employment report missed expectations, job cuts jumped in the latest Challenger layoffs reading, December job openings dropped sharply in yesterday’s slightly delayed data by JOLTS, and even the weekly jobless claims edged higher.
Although most investors will be waiting for next Wednesday’s official payrolls report for stronger evidence that the jobs market is deteriorating again, Fed rate cut expectations have been ramped up slightly, rising to 58-basis-points reduction by December.
Short-dated Treasury yields have fallen as a result, although safe-haven flows amid the rotation out of riskier assets could also be lifting demand for sovereign bonds.
Yet, the US dollar is having its best week since mid-November, regaining some of its appeal as the world’s reserve currency, as the preferred safe-haven gold falls victim to speculative trade.
Gold, silver and Bitcoin reverse higher after plunging
Gold and other precious metals have been extremely volatile over the past two weeks. The slide from the peaks scaled two weeks ago may have started off as just profit taking, but this week’s losses were more panic driven, likely from algo-triggered selling.
Silver’s moves were even more erratic, but together with gold, it is recovering today. The growing possibility that the Fed was too quick to judge that the labour market has stabilized and that rates will be cut sooner rather than later could support any rebound attempt.
Cryptocurrencies were also battered by forced liquidations. Bitcoin plummeted by 13% on Thursday, extending its decline to just above $60,000 earlier today before bouncing back above $65,000.
Yen eyes weekend election
In FX markets, the Japanese yen is benefiting from some caution ahead of the snap election in Japan on Sunday. Prime Minister Takaichi is widely expected to gain a majority for her LDP party, giving her the mandate to press ahead with further loosening of fiscal policy.
In the meantime, the Bank of Japan is flagging more rate hikes ahead. Board member Kazuyuki Masu said underlying inflation could overshoot the BoJ’s 2% target without further rate increases. But he also warned that hiking rates too quickly could choke off price and wage pressures.
The dollar is trading around 157 yen today, while the euro and pound are both up slightly at $1.1795 and $1.3577, respectively.
Surprise dovish bias for ECB and BoE
The euro fell slightly on Thursday after the European Central Bank held interest rates unchanged, but President Christine Lagarde hinted at downside risks to the inflation outlook.
The Bank of England also saw inflation falling over its forecast period. Rising unemployment and the uncertain global environment were also cited by Governor Andrew Bailey as reasons for concern. Bailey held the casting vote yesterday in keeping rates unchanged following the unexpectedly tight 5-4 split.
Many investors now think the next cut could come as early as the next meeting in March, although futures markets don’t have a 25-bps reduction fully priced in before June.
The pound skidded by almost 1% yesterday before steadying today.
In contrast, the Reserve Bank of Australia is sounding increasingly hawkish, with the Australian dollar climbing to $0.6970 today following fresh remarks by Governor Bullock.
By XM.com
