Written by Equities slide as investors fret about AI valuations
Growing concerns about excess valuations in the AI and wider tech sector intensified in the last 24 hours, pushing Wall Street and Asian equities sharply lower. The Nasdaq 100 plunged just over 2% on Tuesday while the S&P 500 lost 1.2%. In Asia, the Nikkei 225 index came tumbling down from yesterday’s intra-day record highs to close 2.5% lower.
But Chinese stocks recovered from an earlier dip to finish in positive territory, following a solid services PMI reading from RatingDog. Sentiment also improved somewhat after China’s State Council confirmed that it will cut its reciprocal tariffs on US imports by 24% following last week’s trade agreement between Presidents Trump and Xi.
Losses in Europe are more muted today although shares in the region have been underperforming for well over a week. But US futures are also pointing to a rebound on Wednesday, suggesting the latest selloff is likely being driven mostly by profit taking rather than investors rethinking their rosy outlooks on AI stocks.
Tech earnings under scrutiny
Worries about frothy valuations have been steadily building up over the past few weeks, with the VIX Volatility index – Wall Street’s fear gauge – spiking above its recent range. But the latest panic came when the CEOs of both Goldman Sachs and Morgan Stanley warned of a possible pullback of 10%-15% in the next 12-24 months.
Moreover, this week’s tech earnings haven’t been quite as upbeat as last week’s results from the Magnificent Seven. Although Palantir and AMD both reported strong results, investors weren’t impressed by their forecasts for the upcoming quarters, mainly due to the very high expectations that had been fuelling the rally in their stocks.
Super Micro Computer shares have also been under heavy selling pressure this week and will likely slide further today after the company reported weaker-than-expected earnings after yesterday’s closing bell and its guidance fell short of estimates.
Safe havens back in demand, cryptos pare losses
The souring in risk sentiment has taken a toll on cryptocurrencies. Bitcoin is down 7.5% so far this week and Ether is 14.5% lower. However, they seem to be rebounding today even as gold recoups some of its losses.
The precious metal has been oscillating around the $4,000 mark for more than a week and today’s gain of about 1.2% is far from being a bullish reversal sign. Still, it confirms the ongoing risk aversion in the markets, and this is further underpinned by the outperformance of the Japanese yen, which is enjoying a much-needed reprieve.
Dollar eyes ISM services and ADP data
The US dollar, meanwhile, is holding near yesterday’s fresh three-month top, as most Fed officials continue to cast doubt about a third back-to-back rate cut in December. Although earnings will remain in the spotlight today, with results from Qualcomm and ARM Holdings expected after the market close, US data is likely to take centre stage amid the recent scarcity of it due to the never-ending government shutdown, which just became the longest in US history.
In particular, the ISM services PMI will be closely watched following Monday’s soft manufacturing print, and the ADP employment survey will provide a crucial insight into the jobs market in October.
Any weakness in the PMI and ADP numbers could revive bets of a December rate cut, hurting the dollar but boosting risk appetite.
Pound has one eye on budget and another on BoE
Elsewhere in the currency markets, the New Zealand dollar is on a steadier footing after briefly hitting a seven-month low against the greenback following a rise in the country’s unemployment rate in Q3, which heightened bets of an RBNZ rate cut later this month.
The euro and pound also edged up after the services PMIs for the Eurozone and UK were revised higher in October’s final readings.
Still, the pound is at high risk of breaching the $1.30 handle amid persistent concerns about the UK’s debt situation. UK finance minister Rachel Reeves yesterday gave investors a sneak peek of her November 26 budget, hinting at tax rises. However, her commitment to reducing the budget deficit over time has only partially convinced markets that a UK debt crisis isn’t on the near-term horizon.
Even if embattled Reeves, who is struggling to hold onto her job as chancellor, can keep investor nerves in check, another big hike in taxes is likely to weigh on growth, paving the way for more Bank of England rate cuts. The BoE meets tomorrow but is expected to stay on hold for now.
By XM.com
