By Anna Szymanski
Oct 16 (Reuters) – Hello Morning Bid readers!
Are we reaching an inflection point? Whether it’s the AI boom, the escalation in the Middle East, or the relationship between the US and Ukraine, this week brought further signs that markets and geopolitics may be nearing a breaking point.
A significant AI-related selloff hit global markets this week amid growing concerns that rising interest rates could create funding challenges as the web of circular financings in the AI ecosystem grows ever more complex. Markets were calmer early on Friday, but investors remain wary that higher borrowing costs could end a party that has helped keep the global economy chugging along over the past year despite the headwinds from both trade wars and actual wars.
The Philadelphia Semiconductor Index recorded seven straight daily declines through Thursday, while Asia’s tech-heavy indices – some of the biggest beneficiaries of the AI euphoria earlier this year – were hit hard this week. South Korea’s KOSPI index dropped almost 8% on Thursday, though it rose over 3% on Friday.
The pullback was amplified on Wednesday by a slightly hotter-than-anticipated US CPI print. The Consumer Price Index rose 0.6% last month, increasing 3.7% in the 12 months through September, largely thanks to higher gasoline prices. This was in line with economists’ expectations, but the 0.3% monthly rise in core inflation – which strips out food and energy prices – was slightly above consensus projections.
This spooked markets, briefly boosting bets for another Federal Reserve interest rate hike this month to roughly 50% – up from roughly 25% before the inflation release. While that has since receded, markets still appear worried that sticky inflation will force the Fed to remain hawkish, as investors shed the equity and debt of some of the more heavily indebted companies.
Most notably, CoreWeave’s shares dropped 15% on Wednesday, while the cloud computing company’s bonds due 2032, issued just four months ago, fell into distressed territory as its credit default swap spreads briefly blew out beyond 1,000 basis points.
The International Monetary Fund put a spotlight on AI risk at its meetings in Bangkok this week. Jason Wu, assistant director of the IMF’s Global Markets Analysis Division, warned: “If there are questions about the monetization of AI, the equity investments will deplete in value, the debt may be difficult to service, and the revenue commitments in the future may not materialize.” That’s not a pretty picture.
Earnings releases from the AI giants in the coming weeks may ease some investor concerns – but the bar is very high. Just look at Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest manufacturer of advanced chips. It reported a 69% jump in third-quarter net profit on Thursday, beating market forecasts, while noting that demand for chips is still outstripping supply. Yet this didn’t do much to stop the bleeding across global AI equities.
This points to a worrying question: are Wall Street’s AI bets simply too big to succeed?
Analysts expect earnings for S&P 500 companies to rise more than 30% year-over-year for the third quarter, with two-thirds of that coming from tech and AI, according to LSEG.
But Wall Street banks, the first major set of companies to report this season, had a bit of a rocky start. The results from the likes of JPMorgan, Citigroup, Goldman Sachs and Wells Fargo were mixed, but overall they indicate that the dealmaking and trading bonanza that powered record-high earnings in the first six months of the year may be slowing in the face of higher borrowing costs.
At the heart of that rise in interest rates is, of course, this year’s energy-driven inflation surge.
On that front, Brent crude rose above $106 a barrel on Wednesday amid escalating attacks in the Middle East, though it pared some of those gains later in the week.
Yemen’s Iran-aligned Houthis stepped up their attacks on Saudi Arabia throughout the week. The group hit oil giant Saudi Aramco’s <2222.SE> headquarters as well as Riyadh’s international airport. The attacks came as the kingdom hosted a major energy and investment conference.
Iran also said it was deploying new tactics to target ships transiting the Strait of Hormuz as Tehran seeks to keep upward pressure on oil prices ahead of the US November 3 midterm elections. A container ship and a dry bulk carrier both sank near Hormuz within 24 hours of each other after being struck by projectiles in separate incidents, according to maritime officials.
Meanwhile, fuel prices remain sky-high, most notably diesel. While US President Donald Trump announced a diesel deal with Russian President Vladimir Putin last Friday to enable Russia to resume some diesel exports and claimed on Sunday that an energy ceasefire between the warring parties was in place, the impact on energy prices was modest.
The volumes cited in the diesel agreement were very small and even though Kyiv initially agreed to suspend strikes on Russian energy infrastructure, the tenuous “ceasefire” arrangement had unravelled by Thursday.
Ukrainian President Volodymyr Zelenskiy cited US “betrayal,” as Ukrainian officials complained that they had not received any US early-warning alerts about incoming Russian ballistic missiles for multiple days. They also said the military version of Elon Musk’s Starlink satellite communications service had been slowed across the country, hampering their military activities.
While the outlook for both the Middle East and Russia/Ukraine conflicts is murky — to say the least — one thing is becoming clear. Something in the mindset of energy traders is shifting. For many months, Trump was able to talk down oil markets with a few words, but energy price moves in recent weeks suggest that his trademark ability is fading.
Looking ahead to next week, geopolitics and earnings will likely vie for investor attention, as Meta, Tesla and IBM are all set to report.
Before you head off, take a look at some questions ROI columnists have recently been exploring:
• Why aren’t Middle East LNG flows recovering as fast as crude?
• What’s left of the US economy when you strip away AI?
• Why aren’t surging yields spooking corporate borrowers?
• Can the US maintain its strategic copper reserve?
• Why is yuan devaluation good news and bad news for Europe?
• Might governments actually be rooting for AI to stumble?
• How has the aluminium market remained immune from the Iran war?
• Why might the road to an all-electric car fleet be bumpier than expected?
• Could Asian oil refineries be among the biggest winners of the Iran war?
• Why might AI be weighing down US GDP?
• What’s the dirty secret behind Europe’s battery boom?
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Opinions expressed are those of the authors. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(Editing by Marguerita Choy)
