AI trade turns a corner

The roller coaster ride for markets continues, and US stocks are staging a recovery today, after Tuesday’s post CPI sell off. US stocks are surging, led by Nvidia is higher by more than 2.5% so far. Global bond yields are also recovering, although US Treasury markets are closed on Wednesday. 

Anthropic IPO suggests demand for AI stocks remains strong 

Anthropic’s IPO is one of the central narratives today. This IPO has been confirmed for 18th November, the stock will start to trade the following day. The valuation is currently $1.4 trillion, but it could be much larger after reports suggest that demand for shares is multiple times higher than what is available. 

Demand is so huge that pre-IPO backers have started to market their stakes in the company through special purpose vehicles. This is highly unusual, and seems to be linked to big AI IPOs, with the same thing happening for SpaceX. These developments suggest that Anthropic’s IPO will be well-received, but what happens after that? SpaceX’s share price is still below its all-time high, and it’s worth noting that major IPOs tend to have a mixed stock market performance even after a stunning debut, this also happened to Meta.  

Anthropic has had a mixed impact on investor sentiment 

Today, Anthropic’s massive IPO is risk positive. This has not always been the case, and the company’s expected IPO valuation has fallen from $2 trillion earlier in the summer. Next week’s IPO is a major test for the AI trade. It is the first public listing for an AI Lab, and if it trades well it will validate the whole AI trade, from chips, to cloud to power. 

There are still risks around the Anthropic listing. For example, its biggest backers are also buying $26bn of stock, which will add to fears about circular financing, and there is a dispute with the Pentagon that can hit future revenues. On top of that, there are concerns that a successful mega IPO for Anthropic could drain demand for other AI names and hurt the broader trade. However, investors will cross those bridges when they come to them, today is all about the good news. 

CoreWeave surprises the naysayers 

The other driver of this risk on mood in markets is CoreWeave’s latest results. The neocloud company, that has seen its share price slump 34% YTD, and the cost to insure its debt surge, posted stronger than expected results for last quarter, and this has caused a major rebound in its stock price. The stock is trading higher by  12% so far today.  

Digging into the results, you get a more upbeat narrative compared to the dire warnings from some analysts about the state of the neocloud sector. CoreWeave’s Q3 revenue was $3.66bn, 168% higher than a year ago. The company also raised its full year revenue outlook. This is fuelled by strong AI infrastructure demand, which boosted operating margins. The company also has a $132bn pipeline of future revenue, which should reassure investors. 

Debt risks still pose a problem for CoreWeave 

The company is still burning through cash, particularly for debt interest, which was $846mn last quarter. However, this is a concern for another day. Investors are interested in headline growth and they typically love it when revenue forecasts are raised, so the sharp increase in the stock price today is unsurprising. 

The question is, can it last? The company has negative net cash flow as it continues to spend billions on infrastructure. This will make it difficult to pay down debt in the short term, and eventually this could hit CoreWeave’s stock, but for now this is not a pressing issue. Overall, the market is putting AI doubts to one side and is focusing on revenue potential and mega cap IPO as we move through this week.  

Why the dollar suggests that risk aversion has not gone away 

The oil price is rising today, but this is not denting the market mood. Added to this, after yesterday’s post CPI rout, bond yields are falling. Although AI is grabbing the headlines today, there are still signs of the rally broadening out beyond tech. European indices are pushing higher, and the Eurostoxx index and the Dax both reached record highs earlier on Wednesday,  the gold price has also stabilised above $4,000. 

The risk on mood is not replicated in the FX market, and the dollar is maintaining gains, it is the best performing currency in the G7 FX space so far today. This suggests that although stocks are surging and market mood is risk positive, this is not the case everywhere, and investors are still willing to buy dollars.