Fears About OpenAI leads to US tech stock sell off, as BP shines in a crisis

Oil is higher once more and has broken the $110 per barrel barrier as the Strait of Hormuz remains closed and the impasse between the US and Iran has yet to be broken. Brent is higher by more than 2% and is back above $111 per barrel, as President Trump says that he is reviewing the proposal put forward by Iran to reopen the Strait and the bring the war to an end.

Right now, the market is not optimistic about the chance of a deal to reopen the Strait due to Iran’s request to push discussions about nuclear disarmament into the future. However, this is a news driven market and the oil price will be sensitive to geopolitical headlines this week.

With oil at these elevated levels, you would expect European stocks to struggle, however, European indices are mostly higher this morning. The Dax is up by 0.2%, and the FTSE 100 is higher by 0.3%, as BP and Shell get a boost from BP’s stunning Q1 results. Unsurprisingly, bond yields are ticking higher on Tuesday, although gains remain moderate so far. The UK 10-year Gilt is now back above 5%, after falling sharply post the ceasefire announcement. Yields are likely to creep higher as we lead up to the key central bank meetings this week, and as we wait to hear what happens next in the Strait of Hormuz.

Tech stocks are also in focus today. After a record run for semiconductor names and historic highs for the S&P 500 and the Nasdaq, tech stocks are coming under pressure on Tuesday after a report cited concerns about the vast amount of investment in AI in recent years. The Wall Street Journal has reported that OpenAI, the maker of ChatGPT, missed sales targets and user acquisition goals. US futures have slid on this news, and semiconductor stocks, which have risen by 10% this month, are also on the backfoot. Nvidia, ARM and AMD are all lower in pre-market trading this morning, ARM Holdings is lower by 5% after a strong run last week, where it rose by more than a fifth.

Companies like Oracle are also under pressure, and Oracle is lower by 4% in the pre-market due to its tie up with OpenAI. Microsoft, is faring slightly better and is lower by 0.45% in early trading on Tuesday after it announced a change to its partnership with OpenAI on Monday. Microsoft’s license with OpenAI will no longer be exclusive and it will no longer pay a revenue share to OpenAI, although it still remains a major shareholder.

OpenAI sales issues could threaten AI theme

OpenAI is the poster child for AI and its capabilities and ambitions. Its touted IPO is expected to raise close to a $1 trillion, but if it is struggling with sales then it could limit its spending on data centres, which would be a blow to the speed of AI uptake. This news may threaten the AI investment theme that has driven US stock markets to record highs.

The spending scrutiny could limit OpenAI’s ambitions, which may slow down the speed of AI uptake more generally, considering how central OpenAI has become to the AI revolution. This is one reason why we are seeing some rotation out of US equities and back into European markets this morning.

The OpenAI news comes ahead of some key earnings releases this week with 5 of the Magnificent 7 reporting, four of whom have been massive hyperscalers committing hundreds of billions of dollars to AI investment per year. The latest news about OpenAI, who  created ChatGPT, means that capex plans for Microsoft, Amazon, Meta and Google will be scrutinized even more this week. If these companies are significantly stepping up their spend, this could lead to questions about how sensible this is and how quickly they can monetize AI investments, while if there are signs that the hyperscalers are slowing their spending on AI then it could hit the AI ecosystem hard, including recent big winners like semiconductor stocks and Intel, which has risen more than 50% in the past month.

BOJ moves in line with major global central banks

The Bank of Japan kept rates unchanged earlier today, although 3 members voted to hike rates from 0.75% to 1% to combat the inflationary pressures from the rising oil price. The vote split was expected; however, it highlights the conflicting factors that central banks need to contend with in the era of the Middle East conflict and the face-off between inflation and growth. Not so long ago, the BOJ was a major outlier as it was focused on raising interest rates to normalize policy, while other global central banks were cutting rates. Now, they are more unified in keeping policy on hold, while raising their inflation  forecasts as they try to fight the energy price spike.

BP: will the profit boost last?

BP is also in focus, after it reported results that smashed expectations. In fairness, an oil major that makes bags of money during an energy price shock should not be a surprise. It’s share price was higher by 3%, after it reported profits of $3.8bn, driven by strong oil trading revenue. This is a good start for new CEO Meg O’Neil, but the question is, will it last? The answer is most likely no, as the company also noted flat production levels due to disruption at its sites in the Middle East. However, BP is having its moment in the spotlight. It pivoted back to oil and gas at exactly the right time, and its share price continues to extend gains after rising by 36% YTD, higher than Nvidia, which is up 14% YTD.

The strong performance of the oil majors is a major boost to the UK index, which may continue to outperform in the short term, if there are growing concerns about AI stocks in the US.