UK the harbour in the storm as tech bloodbath continues

The tech bloodbath continues on Thursday. Asian stocks have slumped, the Kospi fell more than 7%, and trading had to be halted at one stage, while Japanese stocks are down 4%. The MSCI Asian index is now at its lowest level since July. European tech names are also sharply lower, and US futures markets are predicting another 1% decline for the Nasdaq, and a smaller loss for the S&P 500. 

Bonds attract flows as stocks sell off

The AI trade is experiencing a major shake out, and the market is ignoring strong earnings beats as investors fret about strong inflation, amid an increase in Fed rate hike bets. However, there is a major bond market rally on Thursday, and bond yields are falling across the curve in Europe, the US and in the UK. 

Risk aversion grips markets ahead of key October event risk 

This is not just a sign that the market is reassessing the chance of further rate hikes, and is instead a sign of risk aversion. Investors are cutting their risk exposure as we move through October and the moves of the last two days are fairly typical in periods of elevated volatility. 

What is driving the AI sell off: future earnings fears 

There are three main drivers of the AI stock market sell off: 1, fears about the future of capex spending, 2, Chinese competition and 3, expected returns. Investors are not worried about Q3 earnings, instead they are worried about future earnings and the payoff. 

CoreWeave: the canary in the coalmine? 

CoreWeave, a US cloud-computing firm that rents our data centres and GPUs, saw its stock price plunge more than 15% on Wednesday, and pre-market trading suggests that it will be lower by another 4% later today. CoreWeave is quickly becoming the AI trade’s canary in the coalmine. Its bonds have sold off sharply, and are now trading well under par at $0.78. This is a sign that investors might be going off the AI investment narrative, which has included massive debt issuance to fund AI ambitions. 

Why CoreWeave debt market sell off may not spark contagion 

The CoreWeave sell off may not spark a broader sell off in tech sector debt. Coreweave has a credit rating of BB+ to BB-, this compares to Alphabet’s AA+rating, which is stronger than many sovereigns. Thus, we think lower rated, smaller-sized AI firms could be in the firing line during this latest AI trade shake out. 

Anthropic: when $16.8bn in revenue is just not enough 

Anthropic is another area of concern. The AI giant, which is set to list on the stock exchange later this year, told prospective investors that Q3 revenue hit $16.8bn, which analysts see as a disappointment. The cost of building out Anthropic’s infrastructure is huge, and it needs massive revenues to sustain this. When $16.8bn in quarterly revenue is not considered good enough, the sector has a problem. 

We have mentioned that some AI linked stocks and chip makers now look extremely cheap on a P/E basis, but this is not enticing people into the market. SanDisk’s forward P/E ratio is now 8x future earnings, but its stock price is down another 4% in the pre-market this morning. This is typical risk averse behavior, and investors are unwilling to come in and stabilize the tech trade at this stage. 

AI powers UK economy 

The stock market is not always correlated with economic reality and we are seeing this with AI. As the AI stock market party comes to an end, we are starting to see the economic benefits of AI in the UK GDP data. 

The UK economy grew by 0.1% in August, defying fears of a 0.1% contraction. This may be unspectacular growth, but the 3-month-on-month rate is looking good at 0.7%. The annual rate of growth is also above 2%, and is at its fastest rate for nearly 4 years. What is driving this growth: AI investment. 

Services output was the main driver of the economy in August. The industries and sectors that provided the largest contribution to growth in the 3-months to August were  computer programming, which contributed 0.3%, and then legal services. Scientific research, advertising and information services combined have contributed half of the annual growth in the UK over the last 12 months. 

We expected growth to surprise on the upside due to the previous month’s large increase in AI investment. The IMF revised up the UK’s growth forecast for 2026 in part due to AI growth across the country. You don’t just turn the taps on and off for this type of investment, and it could have a big impact on GDP in the coming months. 

Why it’s crucial Healey does not disincentivize investment at the budget 

In contrast, the construction sector is in the doldrums. Today’s GDP data is important as it comes less than 2-weeks before the budget. The Chancellor must not disincentivize investment, as that is propping up the UK economy, and he must also do something to boost homebuilding, since this is a major drag on the UK economy. 

UK: the harbour in the storm 

A stronger economy, combined with a resilient FTSE 100, which is the best performing major index so far this week, is good news for the pound and the Gilt market. As other markets crash and burn, the pound is the top performing G7 currency this week, and the Gilt market is the best performer amongst its peers on Thursday. When the AI trade sells off, the UK is the harbour in the storm.