As we move into the middle of the week, the market is digesting two things: the sell off in US AI stocks, and Donald Trump’s controversial speech at the UN.
US stocks slipped on Tuesday and closed lower, led by large declines for IT stocks and the consumer discretionary sector. The sell-off was triggered by Federal Reserve chair Jerome Powell’s comments that there is no ‘risk free policy path ahead’. It is not unusual for a central bank head to spell out the downside risks, however after hitting record highs at the start of the week, a pullback in US stocks was to be expected.
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Buat Akun DOWNLOAD APLIKASI SELULER DOWNLOAD APLIKASI SELULERConcerns about Nvidia’s financing model
Amazon and Oracle were some of the weakest performers on the S&P 500 yesterday, while Nvidia was lower by more than 2%. Nvidia’s sell off was triggered by concerns about its $100bn investment in Open AI. Essentially, this will be used to buy Nvidia chips to build Open AI’s data centres. This is leading to fears about a ‘circular’ financing model, and Nvidia funding the cost of its own chips. Ultimately it is a leasing agreement: OpenAI had been a nonprofit, although it has moved away from that mission, it would still struggle to fund the cost of Nvidia chips to execute its planned data centres, so Nvidia, who has the cash, has stepped in. Investors will need to decide if this is a cynical ploy, or another way to generate revenue. We think that the market will eventually focus on the latter, and this will be a temporary blip for Nvidia. US futures are pointing to a higher open later today.
Trump tough talk on Russia could boost European stocks
Donald Trump’s controversial UN speech is also expected to have an impact on financial markets in Europe today. He lambasted Europe for immigration and climate change policies, but he also said that with the support of the European Union, Ukraine could ‘win’ the war with Russia, and reclaim all of its territory taken by Russia since 2022. This could boost European defense stocks on Wednesday, and defense names have also risen during the Asian session.
Trump’s comments that Europe should shoot down Russian planes if they get too close, could be seen as a signal that the US is not going to abandon Nato. Europe could only escalate the conflict with Russia if the US was there for support. Thus, we could also see European bonds rally at the open, especially German debt, as it may ease the need for rapid defense spending on the continent.
Trump gives oil a boost
Eurostoxx futures are pointing to a lower open, however, the FTSE 100 is pointing to a small gain later this morning. The FTSE 100 could receive a boost from the oil sector. The oil price is higher today and Brent crude is currently trading at $67.70, after Donald Trump ramped up further pressure on sanctions on Russian oil, which is exacerbating concerns about oil supply. Added to this, President Trump called on Europe to abandon its green energy plans, and for the UK to restart drilling in the North Sea, which may also boost domestic oil names like BP and Shell on Wednesday.
Gold continues to glitter
The gold price reached a fresh record early this morning. The environment is perfect for another leg higher in the gold price: fears of a dovish shift from the Fed combined with concerns about an escalation in the Russian conflict, should keep the yellow metal in high demand. This could trigger a move above $3,800 in the near term; the gold price is currently trading above $3,770.
Overall, as the US AI trade takes a breather, a push into defense stocks and oil and mineral stocks could keep US and European indices buoyant as we move into the middle of the week. Halliburton, the oil services company, was the best performer on the S&P 500 on Tuesday and rose more than 7%. In Asia, news that Alibaba was investing in AI triggered a 7% rally in the stock. Thus, the AI boom may have further to run in Asia.
