Key Points

 

  • Global stocks fall amid AI valuation worries
  • Palantir falls 8% and extends losses after earnings
  • Bank of England may cut rates tomorrow
  • Bitcoin falls below $100k

 

The last day or so has seen a lot of the recent background market chatter about AI bubbles… ”of course, it’s a bubble, it’s only a matter of how far it goes first and when it pops and how much damage there is”… bubble up (ahem)  to the surface and become the dominant market narrative. Investors are showing signs of jitters for sure.

AI valuations have become the focus for this selloff in global equities, with the Kospi in South Korea and Japan’s Nikkei tumbling overnight, led lower by some of the big chip and AI-adjacent names. Japan’s big AI investor SoftBank plunged 13%. Yesterday the S&P 500 declined over 1.1% and the Nasdaq composite fell over 2%.

Chip names bore the brunt of the selling, with Micron –7%, Nvidia –4%, Intel –6% and Broadcom –3%. AMD fell 3.7% and extended its decline by another 5% despite beating estimates on revenues and earnings and raising its Q4 sales guide. Momentum tech suffered enormously with quantum stocks – adjacent to AI and bid up on speculative momentum – down about 10% yesterday. Palantir tumbled 8% and was down a further 3% in after-hours trading.

We have seen a shift in the narrative in the last couple of days that is evidenced by notable selling in tech names, particularly AI. An 8% decline for Palantir – the bubbliest of all AI bubble stocks – after thumpingly good earnings suggests investors are calling the top. Long-term I think Palantir is an amazing company, but it was just too rich.

So, investors have clearly pivoted in the last 48hrs, but is that the bubble finally popping?

The CEOs of Goldman Sachs and Morgan Stanley were out yesterday with warnings about 10-20% corrections in equity markets in the next 12-24 months. It’s hard to argue that – it’s pretty normal. And this has become crowded – too many bulls in this AI trade for it to be sustained. The market has also had to eat a lot of circular AI investments (Amazon and OpenAI the latest eg) and it’s suffering indigestion as it tries to absorb all this capex and what it really means.

One who wasn’t part of the crowd was Michael Burry of “Big Short” fame, who disclosed a $1.1 billion options bet against Nvidia and Palantir…PLTR CEO Alex Karp called this “batshit crazy”. But it’s been AI or bust lately and crowded manias always, always, always go one way.

Technicals are suspect. The S&P 500 just about held its 20-day SMA and 38.2% retracement of the rally from the October 10th low around the 6,750 area. There’s also a bearish crossover on the daily MACD.

Meanwhile, underscoring the mood Bitcoin dipped below $100k to enter bear market territory – down 20% from its peak. It’s been lacking any bid since the big liquidations of October. Strategy, which pioneered the bitcoin holding treasury strategy, was down over 6.6% yesterday, taking losses to about a third in the last month.

European shares are generally softer this morning with the broader risk-off tone dominating with ASML -3.1%, BESI -3.2%, Infineon -1.9%. Luxury, healthcare and banks are all in the red. Pandora -4.5% after missing revenue estimates, Novo Nordisk bounced after an initial -4% fall as it cut growth projections for obesity and diabetes treatments. Vestas Wind Systems were trading up +13% after its Power Solutions division drove strong Q3 results.

The FTSE 100 traded flat with Marks and Spencer down 1% as it detailed a halving in profits due to the cyber attack. Today’s half-year results reveal the full impact of the disruption, which was material. But Ocado and the food business look positive and MKS seems on the recovery with group sales +22% despite the hit. Shares are up 300% in the last 5 years.

 

BoE: Surprise cut?

Much has been made of yesterday’s ‘surprise’ speech by Rachel Reeves. The funny thing is that it didn’t really say anything, and what you could read into it wasn’t that surprising. I don’t think anyone thought there weren’t going to be tax hikes. And I don’t think anyone is ignorant of the fiscal challenges and, among market participants, the potential for a flare-up in gilt markets. Indeed, the roughly 30bps move lower in 10yr gilt yields in Oct indicated the market was not anticipating a Truss-like blow up for the very fact that it assumes considerable fiscal tightening. But the timing of the speech was interesting in terms of this week’s Bank of England meeting because it suggests there is a higher chance the MPC pulls out some fireworks and cuts than we thought before. (The BoE meeting usually takes place on the Wednesday before the announcement on Thursday). The market is not really reflecting the real odds of a cut tomorrow IMHO.

As detailed on Monday – before we knew about the Reeves speech – the BoE rate decision will be a close call. But I cannot help but think we could see a cut brought forward, bringing back into step with the sequencing of the last year’s easing cycle. The key will be governor Bailey – he could see it as prudent to await the outcome of the Budget, or act sooner and back up his more dovish shift lately.

Markets are currently still betting on a cut only by early next year – a one in three chance tomorrow, two in three in December. But the optics of the politics and nature of the telegraphing of a significant fiscal headwind to growth portend a more spritely move by the BoE with doves increasingly in the ascendancy. We have the Sep CPI inflation data, we have the BRC food inflation data, we have the jobs data, we have expectations that inflation will cool to 2.5% next year, and now very strong expectations of a big contractionary fiscal impulse from the Budget. And then we have the timing of that speech.

We are still in the phase of OBR-Treasury back-and-forth – a rate cut this week could help Reeves. But it also means that we have three torrid weeks of speculation to get through before we know the facts of this Budget. Reeves has rolled the dice, we’ll see if the BoE follows.  Sterling sold off yesterday for a couple of reasons – tax hikes crimp growth, tighter fiscal policy will lead to looser monetary, plus a broadly stronger dollar amid a strongly risk-off market. Sterling is the release valve for this kind of risk and part of the sharp move lower on Tuesday was down to bets on the BoE cutting this week. Sterling rather than gilts is acting as the better guide to what could happen. Ultimately it goes back to my belief that the terminal rate will be lower than the market thinks currently – the BoE will go deeper than 3.5% because the fiscal situation is getting worse.

 

 



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