| Good morning. We forgive you if — distracted by the bloodbath in US tech stocks — you did not notice that the Bank of England became the last of the G7 central banks to raise rates since the start of the Iran war. The BoE’s decision came just as oil prices were falling sharply on the expectation that the conflict in the Middle East might be coming to an end. But the BoE said the increase was warranted because higher inflation is already “in the pipeline”. Is the BoE fighting an energy shock that is already fading? Send us your thoughts: unhedged@ft.com On Wednesday, we were surprised that the tech sector didn’t take a harder hit in the wake of the US midterm election blue wave. We only had to wait a day, as it turns out. The whole AI complex got absolutely crushed on Thursday, and the selling was frenzied enough that other sectors were dragged down. The Nasdaq closed down 5.5 per cent and, ominously, at its low for the day. The question on everyone’s lips — is this The Big One? — is unanswerable. Leveraged investors could start selling indiscriminately to meet margin calls, sparking a downward spiral. Critics of passive investing have long warned that, in such a spiral, index fund investors will take flight, pulling the whole market down in their rush to discharge AI risk. Maybe this is the moment the critics are proven right. Certainly, yesterday’s moves were big and broad enough to bring these possibilities to mind. Time to run for it? The case against panic starts with the fact that, if we were in a classic FOMO market riven with euphoria, it ended a while ago. The biggest US semiconductor companies peaked in early October or, as in the case of Micron, well before that: The memory hardware companies, which have risen even more than the semis, peaked back in June: The industrial stocks most associated with the data centre boom have been falling steadily since May: The point is that the election has accelerated a process that was already in place. Risk has been coming off the table for a while and, until yesterday, in a reasonably orderly way. At some point, we can hope, the AI complex will find a new equilibrium, and the market can go on about its business — at a meaningfully lower level, perhaps, but without an all-consuming crash. Remember that the economic fundamentals underlying the market remain strong, as witnessed just this week by solid Jolts, jobless claims, and ISM manufacturing and services surveys. Earnings growth, even outside of technology and energy, is solid too, and share performance outside of tech has been improving in recent months. None of this is a guarantee against a market collapse, but has to make one less likely. Also comforting: while safe havens outside of equities performed well yesterday, investors are not exactly piling in. Five- and 10-year Treasury yields both fell 8 basis points, a meaty move, but that has been the direction of travel for a month now. Gold rose all of 1 per cent. Credit default swaps, which are famously capable of speculative hysteria, continue to make careful distinctions among the different parts of tech. The spread on “Neocloud” CoreWeave’s CDS jumped 127 basis points on Thursday to 1,289bp (implying it costs 12.89 per cent annually to insure its debt against default). The cost of SpaceX’s five-year CDS also rose more than 20bp to a fresh high of 287bp. Meanwhile, equivalent contracts for Microsoft, Amazon and Google were all but unchanged. What’s the case for panic? In a way, the big declines in the AI complex were less worrisome than the small declines in sectors that, up until yesterday, had been performing well, such as staples and healthcare. Walmart, Procter & Gamble, Coca-Cola, Eli Lilly, Apple and other stalwarts ended the day in the red. This looked like a move, at the margin, from “sell AI” to “sell what you can”. Yes, there was wide dispersion of performance, but everyone felt the pain: We will be looking for four things in particular in the days and weeks to come. Are there signs of investor capitulation outside of tech stocks, that is, a widening (as opposed to a deepening) of the equity sell-off? Are there any signs of emerging macroeconomic weakness that could reinforce the troubles in the equity market? Does the confidence of the leading companies in AI crack, as expressed by abandoned plans to raise and deploy capital? For example, will Anthropic indefinitely suspend their plans to list? Despite persistent inflation and sound macroeconomic data, do bond yields take another major leg down from here, foreshadowing a slowdown?
If the answers to those four questions are no, the equity market should be OK. ‘A kind of ironic subversion’. |
