The market jitters seen of late continued last week with global equities ending the week down 2.1% in both local currency and sterling terms. The main source of nervousness remains AI and the trillion-dollar question of whether or not it is all a big bubble waiting to burst.
Nvidia’s results on Wednesday were keenly awaited but did little to clear this up. It reported yet another set of blow-out results with revenues and earnings up a stonking 62% and 65% respectively on a year earlier on the back of rocketing demand for its chips. And CEO Jensen Huang even dismissed talk of an AI bubble. But while its share price gained as much as 5% immediately afterwards, the gains were short lived.
Thursday saw markets turn tail with the main US S&P 500 index reversing its initial Nvidia-led gains and ending the day down 1.5%. The realisation that turkeys – Jensen Huang in this case – don’t generally vote for Christmas and that the explosion in chip demand, far from offering reassurance, could itself be a sign of the bubble may have been behind the market’s second thoughts. The more sobering comment by the head of Alphabet (Google) that valuations were indeed displaying ‘elements of irrationality’ will also not have helped.
Anyway, all this left Nvidia down 6% over the week and off 15% from its end-October high. Alphabet, by contrast, ended the week up 8%, buoyed by news that Warren Buffett’s Berkshire Hathaway had recently bought a stake. The performance of the companies making up the Magnificent Seven has become increasingly divergent but, for what it’s worth, the group overall lost 2% last week and are off 8% from their high.
Even though tech stocks led the decline, the US held up relatively well, falling 1.5% over the week in sterling terms. So did the UK, which benefited from its defensive characteristics and was down 1.6%, while Europe and Japan both lost a rather larger 3%. China fared worst, falling 5%. It was hit by the disappointing economic data of late and a reversal in its tech sector which had been at the forefront of the recent tech rally.
On the macro front, US payroll numbers for September were finally released, along with confirmation that the October data will never see the light of day due to the recent government shutdown. Although payrolls posted a larger than expected gain, the unemployment rate unexpectedly ticked higher.
Just as importantly, a key Fed official said he would favour another rate reduction in December, countering the more hawkish talk of late from some of his colleagues. Markets, which had begun to lose faith in a cut next month, duly moved to price one in once again, leading to a decline in bond yields and Treasuries returning 0.5% over the week.
UK gilts also returned 0.4%, helping offset the declines in equities. Gilts were assisted by the news that UK inflation eased a little in October with the core and headline rates falling to 3.4% and 3.6% respectively. Less encouragingly, retail sales declined an unexpectedly large 1.0% in October and business confidence also deteriorated in November. Still, all this only served to cement expectations that interest rates will be reduced another 0.25% to 3.75% in December.
With Budget day mercifully finally approaching, we are resisting the temptation to put together our list of top picks to be included in the smorgasbord of tax increases certain to be announced on Wednesday. Much ink has already been spent and wasted on this subject as a result of the Chancellor’s recent – how shall we put it politely – indecisiveness.
Whereas the UK Budget will very likely see tax increases amounting to £25-30bn, which equates to around 1% of GDP, Japan on Friday saw the recently elected Prime Minister Sanae Takaichi announce a stimulus package potentially totalling $135bn or 3% of GDP. The stimulus was not unexpected and the boost to equities limited. This was partly because whereas this more expansionary policy may be music for stocks, Japanese bonds and the yen view it rather differently and have weakened.
Finally, a word on gold and its nemesis bitcoin. Gold ended the week little changed at $4068/oz. Bitcoin, by contrast, confirmed that, far from offering any protection in a market sell-off, it is often at the forefront of such moves. It was down a hefty 11% and has now lost a third of its value since hitting an all-time high in early October. These losses may hit many of the same retail investors who have been such avid buyers of previous dips in the equity market and could make them rather less gung-ho about piling into the latest dip.
This coming week, all eyes in the UK will be on Rachel Reeves at 12.30pm on Wednesday. Elsewhere, macro releases are limited other than the drip-feed of overdue and rather out-of-date figures being released in the US now the government has reopened.
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