US markets are still up for the year despite cocktail of concerns: Richard Hunter
The AI trade continues to pose more questions than answers, sending US and in turn Asian markets lower as investors mull the next steps.
The reasons for the recent sell off are unclear and have drawn differing theories. At best, investors could simply be repositioning and raising funds in advance of the hugely anticipated IPOs for SpaceX, Anthropic and Open AI. It has already been reported that SpaceX has seen investor demand of $250 billion and these funds need to come from somewhere.
Equally, there are signs that investors are becoming more selective in the tech space, with weakness in certain stocks suggesting that there will ultimately be winners and losers, and these will need to be separated. At the same time, some spending plans are rattling investors, and Oracle was the latest casualty as its shares fell by 10 per cent in after-hours trade on Thursday into Friday after announcing a $40 billion raise for further investment.
Another possibility is that some air is being let out of the tyres after what has been a stellar run for tech and chip stocks in particular.
Nvidia has a disproportionate weighting on the S&P500 and its near 4 per cent drop was a prime reason for the fall in the index, while another recent star Broadcom fell 5 per cent, alongside losses for Advanced Micro Devices and Micron Technology. More positively, these recent share price falls ease some of the valuation concerns, although pressure will remain on earnings which will need to keep pace to keep valuations in check.
Meanwhile, the increasingly loose definition of a ceasefire in the Middle East is becoming meaningless, as the US and Iran carried out targeted attacks on each other. President Trump ramped up the rhetoric once more by promising further “very hard” attacks as negotiations had taken too long, while Iran threatened to target vessels passing through the Strait of Hormuz.
With little light at the end of the negotiating tunnel, oil prices spiked once more, although the price remains comfortably under $100 per barrel. Nonetheless, the rise had its effect, with the likes of United Airlines and cruise-operator Carnival each falling by more than 6 per cent in anticipation of higher fuel bills for travel companies.
May’s Consumer Price Index reading was bang in line with expectations, with the core reading rising by 0.2 per cent, annualised to 2.9 per cent although the headline rate nudged over 4 per cent for the first time in three years. With a blowout jobs report the most recent indication of the labour market, the Federal Reserve has its work cut out as its dual mandate which covers inflation and the labour market would in normal circumstances lead to an interest rate hike, which is increasingly being priced in by the market before the end of the year. Despite the cocktail of concerns, the main indices remain comfortably ahead in the year to date, with gains of 3.9 per cent, 6.2 per cent and 8.3 per cent for the Dow Jones, S&P500 and Nasdaq respectively.
The FTSE100 marginally escaped the dour sentiment emanating from other global markets, with small gains at the open on Friday given its relative lack of exposure to big tech.
Some of the index heavyweights which had been under pressure given their exposure to Hong Kong and China reaped the benefit of renewed buying interest, with decent gains for the likes of Prudential, HSBC and Standard Chartered. Selective buying among the miners also helped to nudge the primary index higher.
In the year to date, the FTSE100 has now added 3.5 per cent, although it remains more than 6 per cent lower than the record high set in February.
Its average dividend yield of 3.1 per cent is a stable and additional attraction for investors, and while the index could be viewed as a global tracker on many fronts, the absence of a large tech presence has tended to be both a blessing and a curse this year depending on the global backdrop and investor risk appetite.
Richard Hunter is head of markets for interactive investor