Equity rebound stutters as oil spikes again, yen gains from AI jitters

AI bubble fears refuse to subside

Fears about an impending AI bubble continue to dog stock markets, with the AI selloff resuming in Asia today and US futures turning negative. Korean chip giant, SK Hynix, once again led the way downhill and Japan’s Nikkei 225 index also took a tumble.

European indices, which have recently had a tendency to go the opposite way of the AI trade, failed to benefit from any rotation away from the AI sector, underscoring the significant souring in broader market sentiment this week.

Moreover, the start of the Q3 earnings season has been unable to revitalize Wall Street thus far. Although all three benchmark US indices have recouped a large chunk of last week’s heavy losses, the rebound is on shaky ground.

Rising interest rates and soaring bond yields have increased scrutiny on AI valuations, as the investment boom is increasingly being financed by borrowing. With no end to the Middle East crisis in sight, keeping inflation risks elevated, investors are worried that the jump in financing costs will eventually hurt AI spending, eroding the rosy earnings outlook.

Mixed response to tech earnings

Still, there are plenty of winners this week within the AI space, such as SpaceX, which rallied 7.8% on Wednesday following its impressive earnings results. However, sister company, Tesla, didn’t have the same luck with its earnings numbers, as revenue fell short of expectations. Investors also weren’t happy with the company’s lower spending plans, fearing it would fall behind in the AI race.

But Meta Platforms’ earnings enjoyed a better reception, sending the stock higher in after-hours trading, after revenue beat estimates and a slight increase to the bottom end of the range of its projected AI spending didn’t spook investors.

Oil prices creep up again

With AI earnings taking the backseat until next Wednesday, when the Federal Reserve will announce its latest policy decision, stocks are likely to stay hostage to the situation in the Middle East where there’s been some escalation in recent days.

Iran-backed Houthi rebels have stepped up their attacks on Saudi Arabia, striking an airport in Dammam and a Saudi Aramco oilfield. Meanwhile there have been more attacks on ships in the Strait of Hormuz by Iran’s navy and vessels have also been damaged by mines.

But perhaps more concerning is that there are fresh reports of the US and Israel planning new strikes on Iran after the November midterm elections, suggesting a near-term de-escalation isn’t on the cards.

Both WTI and Brent crude futures are trading around 3.0% higher on Thursday, with the former just shy of the $100 level, and the latter surpassing $112 for the first time since May.

Yen buoyed by AI worries, franc rallies too

Unusually, the new highs scaled by oil prices didn’t trigger renewed selling in bond markets, thanks largely to the rout in AI stocks. US Treasuries in particular have been attracting substantial safety flows, with the 10-year yield slipping to 5.0773% today.

This is clearly weighing on the US dollar, which has been on the backfoot for the past week. In contrast, the yen and Swiss franc have seen a revival of their safe-haven attributes on the back of the AI jitters.

The dollar is attempting a downside break of the 157-yen level and has fallen to one-month lows versus the franc.

The yen and franc are gaining across the board today, but the dollar’s softness couldn’t have come at a better time for the euro, which is under pressure from worries about French debt.

Euro stays calm, kiwi dips on soft CPI

France’s 10-year yield just hit 5.10% – the highest since July 2002 – as the National Assembly dissects the Macron government’s proposed budget for 2027. Any watering down of the spending cuts, which seems like a tough ask amidst all the social unrest, could push yields even higher.

But for now, the euro is ignoring the widening spread with German yields and holding its nerve around $1.1240.

The pound is edging higher for a third straight day, reclaiming the $1.34 level, as the Bank of England is almost certain to hike rates next month following this week’s strong UK jobs and CPI data.

The RBNZ is also expected to raise rates when it meets next week, but slightly weaker-than-expected CPI figures out of New Zealand today have dampened bets for an overly hawkish tone, dragging the kiwi lower to $0.5690.

Bitcoin and gold dive

The prospect of ‘higher for longer’ interest rates also pressured cryptocurrencies, with Bitcoin and the major altcoins skidding between 3% and 4% today. The latest selloff in AI-related stocks hasn’t driven any flows toward cryptos and even the safe-haven gold has been struggling.

The precious metal is testing its lows around $4,065 from earlier this month. Breaching it would take it to early August levels.

The lack of meaningful upside for gold is surprising given the pause in the rally in Treasury yields, suggesting elevated oil prices remain the biggest obstacle for the bulls.