Stocks sink amid AI wipeout, dollar shines ahead of NFP

Wall Street’s post-midterm bounce turns to bloodbath

Shares on Wall Street took a nosedive on Thursday, as investors were hit by a delayed reality check following the Democratic sweep in the US midterm elections on Tuesday. US stocks initially rose on Wednesday in what appeared to be a relief rally, as the Democrats’ decisive victory produced a clear outcome for investors, while making it very difficult for President Donald Trump to contest the results.

The likelihood that a Democrat-controlled Congress will pursue less inflationary policies also boded well for the stock market, as Fed rate hike expectations were pared back.

However, as the post-election dust settles, the focus has shifted firmly onto the AI sector, amid rising opposition across America, particularly in flipped states like Texas, to the buildout of vast datacentres, not to mention the fears that Democrats will tighten regulation around the development of AI.

Ironically, traders are going with the notion that this may not necessarily be such a bad thing for the AI hyperscalers, as they are forced to scale down their costly investment plans that were eating into their cash flow. Microsoft, Amazon and Alphabet are headed for weekly gains if the selloff turns into dip buying today as Wall Street futures are currently indicating.

Chip selloff may not be over

But there may be more pain to come for chip producers and other AI infrastructure and equipment makers even if the turbulent week ends with a technical correction, as investors reassess the demand outlook following the ‘blue tsunami’ in Washington.

AMD, Micron and Marvell were some of Thursday’s biggest sliders, declining by around 17%, while chip giant Nvidia slumped by a hefty 9.3%, pushing the Philadelphia Semiconductor index down by more than 12%.

The Nasdaq 100 shed 6.4%, which was its worst day since 2020, the S&P 500 lost 4.4% and the Dow Jones fell 3.4%. Wall Street’s fear gauge - the VIX volatility index – jumped to the highest since early April when US-Iran tensions were running high.

Asian indices that have heavy AI constituents such as South Korea’s KOSPI and Japan’s Nikkei plunged 6% today, but losses in Europe are contained.

October NFP eyed as hike bets recede

The latest rout in AI comes amidst a significant repricing in Fed tightening expectations, not just due to concerns about slowing AI spending, but also on speculation that a Democratic Congress will bring about a speedy resolution to the Iran conflict.

Investors are even having second thoughts about a December rate hike, despite Fed officials continuing to strongly hint at one. The presidents of the Cleveland and Richmond Feds both backed the need for a gradual pace of rate hikes on Thursday.

The odds for a 25-bps increase in the Fed funds rate in December currently stand at around 70%, down from about 75% after last week’s FOMC decision.

All eyes are now on today’s nonfarm payrolls numbers for October, as a stronger-than-expected report could bolster December bets, potentially making things worse for equity markets. Payrolls likely rose by 65k last month, with the risks of a surprise tilted to the upside when looking at all the job indicators already released.

Dollar stands tall

But for the US dollar, a hot report would only strengthen its comeback bid, as safety flows generated by the AI selloff have helped the greenback snap its almost uninterrupted week-long slide.

This could pose a problem for the yen, as the dollar is back above the 158 level today and a strong NFP print could take it closer to the critical resistance area of 159 yen. The euro is licking its wounds around $1.1170, while the pound has been unable to capitalize from the Bank of England’s hawkish shift.

The BoE finally joined the rate hike club yesterday, raising rates by 25bps as expected and signalling more to come. But it cast doubt on the need for aggressive tightening, with pound bulls mainly gripping onto the hawkish dissent in the MPC vote for support.

The Australian and New Zealand dollars tumbled sharply for a second day, with even the Swiss franc coming under pressure against the emboldened US currency.

Gold and oil consolidate their big weekly moves

Gold also fell, settling around $4,070 following an impressive rebound this week of about 5%. Nevertheless, the ongoing retreat in Treasury yields hasn’t provided the boost one would have expected, and if today’s jobs report doesn’t disappoint, gold’s recovery attempt will likely run into trouble.

The volatility in oil prices isn’t doing gold and other precious metals any favours either. Oil futures plummeted on Wednesday when it became clear US voters punished the Republican party for Trump’s war on Iran. Even before the midterm results, oil had been under pressure on hopes that Trump was backing away from ordering fresh strikes on Tehran.

WTI is down 13.7% for the week, while Brent crude is 17% lower. The selloff has eased in the past couple of days amid reports of new attacks on oil tankers around the Strait of Hormuz.

However, the bigger risk is that investors may be underestimating Trump’s determination to force Iran to sign a nuclear deal and that the Democrats would automatically oppose any further military action.