The AI reset

This transcript was created using speech recognition software, it may contain errors. Please review the episode audio before quoting from this transcript.

Elena Casas

Today, markets dust themselves off after the Nasdaq slides 3% on more AI jitters.

Peter Devlin

The tech route triggers a rush for safety back into US government bonds and even the Japanese yen.

Elena Casas

So with both the Fed and the ECB to set rates next week, we'll market volatility, push hikes further into the future.

Peter Devlin

This is Reuters Morning Bid, bringing you unfiltered market news and analysis straight from the Reuters newsroom. I'm Peter Devlin in London.

Elena Casas

And I'm Elena Casas. It's Friday, October 23rd. So, Peter, we've seen some recovery in Asian shares but still a fairly disastrous day in South Korea where the KOSPI is still on track to be the worst performing index in the world for this year. Samsung and SK Hynix fell further on the back of a tech route that started really with Meta, didn't it, in the US. Meta lost about $124 billion off its valuation on Thursday as nerves grow about just how much that company is spending on rolling out AI and whether or not there's really the appetite among shareholders to keep sustaining it.

Peter Devlin

Well, the Nasdaq had its worst day yesterday since June on track for its second weekly consecutive losses. I mean, it's really quite worrying out there. There's sort of a growing concern that maybe this is the end of the AI boom, and that's say for argument's sake that the AI bubble is bursting. I mean we've seen already concerns about how the AI companies will be able to fund their investments, and now with shares dropping it's going to get even, even harder to raise capital. And if we look to next week, even more big tests are coming through. We have earnings from Microsoft, Amazon, Alphabet, as well as the Fed meeting, ACB meeting. And even beyond that, you would say, after that we would see a bit of the volatility diminishing a bit, but after that, we have the midterms. So it just seems like a long stretch of uncertainty and a bit defensive taking.

Elena Casas

We should also point out that oil is up over $114 a barrel this morning for the first time since May. That's on the back of reports in various media that the US and Israel are planning new strikes on Iran. So that conflict there could become hot again and reignite, perhaps even before the midterms, even though President Trump previously said that he wouldn't move before that vote. Of course, there's an election in Israel next Tuesday, after which anything is possible in theory. So this is all adding to price pressures on the markets, isn't it?

Peter Devlin

As well, if we just look to the chip stocks, specifically the Philadelphia Semiconductor Index down for three weeks in a row on PS4, and that's its worst streak in over a year. Now, there is maybe the argument to come through and say this is the time to come in. We know that demand is completely outpacing supply, but even look to SK Hynix as well, shelving plans for its $10 billion US listing of its Solidigm units. On the face of it, it does seem to be concerns about regulatory issues in South Korea, but if you're just looking at the headline, more just evidence of AI just rocking the markets.

Elena Casas

After we were expecting a rush of new US listings in the AI space this year, it increasingly looks like Anthropic will stand alone, doesn't it? We are still expecting that to list in November and a prospectus perhaps as soon as next week, but just about every other AI IPO has been pushed into next year. Now, perhaps as you might expect, as traders pull their money out of AI stocks, they're taking them back into traditional safe havens. We've seen a recovery from US treasuries. They were down 19 basis points in the course of Thursday. Now this isn't really about any of the worries in the US economy that had led traders to sell off US government debt in the first place, easing, isn't it? It's not really about data. It's just about traders looking for a traditionally safe place to put their money.

Peter Devlin

Well, I disagree. I mean, we've seen throughout this year about a trader stop finding any protection from bonds when we've see tech stocks wobble. But it seems that bonds have found their license to hedge once again. I means, if you look at what we're seeing in markets, I think it's just a real repricing of what happens when we see this AI reset and growth worries and risks start to come into the market again. And with that comes to looking to US debt once more. And maybe a bit of a repriced of where the Fed goes. Seeing a bit of expectations push out to January for the next hike instead of December.

Elena Casas

That certainly seems to be the case that those Fed expectations are being repriced. A hike in December was seen as certain as recently as last week. That's certainly not the case now and nobody expects them to move next week either. Now, of course, inflation does still remain strong. So that pressure on the Fed isn't really going away. But certainly investors seem to think that they can put it off that hike for longer, don't they?

Peter Devlin

Well, yes, next week, we'll probably just hear the most of the same from Kevin Warsh little guidance. And then at that point, we will have six weeks of data to pile through, again, just coming through inflation to see if there's any more wider effects from the Iran war. That's probably the same story for the ECB. We look at inflation, trying to bring it back to 2% when it stands at almost more than double that. And analysts currently see no sort of wider effects, from the energy-related price increases. So I mean, we're probably seeing another wait and see effect, but I mean the bigger issues, France still for the ECB, isn't it?

Elena Casas

Well, postponing a hike that we are expecting in December could be one way that the ECB can ease pressure on French government bonds, which are of course now over 5% and French debt could be downgraded by Moody's as soon as this Friday. So, of course, it's probably very premature to talk about the ECB stepping in and buying bonds. While there are instruments for that, they're supposed to be used in the case of an unwarranted jump in the country's bond yields, whereas many economists would argue. Given France's fiscal situation the jump that we've seen is perfectly warranted, but one thing they could do of course is to put back that height. Well, for today's recommended read, check out Jamie McGeever's column on whether the US Treasury will scrap some bond sales altogether as debt markets buckle. That link is in the show notes.

Peter Devlin

And for more of any of today's stories, head to Reuters.com or the Reuters app. Follow us on your favorite podcast player and if you're on a smart speaker, just ask for the latest market news from Reuters.

Elena Casas

And we'll be back on Monday.