AI Market Shakeup: Tech Rout Slows, Safe-Haven Flows Boost US Treasuries
Market Overview and Key Developments
By Jamie McGeever
ORLANDO, Florida, Oct 15 (Reuters) - The AI equity rout accelerated significantly in Asia on Thursday on growing fears about the murky, circular financing powering the intelligence revolution's buildout, although its force evaporated in European and US trading hours. Still, safe-haven inflows meant US Treasuries had one of their best days in months, despite a surprisingly strong rise in US producer inflation.
Today's Key Reads
- CoreWeave's slump spotlights growing burden of debt behind AI boom
- AI credit worries send default insurance to record high
- AI investment boom may be papering over US economic cracks: Mike Dolan
- US producer prices post largest gain in 4-1/2 years; expensive gasoline boosts retail sales
- Warsh's quest for quiet Fed gets vocal pushback
Today's Key Market Moves
Stocks
Asia in the red, South Korea -7.5% to 6-month low, Japan -5%. UK +1% to 7-week high. Nasdaq +0.1%, S&P 500 +0.3%, Dow +1%.
Sectors/Shares
Eight sectors on the S&P 500 rise, three fall. Tech -0.5%, energy -1.5%, healthcare +2%. CoreWeave +6.5%, Nike +5%. Hewlett Packard, Dell -7%.
FX
Dollar slides, biggest fall in six weeks. Biggest gainer is Swiss franc, +1%; biggest decliner is Brazilian real, -1.5%.
Bonds
Bund yield -11 bps to 3.35%, lowest in over a month. US 10-year yield -10 bps to 5.08%, curve flattens. CoreWeave and other AI corporate bonds rise.
Commodities/Metals
Oil mixed — Brent flat, WTI +3%. Gold +1%, silver +3%.
Today's Talking Points
Funny Money: AI Credit Risks and Market Turbulence
The global AI trade has hit some major turbulence. South Korea's KOSPI, a top 10 global index, has lost 20% of its value in barely a week, and on Thursday Japan's Nikkei slid 5%. CoreWeave 2032 bonds issued just four months ago fell below 80 cents in the dollar, typically considered distressed debt levels, and the cost of insuring against major US AI firms defaulting has soared to record levels.
Credit Markets and the Doom Loop
As ever, credit markets are likely to lead equities, and the risk of a self-fulfilling doom loop cannot be ignored — selling in certain names casts a shadow over healthier credits, and downgrades and loss of investment-grade ratings could force further selling. All while cash has been spent, and capex is increasingly being financed by debt, private credit and off-balance-sheet borrowing. We're not at crisis point yet — look at the rebound in US stocks and bonds today — but vigilance is required.
Bonds Be Bonds: Treasuries Defy Inflation
Incoming data shows US producer price inflation is running hotter than expected, like CPI the day before, WTI crude spikes another 3%, and Treasuries rally. Sounds counterintuitive, especially given how heavily fixed income markets have traded in recent weeks, but it shows that the demise of Treasuries' safe-haven appeal has been greatly exaggerated.
Safe-Haven Appeal and Investor Sentiment
Thursday was one of the best days of the year for Treasuries, especially for maturities of 10 years and beyond. The question is whether this is a knee-jerk move, or will continued volatility in equities and weakness in AI-related corporate debt remind investors that the best place to hedge, diversify and protect their capital is the traditional "risk-free" asset? Guaranteed nominal yields of over 5% appear to be tempting.
Rotation, Rotation, Rotation: Sector Shifts on Wall Street
Wall Street's resilience on Thursday was pretty remarkable, given the ferocity of the tech selloff in Asia and weight of negative sentiment at the session open. Chip stocks fell for a seventh day, their longest losing streak in four years, but the Nasdaq edged higher and, more impressively, the Dow rose 1% to its highest in a month.
Tech Sector Drawdowns and Rotation Trends
As the US earnings season kicks into gear, the focus will be on tech. The bar of expectations is high, and if it is not hurdled, investors may decide to ramp up the rotation into other sectors. How long do rotations out of tech last? According to Deutsche Bank, since mid-2024 the average length of rotation is 67 days and the median is 59 days. In terms of tech drawdowns over these periods, the average is 16.6% and the median is 14.6%.
What Could Move Markets Tomorrow?
- IMF/World Bank meetings in Bangkok, Fed Chair Kevin Warsh, ECB President Christine Lagarde, and BoE Governor Andrew Bailey among several officials speaking
- Euro zone trade (August)
- Euro zone inflation (September, final)
- US import prices (September)
- US industrial production (September)
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(Reporting by Jamie McGeever; Editing by Nia Williams)
