Market report: Burnham in tighter fiscal spot while Meta’s Muse fires up AI optimism
Susannah Streeter, chief investment strategist, Wealth Club: “The Burnham fiscal bind has wound even tighter, giving him very little room for manoeuvre at the Budget. Borrowing vastly overshot expectations again in August – it came in at £18.3 billion, way over the forecast from the Office of Budget Responsibility of £14.8 billion. It’s highly likely that there will only be tinkering at the end of October given there’s no headroom for spending splashes, despite pledges to alleviate cost-of-living pressures. Signs of being too flash with government cash are likely to get a strong reprimand from bond markets, and given that it’s mainly interest on public sector debt, which has meant the government has spent more than expected, there will be nervousness about setting off another spike higher in gilt yields. So, focus is likely to turn once again to making up the shortfalls through higher taxes, with speculation set to intensify about potential increases to Capital Gains Tax, which inevitably will be accompanied by concerns about the potential impact of this on investment and entrepreneurship and growth prospects. In the meantime, there’s likely to be a doubling down on efforts to try and contain inflationary pressures, partly responsible for this grim fiscal position. While Andy Burnham can’t fly away from UK tax pressures, his meeting in New York with President Trump later is set to focus on geopolitics and international efforts to calm energy markets by supporting international efforts to resolve the Iran conflict and the war in Ukraine.
With the headlines predicting AI Armageddon dwindling, inflationary worries retreating a little and enthusiasm for AI agents gathering pace, it’s laid the ground for a fresh streak higher for big tech names. The Nasdaq has broken through record levels once again, as appetite for the hyperscalers and chip giants resurged. The trigger appears to have been the huge popularity of Meta’s Muse AI, the agentic tool which is highlighting voracious demand for the next wave of AI.
Muse has hit number 1 for downloads on Apple’s App Store after being released this month. While the advent of AI agents which can carry out complex tasks has been the talk of the town for years, Meta’s launch of a personal AI agent in an easy-to-use app form has set pulses racing about widespread adoption. Meta’s agent interacts with a user’s digital experience, linking diaries and mail and can shop and make bookings. With expectations that the social network will integrate even further into the lives of billions around the world, and demand huge amounts of supporting infrastructure to do so, Meta’s shares have rocketed. But the semiconductor sector was also buoyed, given that manufacturers like Intel and designers like Arm are the vital cogs in the engine room of this compute-heavy revolution. As the agentic era gains a firmer foothold, fears of a deceleration in AI adoption appear to have been put to bed for now, and instead the underlying hardware supply chain is enjoying a dramatic surge in expectations. Investors are aggressively buying into the belief that the massive spending cycle required for advanced chips won’t just taper off, despite doom-laden headlines, but instead it’ll stretch out well into the future.
There are, of course, plenty of upsets which could be on the way, not least further regulation, a higher-interest rate environment which could make the surge in corporate and public debt harder to manage. For now though, the big hope is that there will be a smoothing of relations between the US and China this week. It’s expected that talks between President Trump and China’s Xi Jinping may lead to an agreement to extend a trade deal and potentially enable a freer flow of AI capabilities and essential components between the two countries.
There’s been a hiatus in the move lower in oil prices over the last few sessions, with Brent rising back up to $102 a barrel, which is likely to give a little lift to energy giants listed on the FTSE 100. But there are hopes still bubbling of progress being struck this week alongside the UN General Assembly. Saudi Arabia appears to be repelling the Houthi rebel attacks, repairing infrastructure and calling on allies like the UK for support. The RAF’s involvement in defending Saudi underlines the complex nature of the conflict, and just how tricky it will be to find a long-lasting peace deal, given the number of actors involved.
Treasury yields have fallen back slightly, offering some relief to markets after the recent climb in borrowing costs. For now, that is also helping to support the tech sector bounce, but investors will be keeping a close eye on bond markets as the path for interest rates remains a key driver of valuations.”