Market report: Risk-off mood returns amid AI spending fears and high energy costs
Susannah Streeter, chief investment strategist, Wealth Club: ‘’Risk-off sentiment is returning amid high geopolitical tensions and a swirl of worries about financing the AI juggernaut. Even the more defensive Footsie is feeling the heat, as concerns about the chronic energy crunch and the inflationary impact ahead weigh on the index.
Asian markets tanked as semi-conductor stocks sold off as investors turned wary again about the rising costs of borrowing, fuelled by stubbornly high energy prices. The Nikkei closed down 2.2% while South Korea’s Kospi plunged by more than 3%, as the big chip players SK Hynix and Samsung, which account for around 50% of the index due to their huge valuations took a hammering. The cost of getting into the AI race is already eye-watering, and trying to keep abreast of the competition is a high-stakes game.
Meta’s results underlined the balancing act – revenues are growing sharply, but it’s sinking up to $145bn this year into the AI build out. With even mega tech giants seeing fresh cash flow turn negative to stay ahead, the concern is that companies may slow spending on AI adoption, affecting demand for chips, especially given concerns about hikes in interest rates ahead. There is also growing competition from Chinese chip manufacturers, they may be in the slow lane right now, but they are making strides in developing cheaper alternatives, which could put further pressure on established chipmakers’ margins and challenge the dominance of the industry’s biggest players.
The Bank of Korea kept rates on hold but has a hawkish view on the outlook and further tightening is expected. The unrelenting high price of energy is clouding the outlook, especially for economies which are so highly reliant on imports. Brent Crude has crept higher as tensions in the Middle East ratcheted up again.
Brent crude has crept higher as tensions in the Middle East ratcheted up again. Houthi forces have again attacked Saudi energy infrastructure, with strikes on Aramco’s Shaybah oil field. With the US administration ordering personnel to leave embassies, it doesn’t instil much confidence in ongoing efforts to find a resolution. Ukraine is also thwarting US efforts to bypass sanctions and access Russian diesel, launching mass drone attacks this week targeting production facilities. While Middle Eastern producers have upped production, with conflicts so entrenched, the risk of further attacks disrupting supplies remains high.’’