Market report: US sanctions, AI jitters and the search for safer ground
Susannah Streeter, chief investment strategist, Wealth Club: “Markets are in wait-and-see mode, as stricter US sanctions on Iran take hold and investors wait for the latest snapshot of demand for AI infrastructure from tech giant Nvidia. The FTSE 100 looks set to continue to grind higher, extending its run as heavyweight miners bolster the blue-chip index. The London market is proving remarkably resilient given the cocktail of geopolitical tensions, stubborn inflation concerns and uncertainty over the path of interest rates. The Footsie’s relatively low exposure to the tech sector is also helping it avoid some of the turbulence rippling through global tech shares, giving investors a different mix of sectors to rely on.
Gold in particular has been shining, hovering around a more than three-month high, as investors position for a weaker dollar amid concerns about US debt, government borrowing and the potential for currency devaluation. The so-called “debasement trade” is gathering momentum, with investors seeking assets that are harder to devalue through monetary policy. So, gold is regaining its lustre as a traditional hedge against weakening currency. At the same time, more speculative bets on Bitcoin are being placed as a digital alternative. Bitcoin has surged above $80,000 in one of its strongest multi-day rallies in years, as expectations of dollar weakness fuel demand. The US Treasury’s move to increase purchases of longer-dated government bonds in an attempt to lower borrowing costs appears to have fuelled the moves, with investors questioning whether this could ultimately put further pressure on the dollar. For the Footsie, it’s had beneficial knock-on consequences as higher gold and other metals prices are boosting the earnings outlook for mining giants, giving the index an advantage over more technology-heavy markets.
Energy prices are steadying, with Brent crude settling just under $92 a barrel, as traders assess the latest stage of the chronic crisis in the Middle East. Iran says it’s in it for the long haul as the US tightens the screws on its economy, attempting to clamp down on oil exports. President Donald Trump is giving Iran’s customers, including China, a deadline to cut their commercial ties or risk facing US sanctions of their own.
For investors, though, it’s still highly unclear whether this stance will force the conflict towards a breakthrough or simply add another layer of uncertainty and push back hopes of a deal and the reopening of the Strait of Hormuz.
Tech investors are shifting uneasily in their seats ahead of Nvidia’s latest results tomorrow. The chip giant has fast become the financial pulse of the AI revolution and, given how heady valuations have become, it has to prove that demand is still accelerating. Its crucial customers are the hyperscalers – big tech names such as Microsoft, Meta, Amazon and Alphabet, and investors will be looking for more signs of long-term commitment to the AI infrastructure build-out.
Bumps in the road ahead are becoming more visible. There’s a growing backlash against data-centre construction, there are worries about whether AI-fuelled returns will justify the spending, and Chinese chip rivals are marching in for business. Memory chip stocks have again come under selling pressure, after fresh cracks appeared in the incumbents’ hold on the market. Micron and SanDisk fell back sharply, while South Korea’s stars Samsung and SK Hynix suffered fresh declines. It comes amid reports that Apple is seeking permission to source memory chips from Chinese manufacturers, including CXMT, as it looks for ways to ease pressure from the global memory shortage. The Trump administration has publicly pushed back against the move, with commerce secretary Howard Lutnick saying Washington does not want Apple buying Chinese memory.
However, the capricious nature of the US administration’s policymaking, particularly when it comes to trade, makes it hard to see a clear path ahead. The US stance on Iran creates fresh geopolitical uncertainty for the semiconductor industry. If Washington follows through with secondary sanctions on countries and companies continuing to do business with Iran, the fallout could extend beyond energy markets and into corporate supply-chain decisions. With China already at the centre of the debate over memory chips, any escalation in US-China trade tensions may make Western technology groups even more cautious about sourcing critical components from Chinese manufacturers. At the same time, the memory shortage and the enormous demand generated by AI data centres are creating a powerful commercial incentive to look for alternative sources of supply. It leaves companies like Apple caught between cost, availability and increasingly complicated geopolitical considerations.
With geopolitics still so fraught, and US economic policy increasingly being questioned, it’s little surprise there’s been a continued drive to diversify away from US assets after such an eye-watering bull market run. One of Europe’s wealthiest families is providing a striking example of this shift. The Rausing family, heirs to the fortune built through Tetra Pak, has sold more than $1bn of US equities in the second quarter, roughly a fifth of its US stock holdings. That included a 15% stake in Sensient Technologies worth at least $660m, alongside more than 100 other US positions, including holdings in Wells Fargo, Chipotle and Abbott Laboratories.
Instead, the family has been building its position in Swedish private equity giant EQT, with its holding now around 6%, making it one of the company’s largest shareholders. It’s another example of how investors with long-term horizons are becoming more highly focused on diversification, given how stretched some valuations have become.
That doesn’t mean a correction is imminent, as markets can remain expensive for a very long time, but it does underline the growing concerns about US equities, particularly the technology sector, being priced for an exceptionally rosy future.
By increasing exposure to private equity, the Rausings’ actions also highlight the appeal of investing in businesses away from the daily noise of public markets. The shift towards EQT comes as the private-markets giant continues to return capital to investors, totalling almost €17bn in the first half of the year, showing the scale of capital being recycled through private markets.
It’s clear that after a spectacular run in US equities, some of the world’s most established pools of private wealth are becoming more selective, taking profits and looking for diversification beyond the US stock market.”