By Anna Szymanski
June 26 (Reuters) -
Everything Mike Dolan and the ROI team are excited to read, watch and listen to over the weekend.
From the Editor
Huge moves in global tech stocks hogged the spotlight this week. But given how much many AI darlings have run up in the first half of the year, such volatility should probably be expected – especially with the end of the quarter fast approaching.
Global stocks were on the back foot early in the week, with major U.S. indexes dragged down on Monday by weakness
in tech megacaps. Why? Some assumed it was concern about sky-high AI capex, but the next day the selloff broadened into chip stocks – some of the main beneficiaries of all that spending – with Korea's KOSPI sliding nearly 10% and the SOX chip index shedding some 8%.
A blockbuster set of earnings from memory chipmaker Micron Technology on Wednesday initially calmed the horses. But the tide turned yet again after Apple announced on Thursday that it was raising the prices of iPads and MacBooks in response to the surging cost of memory and storage chips, highlighting one downside of the AI frenzy. Apple's share price slid more than 6% overnight, leading to another selloff in Asian markets on Friday.
Amid this week's ructions, the important question – to paraphrase the late Federal Reserve Chair Alan Greenspan, who passed away at 100 this week – is whether AI exuberance has become irrational, leaving markets poised for a bigger correction.
Opinions on that remain as contentious as ever, with SoftBank's Masayoshi Son declaring this week that talking about an AI bubble was "blasphemy against AI". Meanwhile, many Wall Street shops are upping their year-end S&P forecasts significantly, offering compelling reasons why the current rally could have plenty of road to run.
Will the Fed ultimately play spoiler if the AI mania keeps pushing up asset prices? Probably not – at least not explicitly. Newly appointed Fed Chair Kevin Warsh appears to have no more appetite to pop asset price bubbles than his predecessors. There are reasonable arguments in favor of this stance, as equity booms – even irrational ones – can help fuel technological advancement and economic growth over the long term. But the Fed’s "bubble blind spot" remains a cause for concern.
In the meantime, markets appear to be growing confused about the Fed's policy trajectory, with massive gaps in rate expectations between Wall Street banks. This suggests that Warsh's push for less Fed communication – including the elimination of forward guidance – may end up being a recipe for volatility.
Elsewhere, Britain also grabbed attention this week with news that it's about to get its seventh prime minister in a decade. Prime Minister Keir Starmer announced his resignation on Monday after months of mounting pressure and the dramatic return to parliament of key Labour party challenger Andy Burnham.
UK markets took the news in their stride, with no major movements on the day. But their attention has turned firmly to Burnham, Starmer's likely successor, who could take office as soon as next month if no other contenders come forward. Investors are searching for more detail on how he might handle the economy and, importantly, who his all-important pick for finance minister may be.
But replacing another leader won't fix the UK's underlying issues, namely tepid productivity growth and a bloated welfare bill. If prime ministers aren't given time to make reforms – especially the painful ones – the revolving door at 10 Downing Street may simply reinforce the idea that the UK has become ungovernable. That could weigh on investment and accelerate an already vicious cycle.
A key agenda item for the next UK leader will be energy policy, especially now that the Iran war has highlighted the importance of domestic energy stockpiles and the danger of overreliance on imports. Could that alter the British government’s position on oil and gas activity in the North Sea? It may.
Meanwhile, the UK and Europe have been sweltering this week as a dangerous heatwave has hit the region. Here's a breakdown of the impact on Europe's power systems.
In other energy news, oil prices continued to tumble throughout the week, touching pre-war levels on Thursday, as crude shipments through the Strait of Hormuz reached their highest volumes since the war began. Traders seem convinced that the interim U.S.-Iran peace deal will lead to a sustainable agreement and the normalization of energy flows – even as a Taiwanese ship transiting the strait was reportedly attacked on Thursday.
(To better understand the possible long-term implications of the Hormuz closure, check out Ron Bousso's essay on the lessons that can be learned from the 1973 Arab oil embargo.)
While falling crude is lowering prices at the U.S. pump, markets aren't yet drastically trimming bets on Fed rate hikes. The U.S. economy was already running somewhat hot before the war and lower energy prices may well boost spending and other economic activity. That could push prices up further and complicate the Fed's calculus moving forward.
Speaking of inflation, markets got more data on U.S. price pressures with the release on Thursday of the personal consumption expenditures (PCE) index, the Fed's preferred inflation gauge. The index rose 4.1% in the year through May, topping 4% for the first time in three years, while core PCE increased by 3.4%.
Both of those prints were in line with economists' expectations. Bets for a rate hike as soon as the Fed's next meeting fell back after the report, though markets still see about an 80% chance of a hike at the September meeting.
Expectations for tighter Fed policy have helped strengthen the U.S. dollar in recent months, pushing it to one-year highs against major peers this week, though it softened slightly after Thursday's PCE print.
The yen remains particularly weak against the greenback, languishing near a 40-year low past the 160-per-dollar level. That has left markets on intervention watch, though a further round of yen-buying has not been forthcoming – nor has there been much clear communication from Japanese financial authorities.
Next week will be shortened for America's Independence Day, but there will still be plenty of economic data releases to sift through – including U.S. June nonfarm payrolls – as the country celebrates its 250th birthday.
For more data-driven insights on markets and commodities, check out Reuters Open Interest. You can learn:
• What political strategy might Andy Burnham borrow from former U.S. President Richard Nixon?
• Which country filled India's energy import gap in June?
• Why have copper smelting economics been upended?
• What key area are many portfolios lacking diversification in?
• Which small African country has China become dependent on for a key raw material?
• Why is China buying more seaborne thermal coal? (Hint: it's not because of the Iran war.)
• What country is the DRC turning to as it trims its cobalt industry's dependence on China?
• Which energy markets are struggling to return to normal even after the Hormuz reopening?
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(By Anna Szymanski)
