Susannah Streeter, Chief Investment Strategist, Wealth Club: “The markets have been wracked with volatility this week, and the seesaw moves just keep coming. Investors are super-wary about the fragility of the Middle East peace deal after a vessel was struck while transiting the Strait of Hormuz. Fears of geopolitical fracture opening up again are colliding with a return of worries about super-high-tech valuations. The FTSE 100 looks set to be on the back foot in early trade, as investors turn wary amid this fresh bout of unpredictability.
The sell-off in tech stocks has resumed after some brief mid-week respite, with Asian indices plunging dramatically. The Nikkei slid by 5% and South Korea’s Kospi, the home of semiconductor heavyweights Samsung and SK Hynix, dived by 8%. With valuations so stretched, even a slight turn in sentiment shows up in big moves. Right now, investors are highly sensitive to worries about how long the voracious demand for chips to power the AI revolution will last.
The triggers setting off this latest wave of selling are rate hike fright and supply chain fears. The fight for memory chips, which has pushed up prices to eye-watering levels, is showing up in sharp increases for end-users, with Apple and Microsoft forced to hike prices for devices and consoles. There’s a feeling that there’s only so long this can go on for, with companies also baulking at the high cost of tokens used to pay for the use of large language models. Firms are seeing AI expenses soar higher than planned budgets, as employees max out use, at a time when subsidised AI use is ending. With the scalers having to swallow huge sums to pay for the infrastructure needed, they are trying to pass on the costs to customers, and some are baulking already. Investors remain unconvinced that consumers will keep paying higher prices for Apple’s products despite the strength of the brand.
The ramp-up in inflation in the US is also hurting sentiment. Far from rate cuts, as hoped for earlier in the year, rate hikes look firmly on the table. A higher interest-rate environment hurts the value of future earnings, upon which many of big tech’s valuations are based.
Gold is also a casualty of rate hike expectations, plunging below $4,000 an ounce before recovering slightly. As the dollar has strengthened, it’s made gold, priced in the currency, less attractive, but it also highlights the opportunity cost of the asset. It offers no returns, and at a time when investors are searching for steady incomes amid this volatile backdrop, it’s fallen out of fashion.
Bitcoin is deep in polar bear market territory. A crypto winter has descended, and Bitcoin has hit the skids again this week on the frozen landscape. It’s fallen another 5% and is down 44% on the year. There are only so many risks investors are prepared to take, and with high bets being placed on potential AI winners and losers, there’s less to wager in the crypto world. The fever about AI developments and how they will change society is eclipsing speculation about the future place of Bitcoin in the financial ecosystem. It also comes as focus has shifted towards stablecoins, which many in the industry see as the electronic lifeblood which will power the emerging ecosystem of autonomous AI agents.
Bitcoin has also suffered as the "Trump bump" that initially supercharged the market has well and truly slumped. The grand promises of making America the world's crypto capital have yet to translate into the kind of market momentum many investors had hoped for, despite executive orders establishing a Strategic Bitcoin Reserve and U.S. Digital Asset Stockpile. Instead, renewed inflation fears, exacerbated by the conflict in the Middle East, are paving the way for higher interest rates, which are freezing out speculative capital.”
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