Oil and AI fears are causing a double headache for investors, with bond yields rising again and a loss of momentum on equity markets.
Brent crude rose 2.9% to $107.62 per barrel amid ongoing fighting in the Middle East, with new strikes on ships and oil infrastructure. It adds to existing inflation fears which were stoked last week by the latest US consumer price index data remaining at elevated levels.
Markets now expect an 87% chance of a US rate hike this week and a 49% probability of another one in December.
Bond investors are increasingly pricing in a risk that higher oil prices become embedded in inflation. Higher bond yields indicate that investors are demanding greater compensation for lending money, reflecting concerns about inflation and the opportunity cost of locking up their capital in fixed-income assets.
Tech sector fears
Expectations of near-term interest rate rises can also be bad news for equity markets, as higher rates tend to put pressure on valuations. This is particularly true for companies whose value is heavily dependent on strong future earnings growth, rather than profits generated today. Many technology companies fall into this category, which is why tech stocks often struggle when interest rates are expected to move higher.
Also weighing on the tech sector are growing fears about AI becoming too powerful. Previously a hot investment area with investors clambering to own any stock linked to the AI boom, now it looks like AI’s strengths could backfire. There are growing fears that AI is advancing at an extraordinary pace and there need to be greater safeguards and controls in place.
Futures prices imply that tech stocks are set for a bad day on the market. The tech-heavy Nasdaq index is expected to fall 1.4% when it opens for trading on Monday. In the UK, FTSE 100 tech fund Polar Capital Technology Trust was one of the biggest fallers in the blue-chip index.
An AI-related sell-off doesn’t create the best backdrop for Anthropic’s planned IPO, which is already rumoured to be delayed by a month to November.
FTSE 100 pushes ahead
The FTSE 100 bucked the negative trend across Europe thanks to Shell and BP benefiting from oil price strength, and pharma groups AstraZeneca and GSK enjoying a rally potentially as investors looked to diversify their portfolios away from tech and towards more defensive industries.
AstraZeneca’s ascent was surprising given a disappointing result from a Phase 3 trial on a breast cancer treatment. In contrast, GSK reported positive data from a lung cancer treatment Phase 3 trial in China.
Among FTSE 250 mid-caps, GlobalData crashed 25% on a profit warning. It said full-year revenue growth would be at the lower end of market expectations and this, combined with investments in the second half, would lead to lower margins and adjusted earnings to miss forecasts.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...