Stocks Drop on AI Valuations and Fed, Pound Slips: Markets Wrap

(Bloomberg) — Stocks declined as uncertainty over Federal Reserve interest-rate cuts and stretched technology valuations weighed on sentiment. Cryptocurrencies retreated.

Asian equities dropped 1.5% — set for the first decline this week — with tech stocks poised for the biggest tumble since April. The pullback capped a week in which stocks had rallied on optimism that the end of the US government shutdown would allow data releases. That waned after comments from Fed officials damped expectations for any easing in December.

Contracts for the S&P 500 and the Nasdaq 100 indexes fell 0.1% after the underlying gauges sank Thursday. European shares were also set to decline.

Brent crude jumped as much as 3% on mounting risks to Russian flows due to Ukrainian military strikes and US sanctions. The pound slid against all its Group-of-10 peers on reports that UK Chancellor Rachel Reeves is considering dropping plans to raise the headline rates of income tax in the coming budget.

The moves dealt a fresh blow to risk sentiment, highlighted by heavy selling in high-flying tech giants amid mounting valuation concerns. Beneath the surface, some investors pointed to a rotation into more defensive sectors. With optimism over the US government’s reopening largely priced in, traders are now focusing on the upcoming wave of economic data, as the chances of a December Fed rate cut slip below 50%.

“Markets appear to be spooked to a large extent by AI froth fears,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank Ltd. in Singapore. “A Fed that is more likely to bide its time than race against it makes it a lot less conducive for the tech rout, which typically tends to be more sensitive to Fed easing.”

Elsewhere, US President Donald Trump is readying substantial tariff cuts designed to address high food prices and a series of new trade deals as he seeks to address voter concerns over the cost of goods.

As risk sentiment worsened, Bitcoin sank below $97,000 and is down more than 20% since early October. Chinese shares held their losses after weak economic data. A gauge of Asian technology stocks fell 3%, heading for its second straight weekly decline, while South Korea’s Kospi — a poster child for the artificial intelligence boom — tumbled 3.8%.

What Bloomberg strategists say…

A key trigger for this angst-ridden setup is the way that traders are edging toward bets that easing cycles are just about done for most of the developed world with central banks focusing more on inflation than on aiding economies. Part of the motivation for central banks to become less dovish has been that global economies are holding up better than many had expected.

— Garfield Reynolds, MLIV Team Leader. For full analysis, click here.

Tech stocks have been under pressure as investors balanced optimism over technological advances with concerns over stretched AI valuations. Wall Street chief executives have also adopted a more cautious tone, as the market’s gains since April have become increasingly concentrated in a handful of stocks, prompting some investors to warn of “froth” in the AI sector.

Investors will soon test those lofty valuations when Nvidia Corp., the world’s most valuable company at $4.5 trillion, reports earnings next week. The stock has jumped 39% this year, outpacing both the S&P 500 and the Nasdaq 100.

“There are plenty of other risks likely to shape markets through year-end, with Nvidia’s earnings the key bottom-up focal point next week,” Chris Weston, head of research at Pepperstone Group, wrote in a note to clients. That may prompt “traders to de-risk, lock in performance, and sit tight until the tape turns and risk appetite returns into year-end.”

With Trump signing the legislation to end the longest shutdown in US history, investor attention is now turning to the slew of economic data that’s due to flow out. Even so, the October jobs report will skip the unemployment rate as the household survey wasn’t conducted, US top economic adviser Kevin Hassett told Fox News.

Some traders are also concerned that the omission of key data may bolster arguments for Fed officials to stand pat. Currently, traders are pricing in about an even chance that the Fed will hold or cut rates in December.

Chair Jerome Powell said last month a reduction is “not a foregone conclusion,” with the decision to be premised on incoming information.

Fed Bank of St. Louis President Alberto Musalem said officials should move cautiously on rates with inflation running above target, while Cleveland counterpart Beth Hammack noted policy should remain “somewhat restrictive.” Minneapolis Fed President Neel Kashkari said he didn’t support the last cut and is undecided about December.

In the commodities market, gold and silver traded higher, with both on course for substantial weekly gains, aided in part by expectations that the Fed may reduce rates again next month. Gold held close to $4,200 an ounce, up about 5% this week. Silver’s five-day advance was more than 10%.

Corporate News:

Verizon Communications Inc. is discussing plans to announce job cuts next week that could downsize the company by as much as 20%. Kioxia Holdings Corp. shares fell 23% after the NAND memory maker’s current-quarter outlook missed lofty expectations at a time investors globally are exiting highly valued tech stocks. Merck & Co. is closing in on a deal to acquire Cidara Therapeutics Inc., a biotech company developing a treatment for influenza, according to the Financial Times. Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 6:54 a.m. London time Nasdaq 100 futures fell 0.2% The MSCI Asia Pacific Index fell 1.5% Hong Kong’s Hang Seng fell 1.7% The Shanghai Composite fell 0.9% Euro Stoxx 50 futures fell 0.3% Currencies

The Bloomberg Dollar Spot Index was little changed The euro was little changed at $1.1635 The Japanese yen was little changed at 154.63 per dollar The offshore yuan was little changed at 7.0979 per dollar The British pound fell 0.4% to $1.3141 Cryptocurrencies

Bitcoin fell 2.3% to $96,457.04 Ether fell 0.3% to $3,168.42 Bonds

The yield on 10-year Treasuries was little changed at 4.12% Japan’s 10-year yield advanced one basis point to 1.700% Australia’s 10-year yield advanced two basis points to 4.44% Commodities

Spot gold was little changed West Texas Intermediate crude rose 1.3% to $59.46 a barrel This story was produced with the assistance of Bloomberg Automation.

–With assistance from Winnie Hsu and Jake Lloyd-Smith.

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