Market snapshot: AI overpowering other concerns

The AI trade continues to overpower the multitude of other concerns, as investors continue to be attracted by the euphoria surrounding the new “industrial” revolution.

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When an irresistible force meets an immovable object, the paradox is that something has to give. The irresistible force is currently the AI trade, and the latest bout of buying ahead of a crucial quarterly reporting season propelled both the benchmark S&P500 and Nasdaq to new record closing highs.

In other circumstances, the wall of worry at the moment would be sufficient to arrest the ascent of equity markets. Elevated bond yields are heightening the cost of borrowing, the oil price remains over $100 per barrel adding inflationary pressure, and US consumer confidence is beginning to drain even if this has not yet fed through to actual spending.

Increasingly there are concerns that the US Treasury market, where bond yields remain at their highest since the turn of the century, is seeing some repatriation of funds from previous significant buyers such as China and Japan.

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The latest Treasury auction of a 3-year bond provided some relief in terms of demand remaining intact, although the 4.93% yield offered was the highest since 2006 and seen as necessary to attract buyers. There was an element of concern as the estimated share of foreign investors involved declined from 63% to 58%, but the acid test follows today with a $39 billion sale of 10-year bonds later on.

Yet for all the concerns, the unwavering momentum behind the AI powerhouses continues to drive the infrastructure buildout, projected and actual earnings, and ongoing investment which is apparently immune from interest rate worries being experienced elsewhere.

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In the latest session, there were gains of between 3% and 6% for the likes of Advanced Micro Devices Inc (NASDAQ:AMD), Broadcom Inc (NASDAQ:AVGO) and Marvell Technology Inc (NASDAQ:MRVL), as investors whetted their appetite ahead of the imminent set of earnings figures and, equally important, their guidance and outlook comments.

In the meantime, and with two of the three main indices standing at record highs, the performance in the year so far continues to climb the wall of worry. The Dow Jones has added 7.2%, somewhat eclipsed by the gain of 14.2% for the S&P500 and of 18.8% for the Nasdaq.

Perhaps unsurprisingly, and with investor attention turned elsewhere, most notably towards the tech trade, the FTSE100 failed to attract many new buyers and opened marginally lower.

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Some weakness in gold and copper prices weighed on the mining sector, most notably the likes of Endeavour Mining (LSE:EDV) and Antofagasta (LSE:ANTO), while the lack of support from Asian markets overnight shaved the performance of Burberry Group (LSE:BRBY), Prudential (LSE:PRU), Standard Chartered (LSE:STAN) and HSBC Holdings (LSE:HSBA).

In addition, the announcement of a £550 million rights issue from FTSE250 constituent Pennon Group (LSE:PNN) led to a decline of 14% for its shares, with a read across to the primary index utilities such as Severn Trent (LSE:SVT) and United Utilities Group  Class A (LSE:UU.), both of which fell by 2% or more.

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With little buying interest in evidence to offset these weaknesses, the FTSE100 drifted and reduced its gain in the year to date to 5.7%, now some 4% away from its own record set in February but nonetheless underwritten by an average dividend yield of 3.1%, which is historically secure although never guaranteed.