Market snapshot: double, double oil and trouble

The tech-heavy Nasdaq index fell sharply overnight as the mounting chorus of AI spending concerns threatened to turn into a cacophony.

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Despite the declines, there were some reasonable performances elsewhere, with the likes of Procter & Gamble Co (NYSE:PG) and Lockheed Martin Corp (NYSE:LMT) topping earnings estimates and the Dow Jones edging to the slightest of gains. However, tech grabbed the headlines as the S&P500 and Nasdaq suffered.

Meta Platforms Inc Class A (NASDAQ:META) spooked investors, even after exceeding revenue expectations and providing upbeat guidance, as the company revealed that it would be creating a new class of stock to raise funds for the “hundreds of billions of dollars” for further capital expenditure. Quite apart from any dilutive effect on existing shareholders, the Nvidia CEO added that demand for neoclouds was “off the charts”, but growth was being impeded by an increasing scarcity of capital.

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The combined red flags sent Meta Platform shares down by 7%, while NVIDIA Corp (NASDAQ:NVDA) fell 4% which was a disproportionate weight on the indices. There were also steep declines elsewhere in the broad sector, with falls of more than 8% for Advanced Micro Devices Inc (NASDAQ:AMD), 6% for Micron Technology Inc (NASDAQ:MU) and 10% for CoreWeave Inc Ordinary Shares - Class A (NASDAQ:CRWV). With competition for capital high and increasingly expensive, the AI trade has hit the buffers more recently as investors question the likely return on capital required to justify this spend – and over what timeframe – despite there being strong signs of growth in selected shares across the space.

Further market pressure came from the latest spike in the oil price, which currently stands at over $114 a barrel, now up around 60% since the beginning of the conflict and around 90% in the year so far. Widespread reports that the US is considering renewed military strikes on Iran after the midterm elections rather than pursuing a diplomatic route, was enough for the price to pop. What many had considered would be a brief conflict is now in its eighth month.

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In that the moves imply lower borrowing costs, there was some relief as investors switched to the relative haven of Treasury bonds. The wave of capital drove prices higher and therefore reduced yields, with the benchmark 10-year note falling by a significant 17 basis points to land at 4.97%. The yield for the 2-year fell by a similar amount, with some investors analysing whether bonds are returning to their traditional role as a foil for pressured equities.

The declines in the more technology facing indices and the relative strength of the Dow Jones have resulted in something of an equalisation of performance. In the year to date, the Dow is now ahead by 10%, which compares to gains of 12% for both the benchmark S&P500 and the Nasdaq.

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Although shielded from much of the current technology noise, the FTSE100 opened slightly lower as sentiment was tainted by the latest retail sales release. A decline of 0.4% in September came against a consensus estimate for a 0.1% dip, and an upwardly revised rise of 0.7% for August.

The swing into negative territory followed an earlier report which suggested that consumer confidence had fallen by the most over this month since the early days of the pandemic. Quite apart from providing a new set of factors for the Bank of England to consider on interest rate policy, the fact that consumers may be moving towards essential purchases comes at a pivotal time for the retailers as the festive period edges closer.

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The renewed strength in energy prices inevitably pulled the oil majors higher, with both Shell (LSE:SHEL) and BP (LSE:BP.) due to report third quarter updates next week. Sage Group (The) (LSE:SGE) and Computacenter (LSE:CCC) drifted as a read across from the tech wobble, although there was some marginal buying interest among the miners, and the remainder of the UK banks reporting next week also found some support.

The marginal opening decline reduces the gain for the FTSE100 to a nonetheless respectable 7.9%, while the FTSE250 has managed a similar gain as brisk M&A activity over the year has offset lingering domestic economy concerns.