Market snapshot: huge AI spending rounds raise the bar for future paybacks

AI spending concerns rumble on. The unprecedented levels of capital investment have seen companies tap both the debt and equity markets for capital, while in some cases running down their own cash piles to maintain the required funding. Some of the larger tech names dipped into negative cash flow in the latest quarter and continue to seek alternative methods of raising capital. 

For the moment, the supply of extra capital seems to be in place, but at the same time each additional round raises the bar for the level of payback required and indeed over what time frame.

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The numbers continue on an eye-watering trajectory, with the latest reports suggesting that NVIDIA Corp (NASDAQ:NVDA) would be mobilising more than $500 billion (£370 billion) for AI infrastructure spending in partnership with six large assets managers, thought to include the likes of Goldman Sachs and Blackstone. The move is thought to recognise infrastructure as a separate asset class and the fact that the spending continues regardless of any inflation concerns has been one of the factors behind the recent market outperformance particularly in this space.

Even so, inflation more broadly is an immediate concern. The latest claims from the parties involved in the Middle East conflict are typically contradictory, with the two main sticking points remaining control over the Strait of Hormuz and Iran’s nuclear programme. Oil moved marginally higher to around $90 per barrel on reports of further strikes in the region, even as the Pakistani defence minister suggested that a peace arrangement or deal could be in the pipeline.

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The Consumer Price Index (CPI) release today will give further clues on inflation, although critically it will not reflect the latest spike in the oil price and therefore its effects. Even so, it will have a bearing on Federal Reserve thinking on interest rates, where the market is undecided on whether the September meeting will be a hold or hike event, but where a rise is still pencilled in before the year is out. For the July reading, it is expected that prices will have risen by 0.1% as opposed to a fall of 0.4% in June, although the headline number is expected to dip on an annualised basis to 3.4% from 3.5% previously.

The picture is further clouded by a weak non-farm payrolls report at the end of last week, which would normally put the central bank on alert, but in terms of its dual mandate the Fed seems much more concerned in taming inflation rather than supporting the labour market. With its members reportedly split on the next steps, the bond market is making its own assumptions and has sent long-term mortgage rates to recent highs. The 10-year Treasury bond is currently yielding around 4.7% as compared to 4% prior to the Iranian conflict.

In the meantime, the main indices remain in rude health although they have edged away from the record highs of recent weeks. In the year to date, the Dow Jones has added 11.9%, while the more tech-focused S&P 500 and Nasdaq indexes are ahead by 12.9% and 13.8% respectively.

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Despite being largely free of technology concerns, the FTSE 100 struggled to make any meaningful headway in opening exchanges. The strengthening of the gold price lifted the likes of Endeavour Mining (LSE:EDV) and Fresnillo (LSE:FRES), although Tesco (LSE:TSCO), Burberry Group (LSE:BRBY) and Bunzl (LSE:BNZL) weighed on the index after each were on the receiving end of broker downgrades. In general volumes remain light at the height of the traditionally quieter summer season, even though the newsflow is taking no such break.

Even so, the primary index is now ahead by 9.2% so far this year and remains a favoured investment destination in the event of stresses on other global markets as has been seen on many occasions over recent months. Meanwhile, the FTSE 250 is also seeing the benefit of renewed interest and bid activity, with strong interim results from Balfour Beatty (LSE:BBY) and a broker upgrade to Ocado Group (LSE:OCDO) adding to the strength which has seen the index add 10.5% in the year to date.