Tech under pressure as US returns from long weekend

With the US and many Asian markets closed, the first trading session of the week was rather calm in Europe. European yields moved lower, influenced by downside pressure on their US peers following a softer-than-expected CPI print on Friday.

A benchmark for European bond yields retreated to its lowest level since the beginning of December. The Stoxx 600 added a meagre 0.13%, while defence stocks outperformed — unsurprisingly — following a tense meeting among Western allies over the weekend, to which the US did not send its highest-level official, and where Germany and France began discussing nuclear deterrence. Elsewhere, we observed slight divergence across regions: the German DAX fell, pressured by tech stocks, while the CAC 40 eked out a small gain, helped by inflows into defence names.

European banks rallied on reports that policymakers are looking to strengthen the euro’s global status as a reserve currency and in international transactions. Europe is considering offering euro liquidity to global partners in times of crisis. This would represent a significant step for the currency —perhaps one of the clearest signs that Europe is looking to stand up to the US amid the White House unwelcome trade and security policies.

Such a move would be supportive for the euro, potentially increasing demand — particularly as the euro area offers relative policy stability at a time when the Federal Reserve (Fed) is facing credibility questions. Policy missteps in the US — on trade, political and geopolitical fronts — risk fuelling inflation, and inflation erodes a currency’s purchasing power – the last thing you want for a reserve currency. Moreover, if the euro circulates more widely across the globe, companies may increasingly issue euro-denominated debt, and euro-denominated transaction would reduce FX risk for European firms. There are clear positives in this context.

There are, however, risks to consider. A global currency often implies a stronger currency, and strength is not ideal for exporters, as it makes products more expensive abroad and may weigh on demand. This is why France has backed the plan but has called for a clearer assessment of the economic implications. In the end, if the US loses ground, someone else gains — but who?

In the short run, euro traders did not react. The euro continued to give back its early-month gains against a broadly stronger US dollar. The dollar, however, is softer this morning in Asia, with the USDJPY retracing yesterday’s gains. The yen is strengthening on expectations that weak growth figures will not derail the Bank of Japan’s normalization path, as inflation remains a priority and the price component of yesterday’s GDP report was the only upside surprise.

Today, the US returns from its long weekend to investors who are no longer hungry for risk. The Nikkei 225 is down this morning despite a notable fall in Japanese yields on rising bets that Sanae Takaichi would maintain fiscal discipline while supporting the economy (though how that balance would be achieved remains unclear!). SoftBank Group, a proxy for Big Tech appetite, is down more than 5.5% at the time of writing, while Nasdaq Composite futures are leading losses among major US indices.

In the absence of fresh catalysts — and with existing headwinds unchanged — there is little reason for this bearish tech momentum to reverse. On the contrary, concerns around increasingly leveraged AI spending are intensifying.

As Bloomberg noted: “Debt investors are worried that the biggest tech companies will keep borrowing until it hurts in the battle to develop the most powerful artificial intelligence.”

They may keep borrowing until it hurts — both themselves and their investors.

Big Tech is undergoing a significant financial transformation. Companies such as Meta, Alphabet and Microsoft historically maintained strong balance sheets and substantial cash reserves, supported by relatively capital-light business models.

AI, however, is capital-intensive. It requires building complex and advanced data centres equipped with next-generation chips. Investment comes before monetization. And you do not build a data centre overnight — the lag between capital expenditure and revenue generation can be 12–18 months, sometimes longer depending on grid access and deployment. During that period, free cash flow can come under pressure.

Big Tech has significantly increased AI capital expenditure in recent years. While these companies continue to generate substantial operating cash flow, rising investment means that incremental spending is increasingly financed through debt issuance. Higher leverage alters a company’s risk profile, even if from historically strong starting positions.

Happily, markets have hedging mechanisms. One way to hedge rising credit risk is through credit derivatives — namely credit default swaps (CDS).

Oracle Corporation CDS became one of the barometers of AI-related debt risk last year, partly because Oracle already carried meaningful leverage relative to peers, and partly because CDS on mega-cap tech companies either not existed for years, or liquidity was low given their strong credit profiles.

But since mid-last year, CDS activity tied to major AI spenders has increased in both visibility and volume, reflecting a growing desire to hedge exposure. Instruments linked to companies including Amazon, Microsoft, Meta, Alphabet and even Nvidia have seen rising interest.

This means that investors are increasingly using CDS to hedge exposure to companies whose credit risk was once considered close to negligible.

What does this mean? It suggests that appetite for Big Tech is becoming more selective as AI spending accelerates and balance sheet dynamics evolve. A durable recovery in sentiment may require clearer visibility on monetization — or a valuation reset.