Weekly focus – Fears of an AI bubble top the agenda

Global stocks are heading towards their worst week since April with tech stocks under pressure. Despite Nvidia delivering yet another strong result and an upbeat revenue forecast, investor concerns regarding an AI bubble remain. The fears are not baseless. Investment growth in the US largely rests upon AI-related and high-tech investments, and at the same time, there is still a great level of uncertainty regarding AI-driven productivity gains. In addition, the market is increasingly concentrated. Nvidia's valuation alone exceeds the entire equity markets of most countries, and the rising number of interrelated deals in the tech sector has further fuelled investor concerns recently.

Understandably then, investors are looking for a hedge against AI risk. This has led to a rapidly rising demand for credit default swaps for companies like Oracle Corp, the software company that has borrowed massively to finance the AI-related spending spree. The company's 5-year CDS price has tripled since summer. Such price moves can hardly be explained by investors actually expecting Oracle, an investment-graded company, to default. Instead, investors probably anticipate the CDS price to rise further, should the AI concerns escalate.

This week, we also started receiving the US data delayed because of the government shutdown. The long-awaited September Jobs Report was released with mixed signals, as nonfarm payrolls growth recovered to +119k but the unemployment rate still rose to 4.4%. The uptick was driven by an increase in native-born labour supply rather than weak demand. As we do not expect labour supply to continue growing, we also do not see this as a dovish signal for Fed. Fed minutes, released earlier in the week, appeared slightly hawkish on the margin with "many participants" suggesting that rates could be kept unchanged in December. Hence, we still like our call for the next rate cut in January. Read more on US Labour Market Monitor - Calm before the storm?, 20 November.

In FX market, dollar was king this week. In the near term, risks remain tilted toward USD strength, but we continue to see EUR/USD at 1.22 in 12 months. Japanese authorities are concerned about weak yen on the back of the expected fiscal easing, and on Friday, the authorities again flagged the possibility of FX intervention.

The US and Russian authorities have drafted a new peace plan for Ukraine, and Ukraine's President Zelensky has received the proposal. The new 28-point plan outlines that Ukraine would have to concede the whole of the Donbas region and cut down the number of reservists. Ukraine would not be allowed in NATO, but doors to the EU would be kept open. Although the 28-point plan clearly favours Russia, there is a separate document regarding security guarantees and those seem strong, NATO-like (see e.g. Axios reporting). Zelensky has been given time until next week Thursday to accept the deal.

The euro area preliminary PMI for November came in close to expectations with the composite index falling marginally to 52.4 from 52.5. On Monday, we will see how the German Ifo index aligns with the German PMI softening. Otherwise, next week is rather quiet in terms of data but watch out for US September retail sales and PPI due on Tuesday.