FTSE 100 gains as Alphabet sinks and exposes another crack in AI trade

There are two factors affecting markets today. The first is the drop in the oil price, Brent crude futures are down more than 1% and are back below $110 per barrel. This is boosting the European bond market, and yields are falling across the curve throughout Europe. The second driver is Alphabet’s disappointing Q3 results. The share price is down more than 10% in pre-market trading, and this is weighing heavily on the Nasdaq 100, which is lower by more than 1% in the futures market. 

Will diplomatic efforts be enough to bring the Oil price down to $100 per barrel? 

The decline in the oil price has been driven by reports that the US Vice President JD Vance is reaching out to his Iranian counterparts to restart efforts to find a diplomatic solution to events in the Middle East. This throws into doubt the potential for attacks after the MidTerm elections next week. 

However, Brent crude is still at elevated levels, suggesting there is a structural war premium attached to energy prices, and it will take more than reports of diplomatic efforts to bring oil significantly lower. Until we hear more, we think that the Brent crude oil price could hover between $109.75 - $110.75. A break below $109.75 would be a bearish development that could signal further losses are possible.

Another crack in the AI trade  

The Alphabet earnings are significant, as it opens another fissure in the AI trade just as it was gaining momentum. The big problem for investors when it comes to AI is the cost of the payoff. Hundreds of billions of dollars are being spent by the hyperscalers to boost their AI capabilities, so investors want to know that it is worth it. Google has now reported two quarters of negative cash flow, and this is unacceptable for investors. This is why the stock price is down by a tenth in pre-market trading. 

The AI trade is not moving as a unified block. Investors are willing to reward good earnings results, for example, Microsoft is trading up 3.5% on Thursday morning, after it reported solid results that have impressed the market. Amazon will report results tonight, before Apple next week, which will test sentiment further. 

European stocks gain from Alphabet’s demise 

There is a clear rotation out of US tech and into European stocks. Bad earnings news for Alphabet contrasts with strong reports from Shell in the UK. Its share price is rising by more than 3% today, and it is leading the FTSE 100 higher. Its stock price is now at a record high, and BP is also rising this morning, as investors favour energy companies. Shell increased its buyback to $5bn, and its adjusted profit level doubled compared to a year ago. Its US LNG business is also a big contributor to Shell’s bottom line as it exports more to Europe and Asia in the wake of the Middle East war. 

UK banking stocks give back post-Budget gains 

While Shell is leading the FTSE 100, Lloyds banking group is reeling this morning. Although it beat profit estimates, it kept its full year guidance unchanged, which is weighing on sentiment towards the stock. Investors are a hard bunch to please these days, so any minor disappointment is pounced upon. 

Lloyds is also under pressure due to the banking tax announced in Wednesday’s budget. The UK’s banking sector initially rallied on this news, as the tax increase was less than feared, however, as the dust settles, the sector is coming under pressure on Thursday, since any increase in tax is usually bad news for stock prices. 

ECB to hold steady 

Ahead today, US PCE data and the ECB are in focus. The ECB is expected to keep rates unchanged. We expect fairly neutral comments from ECB head Christine Lagarde, as the latest Eurozone banking conditions survey found that previous rate hikes and the recent surge in European bond yields have already tightened financial conditions in the currency bloc.